Question

FY 2014 2,212.40 1,818.00 394.40 FY 2015 FY 2016 2,367.40 2,640.30 2,009.90 2,278.20 357.60 362.20 86.99 94.44 90.85 53.80 66.10 54.10 3.10 3.50 1.40 427.95 387.39 389.14 - 29.50 24.30 28.10 15.00 -5.10 -3.80 3.50 3.10 -1.40 379.95 116.86 In Millions of $AUD Revenue -COGS Gross Profit + Other Operating Revenue - Depreciation & Amortization - Other Operating Expenses EBIT - Interest Expense - Foreign Exchange Losses (Gains) - Net Non-Operating Losses (Gains) Pre-tax Income - Income Tax Expense Net Income (loss) In Millions of $AUD Assets + Cash & Near Cash Items + Short-Term Investments + Accounts Receivable + Inventories Total Current Assets + Net Fixed Assets + Gross Fixed Assets - Accumulated Depreciation + Other Long-Term Assets Total Long-Term Assets Total Assets 365.09 109.74 255.34 FY 2015 366.24 100.49 265.75 FY 2016 263.09 FY 2014 1,261.70 1,378.00 1,316.00 204.50 41.20 75.70 537.60 635.50 672.20 47 63.6 70.5 2,152.80 1,887.50 161.00 2,263.20 216.30 196.30 383.10 465.60 533.30 222.10 269.30 317.00 361.90 438.90 521.80 522.90 635.20 738.10 2,410.40 2,788.00 3,001.30

A) Using the multi-stage dividend discount model (DDM), calculate the value of FLT shares. Use scrap paper for your workings (15 MARKS).

Assume that dividends in the next three years (starting from year 2017) will grow at a rate of 13% annually. Further, it is assumed that dividends will grow at a rate of 11% for the next four years (year 4 to 7). Thereafter it is assumed that the company will grow at a constant growth rate of 7% per annum. The last dividend paid (for 2016) is $1.52. Assume a required rate of return of 12%.

Clearly show the following:

Present Value of First Stage (4 marks)

Present Value of Second Stage (5 marks)

Present Value with constant growth rate (5 marks)

Stock Intrinsic Value (1 marks)

(A) Using the following data, calculate the equity value of FLT share (value per share). Answer in the box provided (10 MARKS).

Assume that FLT has FCFF of $ 150 million and FCFE of $ 200 million for the last financial year (since the last financial year had many unusual items, we ignore the FCFF/FCFF calculated earlier and use projected values instead). Both FCFF and FCFE are expected to grow at a constant rate of 7% per annum indefinitely. FTL’s required rate of return of equity is 12% and the before tax cost of debt is 7%. The company expects a target capital structure consisting of 20% debt financing and 80% equity financing. The tax rate is 30%. Use book value of long-term debt. FLT has 100 million outstanding common shares.

Clearly show the following:

FCFE (4 Marks)

FCFF (6 Marks)

(C) P/E Valuation

The EPS for Flight Centre for 2016 was $2.42 and dividend payment - $1.52. Using fundamental trailing P/E multiple method, calculate the value of the stock by assuming that earnings will grow at a constant rate of 8% per annum indefinitely. FTL’s required rate of return is 12% and before tax cost of debt is 7%. Assume that FLT will maintain the current dividend pay-out ratio. (5 marks)

Answer 1

Ans A.		FY( All Amounts in Million $AUD)
First Stage	2017	2018	2019
Dividend paid with 13% increase over $1.52 in three yrs	$          1.718	$             1.941	$            2.193
Discount factor @12%=1/1.12^n=	1	0.893	0.797
PV of Dvidends at First stage	$          1.718	$             1.733	$            1.748
Total PV of Dividends at First Stage	$          5.199
Second stage	2020	2021	2022	2023
Dividend paid with 11% increase over $2.193 in 4 yrs	$          2.434	$             2.702	$            2.999	$              3.329
Discount factor @12%=1/1.12^n=	0.712	0.636	0.567	0.507
PV of Dvidends at First stage	$          1.733	$             1.719	$            1.701	$              1.688
Total PV of Dividends at First Stage	$          6.841

PV of Constant growth stage	Year 2023
growth rate =g=7%
Cost of Equity =Ke=12%
Terminal Value =3.329*(1+7%)/(12%-7%)=	71.241
PV discount factor	0.507
PV of Terminal Value	$          36.12
Stock Intrinsic value =PV of Fist stage+PV of second stage +PV of Terminal value=	$          48.16

Ans B
Amounts $M
Given FCFE =200
Growth rate =g=7% indefinitely
Cost of Equity =Ke=12%
Value of Equity =200*(1+7%)/(12%-7%)=	4,280
So Value of Equity in Million	4820
No of shares outstanding in Million	100
Value per share =4820/100=	$          48.20

Firm Value
Given FCFF=150
Cost of Debt =Kd=7%
Tax rate =30%
Post tax cost of Debt=7%*(1-30%)=4.9%
D/E =20/80
Cost of Equity=12%
WACC=12%*0.8+4.9%*0.20
so WACC =requited return for firm=10.58%
FCFF growth rate =g=7% indefinitely
Value of Firm =150*(1+7%)/(10.58%-7%)=	4,483.24
So Value of Firm =4483.24

Ans C
EPS =2.42
Constant dividend growth rate =g=8%
Cost of Equity =Ke=12%
Last dividend =P0=1.52
Price /Share=P0(1+g)/(Ke-g)=1.52*1.08/(12%-8%)=	41.04
So Price /Share =41.04
P/E Ratio=EPS/Price per share=2.42/41.04=	0.0590