Question 8 (19 marks) Superfresh Co. is an Australian chain of fresh food stores operating in the pan-pacific region. The break- down of Superfresh's sales by regions is as follows. Moreover, the equity risk premium in North America is 5%, the relative standard deviations in the equity market of the rest three regions to the North American equity market are 1.25, 1.04, and 1.62 respectively. Superfresh has a beta of 0.95. Risk- free rate is 3%. Region Regional Sales (billions) % of Total Sales Relative Std. to North America North America 0.667 6.07% 1 East Asia 3.324 30.27% 1.25 Oceania 6.582 59.94% 1.04 Others 0.408 3.72% 1.62 Total/average 10.981 100.00% a) Estimate the cost of equity for Superfresh. (5 marks) b) Superfresh reported $10.981 billion revenue, $2.821 billion equity, and $3.134 billion invested capital in the last annual report. The overall growth of sales is expected to be 3% p.a. in the next three years before tampering to 1.8% p.a. in the long run. The net profit margin has been stable in the past 10 years, fluctuating around 6%. The sales to capital ratio (i.e. the change in sales over the change in invested capital) is approximately 2. The reinvestments are financed with a fixed debt ratio of 10%. The cost of equity is consistent with the result in question a). Estimate the equity value of Superfresh. (14 marks) High growth Stable growth Sales growth rate 3% 1.8% Beta 0.95 0.95 Rf 3% 3% Net profit margin 6% 6% Fixed debt ratio 10% 10% Sales-to-capital ratio 2 2 Question 8 (19 marks) Superfresh Co. is an Australian chain of fresh food stores operating in the pan-pacific region. The break- down of Superfresh's sales by regions is as follows. Moreover, the equity risk premium in North America is 5%, the relative standard deviations in the equity market of the rest three regions to the North American equity market are 1.25, 1.04, and 1.62 respectively. Superfresh has a beta of 0.95. Risk- free rate is 3%. Region Regional Sales (billions) % of Total Sales Relative Std. to North America North America 0.667 6.07% 1 East Asia 3.324 30.27% 1.25 Oceania 6.582 59.94% 1.04 Others 0.408 3.72% 1.62 Total/average 10.981 100.00% a) Estimate the cost of equity for Superfresh. (5 marks) b) Superfresh reported $10.981 billion revenue, $2.821 billion equity, and $3.134 billion invested capital in the last annual report. The overall growth of sales is expected to be 3% p.a. in the next three years before tampering to 1.8% p.a. in the long run. The net profit margin has been stable in the past 10 years, fluctuating around 6%. The sales to capital ratio (i.e. the change in sales over the change in invested capital) is approximately 2. The reinvestments are financed with a fixed debt ratio of 10%. The cost of equity is consistent with the result in question a). Estimate the equity value of Superfresh. (14 marks) High growth Stable growth Sales growth rate 3% 1.8% Beta 0.95 0.95 Rf 3% 3% Net profit margin 6% 6% Fixed debt ratio 10% 10% Sales-to-capital ratio 2 2