LuxHoliday(LHO) is an Australian business travel agency. It specialises in booking business travel arrangements such as transportation (flights, car rental) and accommodation. The company provides these services on both ad hoc basis for non-member corporates and on a regular basis for firms with yearly or bi-yearly contracts. The main competitive advantage is created by heightened bargaining power,where byLHO pools in corporate demand to negotiate better rates with hospitality suppliers. Using the last 2 years of daily data, the company is reported to have a beta of 1.1 compared to the ASX200. The annual risk-free interest rate is 2% and the expected rate of return on the market is 10% p.a. The price of LHO at the beginning of the year (2020) was $14. Dividend is expected to be $0.50 per share at the end of year.

Question 31 Equity Analysis (14 marks)

A) What price do investors expect the stock to sell for at the end of the year if they believe in the CAPM? (keep the answer to the nearest 2 decimal places)(3 marks)

B) An analyst has forecast the following for LHO: Due to the coronavirus, FCFE will drop by 6% every year for the next two years (year 2021 and 2022), after which FCFE is expected to grow at 4% per year forever.

B1) The FCFE of the company at the end of theyear(2020) is expected to be $500 million with 450 million shares outstanding. What is the fair value per share at the beginning of 2020 according two-stage growth model?(Keep the answer to the nearest 2 decimal places)(4 marks)

B2) Assume that the firm applies a plowback ratio of 0.4 before paying dividend end of this year, using the answer from question B1, what is the firm's PVGO at the beginning of 2020? (Keep the answer to the nearest 2 decimal places)(2 marks)

B3) You intend to buy the stock at the end of 2020. Your friend believes that the firm will fail to achieve any forecasted growth (g=0). What will be the P/E ratio of LHO at the end of this year, assuming market price follows CAPM (round to 2 decimal places). How long does he think you should expect to recover your initial investment by dividends, ignoring time value of money and capital gain? (Answer in years and round to the nearest integer)(3 marks)

C)Do you think LHO belongs to a defensive or cyclical sector? Why?(2 marks)