PolyH Holdings is a listed Hong Kong$-$based multinational conglomerate corporation, having four core businesses $$ retail, infrastructure, telecommunications and energy. Its retail portfolio comprises health and beauty products, supermarkets and PolyS Sports.

PolyS Sports is a manufacturer and marketer of branded athletic products in Hong Kong, mainland China and more than $20$ countries worldwide. It has multiple business segments. It mainly sells footwear $(60$ percent of revenue$)$ and apparel $(30$ percent of revenue$).$ In addition, it sells equipment products which account for four percent of revenue. Finally, it also sells non$-$PolyS branded products such as casual dress and footwear and other products under other trademarks $($six percent of revenue$).$

PolyS has just disclosed internally its fiscal year $2022$ results. The management has designed a strategy for resuming growth of the company. In the last few years, PolyS$$s revenues had been stagnant at around $$9$ billion, while net income had fallen from $$1,053$ million to less than $$750$ million $($Exhibit $1*).$ To boost revenue, the company would develop more athletic shoes in the premium$-$priced segment. It also planned to heavily promote its apparel line and aggressively expand to foreign markets. Company executives set their long$-$term revenue growth targets at $8-10$ percent, and earnings growth targets above $15$ percent.

Currently, PolyH is considering selling PolyS to a foreign enterprise. You, being the financial officer of PolyH, is tasked with estimating the value of PolyS$$s business which will help set the selling price. You have developed a free cash flow forecast $($without taking into the above proposed growth strategy into account$)$ for the next ten years $($Exhibit $2).$ You will estimate the discount rate to conduct the discounted cash flow analysis. You have considered that PolyS$$s business has taken no debt, i$.$e$.$ it is all$-$equity financed. It is also your responsibility to suggest ways to maximize the selling price.

$*$ All exhibits are attached in a separate Excel file.

Exhibit $1$

PolyS's Income Statements

$($In millions$)$

$2016201720182019202020212022$

Revenues $4,8006,5009,2009,6008,8009,0009,500$

COGS $2,9003,9005,5006,1005,5005,4005,800$

Gross profit $1,9002,6003,7003,5003,3003,6003,700$

SGA expenses $1,2001,6002,3002,6002,4002,6002,700$

Operating income $7001,0001,4009009001,0001,000$

Other expense $36778481666893$

Income before taxes $6649231,316819834932907$

Taxes $(20\%)132\mathrm{.}8184\mathrm{.}6263\mathrm{.}2163\mathrm{.}8166\mathrm{.}8186\mathrm{.}4181\mathrm{.}4$

Net income $531\mathrm{.}2738\mathrm{.}41,052\mathrm{.}8655\mathrm{.}2667\mathrm{.}2745\mathrm{.}6725\mathrm{.}6$

Growth Rate

Revenues $35\mathrm{.}4\%41\mathrm{.}5\%4\mathrm{.}3\%-8\mathrm{.}3\%2\mathrm{.}3\%5\mathrm{.}6\%$

Net Income $39\mathrm{.}0\%42\mathrm{.}6\%-37\mathrm{.}8\%1\mathrm{.}8\%11\mathrm{.}8\%-2\mathrm{.}7\%$

Exhibit $2$

Free Cash Flow Forecast

$($In millions$)$

Assumptions:

Revenue growth $(\%)7\mathrm{.}57\mathrm{.}07\mathrm{.}06\mathrm{.}56\mathrm{.}56\mathrm{.}06\mathrm{.}06\mathrm{.}06\mathrm{.}06\mathrm{.}0$

$12345678910$

$2023202420252026202720282029203020312032$

Free cash flow $7657928238671,0141,1181,2751,3521,4841,573$

Terminal value $?$

$$

The tax rate for all companies is assumed to be $20\%.$

Discount rate is $3\mathrm{.}716\%$

$$ Support your recommendation with comprehensive discussion to make your boss understand your assumptions, alternative scenarios $($if any$),$ your rationale, etc.

AND

$$PolyS Sports would like to finance the proposed growth strategy $($as a project$)100\%$ by raising debt. What would be the discount rate for the project?$$