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##### a) Explain why terminal values in accounting ?base...

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a) Explain why terminal values in accounting ?based valuation are significantly less than those for DCF valuation. b) How can a company with a high ROE have a low PE ratio? What types of companies have? i) A high PE and a low market-to-book ratio? ii) A high PE ratio and a high market-to-book ratio? iii) A low PE and a high market-to-book ratio? iv) A low PE and a low market-to-book ratio? c) 1. How will the factors in Table 8.4 change if Michael Hill were to maintain a sales growth rate of 10 per cent per year from 2007 to 2016 (and all the other assumptions are kept unchanged)? 2. Recalculate the forecasts in Table 8.4 and 8.5 assuming that the ratio of net operating working capital to sales is 30 per cent and the ratio of net long-term assets to sales is 10 per cent for all the year from fiscal 2008 to facial 2016. Keep all the other assumptions unchanged. 3. Calculate Michael Hill?s cash payouts to its shareholders in the years 2007-2016 that are implicitly assumed in the projections in Table 8.4 TABLE 8.4 PRIOR YEAR 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Income statement (\$000) sales 306374 343139 384316 426590 469249 513828 560072 607679 656293 705515 754901 - Net operating profit after tax 20913 24981 27728 29093 31344 33604 35853 38721 41625 44539 - Net interest expense after tax 1883 1927 1944 1843 1931 2105 2284 2467 2652 2837 = Net income 19049 23054 25785 27250 29412 31499 33569 36254 38974 41702 - preferred dividiends - - - - - - - - - - = Net income to common 19049 23054 25785 27250 29412 31499 33569 36254 38974 41702 Beginning balance sheet(\$000) beg. Net working capital 96079 99922 102382 112620 123319 134417 145843 157510 169324 181176 + beg.net long-ternm assets 37745 40353 42659 44579 46245 50407 54691 59066 63496 67941 = net operating assets 132805 133824 140275 145041 157199 169563 184824 200534 216577 232820 249117 net debt 56206 57513 58016 55019 57651 62840 68182 73636 79159 84700 + preference shares - - - - - - - - - - opening equity 77618 82762 87024 102179 111912 121984 132352 142941 153661 164417 equity injections needed - - - - - - - - - - = Net capital(beginning) 133824 140275 145041 157199 169563 184824 200534 216577 232820 2449117 + profit 19049 23054 25785 27250 29412 31499 33569 36254 38974 41702 Div. distributions -11332 -12083 -12706 -14918 -16339 -17810 -19323 -20869 -22435 -24005 Equity issues 2859 -2572 -6708 2075 -2599 -3001 -3321 -3657 -4665 -5783 -6681 + closing equity 77618 82762 87024 102179 111912 121984 132352 142941 153661 164417 175433 = Net capital (closing) 140275 145041 157199 169563 184824 200534 216577 232820 249117 265808 Ratio operating return on assets(%) 15.6 17.8 19.1 18.5 18.5 18.2 17.9 17.9 17.9 17.9 return on equity (%) 24.5 27.9 29.6 26.7 26.3 25.8 25.4 25.4 25.4 25.4 book value of assets growth (%) 0.8 4.8 3.4 8.4 7.9 9 8.5 8 7.5 7 book value of equity growth (%) 6.6 5.1 17.4 9.5 9 8.5 8 7.5 7 6.7 Net operating asset turnover 2.6 2.7 2.9 3 3 3 3 3 3 3 cash flow net income - change in net working capital 19049 23054 25785 27250 29412 31499 33569 36254 38974 41702 - change in net long-term assets -3843 -2460 -10238 -10699 -11099 -11425 -11667 -11813 -11853 -12139 + change in net debt -2608 -2306 -1920 -1666 -4162 -4285 -4375 -4430 -4445 -4552 = free cash flow to equity 1307 503 -2997 2632 5189 5341 5455 5523 5541 5675 13904 18792 10630 17518 19340 21131 22981 25534 28217 30686 Net operating profit after tax - change in net working capital 20931 24981 27728 29093 31344 33604 35853 38721 41625 44539 - change in net long-term assets -3834 -2460 -10238 -10699 -11099 -11425 -11667 -11813 -11853 -12139 = free cash flow to capital -2608 -2306 -1920 -1666 -4162 -4285 -4375 -4430 -4445 -4552 14480 20215 15571 16729 16083 17894 19810 22478 25328 27848 Table 8.5 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Equity Valuation Abnormal earnings 9656.79 13039.59 15254.87 14886.64 15870.86 16739.17 17554.32 18958.66 20380.56 21807.2 Abnormal ROE (%) 12.44 15.76 17.53 14.57 14.18 13.72 13.26 13.26 13.26 13.26 Free cash flows to equity 13904.23 18791.77 10630.2 17517.6 19340.12 21130.58 22980.77 25533.93 28217.28 30685.74 Asset Valuation Abnormal NOPAT 9656.79 13039.59 15254.87 14886.64 15870.86 16739.17 17554.32 18958.66 20380.56 21807.2 Abnormal operating ROA(%) 7.22 9.3 10.52 9.47 9.36 9.06 8.75 8.75 8.75 8.75 Free cash flows to capital 14480.46 20215 15570.54 16782.74 16082.82 17894.32 19810.32 22478.03 25327.98 27848.3 Discount factors Equity 0.89 0.8 0.71 0.63 0.56 0.5 0.45 0.4 0.36 0.32 Assets 0.92 0.85 0.78 0.72 0.66 0.6 0.55 0.51 0.46 0.43 Growth factors Equity 1 1.05 1.23 1.35 1.47 1.6 1.73 1.86 1.99 2.12 Assets 1 1.05 1.08 1.17 1.27 1.38 1.5 1.62 1.74 1.86

Paper#8679 | Written in 18-Jul-2015

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