TARGET (TGT) DATA/ASSUMPTIONS

Forecasting free cash flow to the firm (FCFF):

- Compute the average sales growth rate over the last 4 years and use the rate to forecast the sales revenue in the next 4 years.

- The ratios of variable costs to sales, working capital to sales, and capital expenditure to sales are assumed to be the same as year 0 (2020)

- Use the cost of sales excluding depreciation and amortization as a proxy for variable costs.

- Use the average depreciation and amortization over a rolling four-year window to forecast the depreciation expense from year 1 (2021) onwards.

- Use the average fixed costs over a rolling four-year window to forecast the fixed costs from year 1 (2021) onwards. Use the selling, general and administrative (SG&A) expense as a proxy for fixed costs.

- Make assumptions about the growth rate of future net cash flow after year 4 based on your own independent research.

Estimating the discount rate (WACC):

- Target's equity beta = 1.01

- Risk free rate is assumed to be 3%

- Market risk premium is assumed to be 6%.

- Use the net interest expense divided by the book value of the noncurrent liabilities in year 0 (2020) to work out Targets cost of debt.

- Use the book value of total liability and market value of equity as of the fiscal year-end (January 30, 2021) to work out the proportion of debt and equity

(Hint: you can retrieve the current and historical stock price data for Target using Yahoo Finance; Use the adjusted closing stock price on the last trading day if the fiscal year-end, January 30, 2021, falls on a non-trading day).

- The cost of debt, cost of equity, and Debt-to-Equity (D/E) ratio are assumed to remain constant over time.

- The expected effective tax rate is 25%

QUESTIONS

(d) Provide a thorough justification for your choice of the growth rate after year 4. Clearly state any other assumptions you have made.

(e) Estimate the years 1-4 free cash flow and the terminal value at the end of year 4.

(f) Find the value of Target.