Subject 3 (30%) An equity research analyst of CS Asset Management" issued a report on the internet company "ABC". She implemented a Discounted Cash Flow (DCF) model in order to derive her target price for "ABC". The following Table presents a summary of some of the analyst's key forecasts. Table: Forecasts for ABC (CS) 2024E Forecasts of Financial Ratios 2020E 2021 Sales Growth Rate 54.1% 30.2% EBIT Margin (EBIT / Sales) 46.3% 48.9% Effective Tax Rate 29.9% 27.5% Depreciation & Amortization / 11.6% 11.3% Sales Increase in Net Working Capital / 3.2% 2.6% Sales | Capital Expenditures / Sales | 17.2% 14.7% 2022 20.5% 49.9% 25.0% 11.0% 2023 15.2% 50.1% 23.0% 11.0% 51.0% 23.0% 11.0% 2.1% 2.2% 2.2% 12.6% 12.0% 12.0% The analyst used a weighted average cost of capital of 10% and assumed a perpetual annual free cash flow growth rate of 4% for the period beyond FY 2024. For FY 2019, the analyst expected that ABC will have a net cash position of 13,804 (cash and short-term investments greater than total debt obligations), sales equal to 15,896, and number of common shares outstanding equal to 2.733. All the amounts are expressed in millions Required: A. Estimate the Discounted Cash Flow (DCF)-based target price at the end of FY 2019. (20 points) B. ABC's stock price at the report issue date was 76.45. Please indicate the recommendation type (Buy, Hold or Sell) that is implied by the expected upside (downside) potential. Explain the rationale of your recommendation (150 words) (5 points) C. Perform a sensitivity analysis using two alternative scenarios for the terminal free cash flow growth rate (-/+ 0.5 percentage points from the base scenario) and another two alternative scenarios for the weighted average cost of capital (-/+ 0.5 percentage points from the base scenario), resulting in a matrix with a total of nine scenarios including the base scenario. (5 points) Subject 3 (30%) An equity research analyst of CS Asset Management" issued a report on the internet company "ABC". She implemented a Discounted Cash Flow (DCF) model in order to derive her target price for "ABC". The following Table presents a summary of some of the analyst's key forecasts. Table: Forecasts for ABC (CS) 2024E Forecasts of Financial Ratios 2020E 2021 Sales Growth Rate 54.1% 30.2% EBIT Margin (EBIT / Sales) 46.3% 48.9% Effective Tax Rate 29.9% 27.5% Depreciation & Amortization / 11.6% 11.3% Sales Increase in Net Working Capital / 3.2% 2.6% Sales | Capital Expenditures / Sales | 17.2% 14.7% 2022 20.5% 49.9% 25.0% 11.0% 2023 15.2% 50.1% 23.0% 11.0% 51.0% 23.0% 11.0% 2.1% 2.2% 2.2% 12.6% 12.0% 12.0% The analyst used a weighted average cost of capital of 10% and assumed a perpetual annual free cash flow growth rate of 4% for the period beyond FY 2024. For FY 2019, the analyst expected that ABC will have a net cash position of 13,804 (cash and short-term investments greater than total debt obligations), sales equal to 15,896, and number of common shares outstanding equal to 2.733. All the amounts are expressed in millions Required: A. Estimate the Discounted Cash Flow (DCF)-based target price at the end of FY 2019. (20 points) B. ABC's stock price at the report issue date was 76.45. Please indicate the recommendation type (Buy, Hold or Sell) that is implied by the expected upside (downside) potential. Explain the rationale of your recommendation (150 words) (5 points) C. Perform a sensitivity analysis using two alternative scenarios for the terminal free cash flow growth rate (-/+ 0.5 percentage points from the base scenario) and another two alternative scenarios for the weighted average cost of capital (-/+ 0.5 percentage points from the base scenario), resulting in a matrix with a total of nine scenarios including the base scenario. (5 points)
