Question
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
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.
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