1: Estimate the value of AEM and its equity from operations using the DCF method.
Earlier 2002, the stock price of Agnico-Eagle Mines sharply decreased by $1 finally closed at $13.89. This price has reached one of the lowest level, from the company's historical perspective. As a professional equity portfolio manager, who has a large number of AEM stocks on hand. Acker and his team are necessary to find a proper way to estimated the fair value of AEM as well as its equity. Discounted Cash Flow (DCF) has been chosen to do this job. The theory behind DCF valuation approach is that the firm's value can be estimated by using the expected future free cash flow discounted by an appropriate discounted rate (Koller etc 2005). However several assumptions need to be clearly examined within this approach. The following sections are showing the process of DCF step by step.
1.1 value of AEM
Free cash flow
US$ 2001 2002 2003 2004 2005 2006 2007 2008
FCF -779000 4281000 6832000 11097000 12625000 13131000 13658000 14206000
The first important component of DCF needs to be estimated is the expected future Free cash flow of the company. However FCF prediction has already been done by Acker. The relevant data is the estimated cash flow from 2002 to 2008, As well as the real FCF at the end of 2001. all figures in this report is in $ value:
.
Weighted average cost of capital
The appropriate discounted rate should use in the DCF approach is the weighted average cost of capital. However the WACC prediction has also already been done by Acker by applying the following equation:
WACC= E/V Re + D/V Rd (1-Tc)
E: value of equity Re= cost of equity
D:value of Debt Rd= cost of debt
V=E+D
However the ...
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...f) 5.79% time to maturity (t) assume equal to T 16
In(S/X) 0.771049125 d1 2.521811406 d2 1.721811406
N(d1) 0.994162386
N(d2) 0.957448156
Call price 1929590819
The above result shows that by including the real option of un-mined gold, it will provide a extra $1929590819 to the value of company. This value will be treated as excess assets, which means it could have a significant effect on the value of equity.
Put all the things together
Adjusted value of equity -105435887.7
+option value of un-mined gold 1929590819
Fair value of equity 1824154932
÷Total numbers of shares 67722853 fair price of stock 26.93558896
Clearly, the current share price of $13.89 is deeply undervalued. The fair stock value of $26.94 has been conducted by including tax-shield, on/off balance sheet value and the value of un-mined gold, however this result is based on number of assumptions.
In order to do this the WACC approach will be used based on the assumption that leverage will stay constant after 2012. Industry average of debt/value is 28.1 percent and debt/equity 71.9 percent. These figures will be used as an estimate for long-term leverage because it is expected that AirThread will maintain a leverage ratio that is constant with the industry. From this the relevered equity beta is found to be 0.9847 which will give an equity rate of return of 9.42 percent. The rate of return on debt will be 5.5 percent. This is the percentage of debt because it is the interest rate of the 10 year U.S. Treasury bond. The WACC is now found to be 7.80 percent. Next, the long-term growth rate of 2.9 percent will be assumed to stay constant. In order to determine the FCF 2013 FCF 2012 of $315.60 will be multiplied by the growth rate. This will give a FCF 2013 of $323.48. The FCF 2013 will then be divided by the WACC minus growth rate. By doing this the PV of terminal value is found to be approximately $4.6 billion. To see the calculations for this step refer to Exhibit 3 in the
After calculating WACC my second analysis would be of the packaging machine investment. I will use incremental analysis and calculate NPV of the incremental cash flows of both strategies (to wait or to invest now). After calculating NPV’s of both scenarios I will calculate the difference between the two.
Theoretically, it is the foundation of simpleness and reasoning for stock valuation as any cash payoff from company is entirely in form of dividends. However, in practice, this model require further hypothesis on company’ dividend payments, future interest rate and growth pattern. Therefore, it is assumed that the DDM model merely applies to evaluate roughly minor proportion of the value of company’ share price. Specifically, the JB HI-FI value obtained from the DDM is 30.65 higher than their actual currently trading share price 24.1; a different of 6.55, and then the stock is undervalued. Consequently, DMM is not applicable for stock price valuation in case of JB HI-FI since it is not an individual approach of stock
Comparing both the charts above I think the target price of $32.50 is accurate for the company’s stock.
