As a financial analyst, after conducting a careful accounting, financial statement, and prospective analysis of a company,
Question:
As a financial analyst, after conducting a careful accounting, financial statement, and prospective analysis of a company, you are now developing an independent assessment of the value of the firm to develop an investment recommendation for your clients. Using the financial statements and additional notes provided for the firm in the attached excel file (Final Exam, tab Alpha Tech BS & IS), develop a valuation for the firm using the DCF model. Additional information and assumptions for the firm that you have made include:
a. The book value of the firm?s debt equals its market value.
b. The estimated market beta for the firm is 0.46, the expected risk-free rate is 2.5%, and the expected market premium is 5%.
c. The firm?s stock closed at $55.85 on March 31, 2017 (fiscal year end), and the stock is currently trading at $59.50 d. The firm?s statutory tax rate is 37%.
e. Based on a historical analysis, adjusted by a strategic and industry assessment, you have developed the following forecasts for the firm for the next four years, (2018-2021):
Sales Growth 8% Net operating profit margin (NOPM) 6.8% Net operating asset turnover (NOAT) 1.41 Terminal Period 1%?
1. Develop an Estimate for weighted average cost of capital for the firm?
a. Estimate the company?s average pretax borrowing cost.?
b. Assuming the book value of the firm?s debt equals its market value, estimate the firm?s cost of debt capital.?
c. Estimate the cost of equity capital for the firm.?
d. Based on (b) and (c) estimate the firm?s weighted average cost of capital (WACC)?
2. Estimating Valuation?
a. Using the discounted cash flow model (DCF), estimate the value of a share for the firm?s common stock.?
b. Based on your valuation, provide an investment recommendation for your clients.
Cost Accounting Foundations and Evolutions
ISBN: 978-1111971724
9th edition
Authors: Michael R. Kinney, Cecily A. Raiborn