Business Valuation

Q$7.$

Figure $8\mathrm{.}10$ shows total assets, book value and market value of equity, equity beta and analysts' consensus earnings forecasts for CSL$,$ Woolworths and Xero. CSL is one of Australia's leading biopharmaceutical companies, Woolworths is one of the two largest grocery retailers, and Xero provides online accounting software. As part of the following calculation, assume that the Australian government $10-$year bond is yielding $2\mathrm{.}75\%$ and the equity risk premium is $5\mathrm{.}0\%.$

FIGURE $8\mathrm{.}10$ Total assets, book value and market value of equity, equity beta and analysts' consensus earnings forecasts for CSL$,$ Woolworths and Xero

$\backslash$table$[[,$CSL$,$Woolworths,Xero$],[$Total assets $($$m$),17559,23491,929],[\backslash$table$[[$Shareholders$\text{'}$ equity$],[($$m$)]],,,],[$Book value,$7488,10669,338],[$Market value,$97425,41826,6829],[$Equity beta,$1\mathrm{.}15,0\mathrm{.}56,2\mathrm{.}32],[\backslash$table$[[$Analyst forecast of$],[$next year's earnings$],[($$m$)]],3076,1826,14]]$

a$.$ Compute the CAPM estimate of cost of equity capital for each firm.

b$.$ Calculate 'normal' or required earnings for each firm.

c$.$ Calculate abnormal $($i$.$e$.$ residual$)$ earnings for each firm.

d$.$ What do the different amounts of abnormal earnings imply for each firm? Do they help explain the differences in market value of equity of the three firms?