You are an equity research analyst who is following Tencent. You see the following information in...

 

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You are an equity research analyst who is following Tencent. You see the following information in its most recent annual report (year 2018): - Net income from non-cash assets: $100 million - - Book value of Equity: $1,000 million Book value of Debt: $ 250 million Net Capital Expenditure: $100 million Change in non-cash working capital: $50 million Your colleague, Peter, is currently doing a DCF valuation on Alibaba based on the following information: - After-tax return on capital of 15% on its current capital invested (which is $200 million). Alibaba to reinvest 80% of its after-tax operating income back into the business for the next 3 years and 20% thereafter (the stable growth period). The cost of capital for the firm is 10%. a) Estimate the earnings growth rate (on NI from non-cash asset) of Tencent in 2018. (3 marks) b) Based on your expectation, Tencent will have a reinvestment rate of 50% and a non-cash return on equity (for both existing and new investment) of 19.5% in 2019. Estimate the expected earnings growth rate of Tencent in 2019. c) Estimate the terminal value of Alibaba for Peter. (5 marks) (7 marks) You are an equity research analyst who is following Tencent. You see the following information in its most recent annual report (year 2018): - Net income from non-cash assets: $100 million - - Book value of Equity: $1,000 million Book value of Debt: $ 250 million Net Capital Expenditure: $100 million Change in non-cash working capital: $50 million Your colleague, Peter, is currently doing a DCF valuation on Alibaba based on the following information: - After-tax return on capital of 15% on its current capital invested (which is $200 million). Alibaba to reinvest 80% of its after-tax operating income back into the business for the next 3 years and 20% thereafter (the stable growth period). The cost of capital for the firm is 10%. a) Estimate the earnings growth rate (on NI from non-cash asset) of Tencent in 2018. (3 marks) b) Based on your expectation, Tencent will have a reinvestment rate of 50% and a non-cash return on equity (for both existing and new investment) of 19.5% in 2019. Estimate the expected earnings growth rate of Tencent in 2019. c) Estimate the terminal value of Alibaba for Peter. (5 marks) (7 marks)

Answer rating: 100% (QA)

a Earnings growth rate of Tencent in 2018 Net income from noncash assets 100 mill... View the full answer