Valuation Part of Target Company Essay Example



This assignment aims to carry out the assessment of the target company. The study mainly applies two evaluation methods namely discounted cash flow (DCF) and the P/E ratio valuation. From the results of the analyzed data for the target company, the DCF valuation was $68 and the P/E ratio valuation was $33.5. The target price for this endeavor should be $50.75.

DCF Valuation

This model obtains the predicted cash flows and the terminal worth of a corporation by considering the present-day value of the prospect cash flows that it generates discounted by the firm’s weighted average cost of its capital.

From the values obtained, the target company had an organic growth between
Valuation Part of Target Company and
Valuation Part of Target Company  1 between the years 2013 and 2016. This value implies a CARG of value 0%. This value is not a good measure for future estimation. However, the target company has a financial target of 1.94 by the year 2021. Therefore, we used an annual growth rate of 4.5% for this case. For the event of the EBITDA margins, the target company had EBITDA margins in the range 8.5% and 10.1% in the past four years. The average value of the historical value is 9.525% which is the value to determine the EBITDA in the projection period. For the depreciation and amortization, the average of the percentage sales was 2.975% and therefore we used 3% over the forecast period. The average tax rate used was 34%, which gave consistently increasing taxes for the future period.

The capital expenditure of the target firm increased between the year 2016 and 2017, which is appropriate for the business. The appropriate CAPEX to use for the future of the company is 40.1%. For us to estimate the total current assets in the projection period, the percentage sales are 15.3%, which is the average of the percentage sales for the history period. The total current assets increase over the projection period. Current liabilities also increases over the forecast period, and the target company will not grow over that time because the Net Working Capital decreases persistently.

Weighted Average Cost of Capital (WACC)

To calculate the WACC, we used the UK 10 year Treasury rate of 1.6% for the risk-free rate. The market premium has the value 8.4% (10%-1.6%). The levered beta value for this target company was 0.89. The model yielded a 10.7% cost of equity. Assuming a tax rate of 34%, the WACC obtained had the value of 9%.

Valuation Part of Target Company  2

The image above indicates the sensitive analysis of the effects changes in WACC. It also shows the effects of perpetual growth rate assumptions on the overall value of the company to be $68. For the last value, the perpetuity growth used is 2.5%, which resulted in a final value of 71% of the enterprise value. The assumption made is collect since it falls below 80% of the business.

The primary motive of the target firm is to grow and improve the cash flow. Therefore, we explore the effect of reducing the cost of debts to levels lower than the current cost of capital. By reducing the cost of debt to 1.0%, the value of WACC reduces from 9.0% to 8.8%. This change did not impact the cost of capital of the target company. However, the last value increases from 71% to 72% of the enterprise value. The cost of debt after taxation, as well as the present value of free cash flow, would decrease the cost of debt decreases.

P/E ratios

The P/E refers to the price per share divided by the earnings for every share (Gibson 339). This rate helps to know the numbers of years used in earning income that gets accounted for in the stock price. To determine these ratios, we use other companies related to the target company.

P/E ratio

Wal-mart Stores Inc

Aeon Co Ltd

Walmart De Mexico

Grupo Comercial Chedraui SA

Don Quijote Holdings

Pricesmart INC

Dollar General Corp

Dollar Tree INC

Costco Wholesale Corp

Five Below

Average P/E ratio

Most of the P/E ratios of these companies are not the same. The main reason may be due to distortion of specific rates caused by bid speculations or weak earnings. The mean value of P/E ratio for these companies is 24.029, which means that anyone who buys a share will buy it for 24.029 times its last published earnings.

For our target group, the post-tax earning is $3,321. Therefore, we estimate its market value at:

Valuation Part of Target Company  3

Assuming that this market value is good, we have to consider the market variations that might affect our target company. We use the reduction for unquoted companies used by tax authorities i.e. reducing the market value by 1/3 to 1/2. The reductions will results in the valuation of our target company falling from
Valuation Part of Target Company  4 to
Valuation Part of Target Company  5 i.e. from $26600.10 to $39900.16. Therefore, the valuation range of our target company will be from $27 thousand to $40 thousand. The average valuation is $33.5 thousand.

Work Cited

Gibson, Charles. Financial Reporting and Analysis: Using Financial Accounting Information. Boston: Cengage Learning, 2008.