Last year, the company recorded revenues of C$45,394 million, an increase of 6.53% over FY2014.The operating profit of the company was C$1,601 million in FY2015, a increase of 142% compared with FY2014, year in which the company had a decrease of 49.9% on the operating profit, and the net profit of the company was C$623 million in FY2015, an increase the total of FY2014, C$53 million (Loblaw, 2016). Loblaw’s stock price (L.TO) ended the year priced at C$65.34, 6.5% higher than price at the begining of the year C$61.35 (Yahoo Finances,
We defined several criteria to determine our choice – return, risks and other quantitative and qualitative factors. Targeting a debt ratio of 40% will maximize the firm’s value. A higher earning’s per share and dividends per share will lead to a higher stock price in the future. Due to leveraging, return on equity is higher because debt is the major source of financing capital expenditures. To maintain the 40% debt ratio, no equity issues will be declared until 1985. DuPont will be financing the needed funds by debt. For 1986 onwards, minimum equity funds will be issued. It will be timed to take advantage of favorable market condition. The rest of the financing required will be acquired by issuing debt.
11a. Answer: (Book Value WACC) Debt = 61.2 / 155.7 = 39% Preferred Stock = 15 / 155.7 = 10% Common Stock = 79.5 / 170.8 = 51% 2. Answer: (Market Value WACC) Debt = 30% Preferred Stock = 10% Common Stock = 60% C. Answer: Weighted Average Cost of Capital determines marginal cost of issuing new securities to finance projects. Such securities should be issued at market value. Therefore weights allocated to debt and equity in determining WACC should be based on market value.
We can rationalize not using DCF for its inability to capture risk uncertainty. Passive investments such as stocks and bonds are good candidates to use DCF on. Once these investments are made, investors cannot influence the cash flow generation. We agree that decision tree can be used to make preliminary judgments and real option analysis can be used to get more definitive answers. We think that sensitivity analysis and scenario analysis could be useful since all inputs may change over time.
Inputting all my assumptions into the WACC formula, my estimate of Nike's cost of capital is 8.4%.
Discounted cash flow is a valuation technique that discounts projected cash inflows and outflows to evaluate the potential value of an investment. There are three discounted cash flow methods: Net Present Value (NPV), Profitability Index (PI) and Internal Rate of Return (IRR). The net present value discounts all cash inflows and outflows at a minimum rate of return, which is usually the cost of capital. The profitability index refers to the ratio of the present value of cash inflow to the present value of cash outflows. The internal rate of return refers to the interest rate that discounts cash inflow projections to the present to ensure that the present value of cash inflows is equivalent to the present value of cash outflows (Brown, 1992).
...ccurately reflects the intrinsic value of the company from the shareholders point of view and their expectations of future earnings.
The basic earnings per ordinary share in 2016 is RM19.14 and RM14.30 in 2015. This shows that the ordinary share had been increased RM4.84 compare to 2016 based on 2015. In the other hand, this company had declared a first interim single-tier dividend of 10 sen per ordinary share amounting to RM22.88 million in respect of the financial year ended 31 December 2016. They sold their ordinary shares of RM400,000,000 units of RM0.50 per each in 2016 and RM200,000,000 units of RM0.50 per each in 2015 to their shareholders. It is increased from 2015 to 2016 with 200,000,000 units. The other investments that available for sale is RM1000 same as in 2015 and 2016.
The reason I select Masteel’ stock to analyse is because I have looked back the historical stock chart of Masteel from 2009 to 2015, it is a declining price movement. Masteel achived the highest RM1.5 price in 2011 but it reduced to RM0.4 price in 2015. This historical price of stock in Masteel made me curios on its current intrinsic value and are this stock is worth to invest now? Thus, I would like to analyse Masteel’s stock value through stock valuation in part B, to figure out whether Masteel is worth to invest now and expect the price will increase in future.
First, the revenue growth used in the case appears slightly optimistic. Therefore, looking at the yearly growth in population (1.4%), as well as the growth in income (1.3%), and the growth share of ad spending (less than 1% on average over the last 10 years); we believe that the real growth rate of revenue for the acquisition should be closer to 8%. Since 1997 they have had negative earnings; therefore, the company has unused tax benefit that they can take advantage of. However, we have used statutory rate because we believe that over the long run they’ll become profitable and use up their tax benefit. The risk free rate that we used for our valuation is 6.35% which was 30-year treasury in 1999. We chose it because we are valuing the acquisition at perpetuity and the 30-year treasury best matches with this time period. For the debt portion we are going to issue 10-year corporate bond which has the rating of AA and yield of 7.18%. In order to find the discount rate or WACC to use in our DCF analysis we assumed market premium of 7% because it is the long-term premium that the market returned
a. 1. What sources of capital should be included when you estimate Harry Davis’s weighted average cost of capital (WACC)?