Case Study Note:

This is a fictitious event and business created exclusively for use in this assignment. As a new junior analyst for a large brokerage firm, your first task is to analyse the shares of HeartyHealthcare, a healthcare provider in Australia. Your manager recommends determining prices based on both the discounted free cash flow valuation method and the comparable P/E ratio method. You are a little concerned about this recommendation because your finance lecturer has told you these two valuation methods can result in widely differing estimates when applied to real data as the result is very sensitive to your assumptions. He stressed on several occasions that it is essential to provide very strong justification for these assumptions. It is also very important to be self-critical. It would come as no surprise if this turns out to be a major marking criterion for assignments. You did some research online and you have discovered the following financial information:

HeartyHealthcare Statement of Profit and Loss For the year ended 30th June 20XX 2018 $ 2017 $ 2016 $ Sales 250,000 200,000 150,000 Cost of goods sold 125,000 110,000 90,000 Gross operating profit 125,000 90,000 60,000 Selling, general and administrative expenses 50,000 30,000 25,000 EBITDA 75,000 60,000 45,000 Depreciation and Amortisation 10,500 8,500 6,000 EBIT 64,500 51,500 39,000 Income taxes 19,000 15,500 11,100 Net Income 45,500 36,000 27,900 Shares outstanding 5,000 Earnings per share $9.10

HeartyHealthcare Statement of Financial Position For the year ended 30th June 20XX 2018 $ 2017 $ 2016 $ Current Assets Cash and equivalents 20,000 15,000 12,500 Receivables 40,000 32,000 30,000 Inventories 29,000 20,000 18,000 Other current assets 23,000 23,000 20,000 Total current assets 112,000 90,000 80,500 Non-Current Assets Property, plant and equipment 145,000 160,000 155,000 Less: Accumulated depreciation (43,000) (38,000) (32,000) Investments 70,000 50,000 45,000 Other non-current assets 36,000 36,000 30,000 Total non-current assets 208,000 208,000 198,000 Total assets 320,000 298,000 278,500 Current liabilities Accounts payable 41,000 30,000 25,000 Short-term debt 12,000 10,000 8,000 Other current liabilities 17,000 15,000 14,000 Total current liabilities 70,000 55,000 47,000 Non-current liabilities Long-term debt 100,000 100,000 100,000 Total non-current liabilities 100,000 100,000 100,000 Total liabilities 170,000 155,000 147,000 Shareholders equity Common equity 40,000 40,000 40,000 Retained earnings 110,000 103,000 91,500 Total equity 150,000 143,000 131,500 Total liabilities and equity 320,000 298,000 278,500 Key Financial Information 5-year Government bond rate: 3.0% Market Risk Premium: 5% Beta for HeartyHealthcare: 0.7 Yield on the companys long-term debt: 5%.

As you are a new employee, you are unsure where to start. Therefore, your manager has given you some guidance and a framework to begin with.

Section 1: Executive Summary The executive summary should state what this report is about, what methods you have used and your recommendations.

Section 2: Macroeconomic and Industry analysis HeartyHealthcare, a healthcare provider in Australia, competes with similar companies that are currently listed on the Australian Stock Exchange. Required: 1. Select at least 2 similar companies from the same industry as HeartyHealthcare. Justify your choice carefully. 2. Discuss the following in your own words. Use references where appropriate: a. Performance of the industry over the past 3 years b. Short-term (up to 5 years) outlook for the industry, including identification of two (2) major risk factors and an explanation of how these affect the performance of the industry c. Forecast the short-term growth rate for the industry based on the above information d. Discuss the long-term (beyond 5 years) macroeconomic outlook and use relevant information to forecast the long-term growth rate for the industry

Section 3: DCF Analysis Use excel to determine the share value based on the discounted free cash flow method: 1. Use the historic data from the financial statements above to compute the three-year average of each of the following ratios: a) EBIT/sales; b) tax rate (income tax expense/income before tax); c) property, plant and equipment/sales; d) depreciation/property, plant and equipment; e) net working capital/sales. 2. Create an empty timeline for the next five years; 3. Forecast future sales based on the short-term growth rate discussed in section 2, part 2(c) of this assignment 4. Use the average ratios computed in part (3.1) to forecast EBIT, property, plant and equipment, depreciation and net working capital for the next five years; 5. Forecast the free cash flows for the next five years using Eq. 10.2; 6. Determine the horizon enterprise value for year 5 using Eq. 10.6 and a long-run growth rate that has been determined in section 2, part 2(d) of this assignment 7. Determine the enterprise value of the firm as the present value of the free cash flows; 8. Determine the share price using Eq. 10.4, with reference to the cash, debt and number of shares outstanding provided in the financial statements in this case. 9. Provide a summary of these results in your report.

Section 4: Ratio Analysis 1. Calculate an estimate of the share price for HeartyHealthcare based on a comparable P/E ratio, (multiply the average of the P/E ratios of your comparable companies by the EPS of HeartyHealthcare). 2. Use a similar method to estimate the value of the shares of HeartyHealthcare based upon the following ratios: a. P/E to Growth b. Price to Sales c. Enterprise Value/EBITDA d. Price/EBITDA 3. Discuss the differences between the share price forecasts you have made in parts 1 and 2 above. Which one do you believe would be a more accurate measure for HeartyHealthcares share price? Explain your choice.

Section 5: Discussion Explain to your manager why the estimates from the two valuation methods differ and which one you believe is most reliable. Your explanation should specifically address the following factors: the assumptions implicit in the models themselves, and the assumptions you made in preparing your analysis.