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FIN321 Security Analysis And Portfolio Management

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FIN321 Security Analysis And Portfolio Management

0 Download6 Pages / 1,316 Words

Course Code: FIN321
University: Thomas Edison State University

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Country: United States

Question:
Discounted cash flow valuationValue the stock of your company using adiscounted cash flow model. You shouldpick the model that you think is the most appropriate for your company. Identify and make necessary assumptions (such as growth rate assumption, interest rateassumption, and etc.). Estimate how sensitive your estimated value is to changes in your assumptions. Support your arguments 
Answer:
Discounted cash flow method to calculate value of a firm:

CASH FLOW OF BCE INC

 All amounts are in CAD millions

 2013-12

 2014-12

 2015-12

 2016-12

 2017-12

 Operating activities cash flows

 

 

 

 Depreciation  

    3,380.00

    3,452.00

    3,420.00

    3,508.00

    3,850.00

 Investments losses (gains)

             7.00

        (10.00)

        (72.00)

        (58.00)

             5.00

 Deferred income taxes

        828.00

        929.00

        924.00

    1,110.00

    1,039.00

 Working capital (other)  

        147.00

        365.00

        241.00

        286.00

        480.00

 Non-cash items (other)

    2,114.00

    1,505.00

    1,761.00

    1,797.00

    1,984.00

 Net cash from operating activities  

    6,476.00

    6,241.00

    6,274.00

    6,643.00

    7,358.00

 Cash Flows From Investing Activities

 

 

 Property, plant, and equipment acqusition  

  (4,034.00)

  (3,717.00)

  (3,626.00)

  (3,771.00)

  (4,034.00)

 Net acqusitions  

  (2,850.00)

        702.00

          98.00

      (386.00)

  (1,649.00)

 Investment purchase

          (3.00)

 

 

      (517.00)

 

 Receipt from sale of investments

        107.00

             6.00

 Intngible assets sold

 

 

 

        323.00

 Other investing activities

          23.00

      (555.00)

      (586.00)

        (17.00)

        (83.00)

 Cash used (net) in investment activities  

  (6,401.00)

  (3,570.00)

  (4,114.00)

  (4,584.00)

  (5,437.00)

 Financing activities  

 

 

 

 

 Issue of debt  

    4,710.00

    1,897.00

    1,574.00

    3,235.00

    3,344.00

 Repayment of debt  

  (2,564.00)

  (1,117.00)

  (2,084.00)

  (2,516.00)

  (2,653.00)

 Issue of common stock  

          13.00

          49.00

        952.00

          99.00

        117.00

 Buy back common stock  

      (138.00)

      (106.00)

      (224.00)

 Payment of dividend

  (1,922.00)

  (2,027.00)

  (2,319.00)

  (2,431.00)

  (2,639.00)

 Other financing activities

      (106.00)

  (1,242.00)

        (98.00)

      (100.00)

        (94.00)

 Net cash provided by (used for) financing activities

        131.00

  (2,440.00)

  (2,113.00)

  (1,819.00)

  (2,149.00)

 Net increase / (decrease) in cash  

        206.00

        231.00

          47.00

        240.00

      (228.00)

Assuming that the future net increase in cash flows will grow by 5% each year perpetually the expected net increase in cash flow in the next five years will be as following:

All amounts are in CAD millions

 2018-12

 2019-12

 2020-12

 2021-12

 2022-12

Net increase in cash (assumed to grow by 5%)

        216.30

        227.12

           238.47

        250.39

        262.91

The weighted average cost of capital is calculated below in the table:

Weighted average cost of capital (WACC)

 

CAD Millions

2017-12

Proportion

Cost (%)

Proportionate cost (%)

 Long-term debt (Market value)

   18,215.00

         0.3049

           5.638

           1.719

 Total stockholders’ equity (Market value)  

41526.3

         0.6951

         13.773

           9.574

 

   59,741.30

         1.0000

 

         11.293

The cost of debt (Rd) has been calculated by taking into consideration the interest expense of 2017 and the book value of debt as on 31st December 2017 (Schueler, 2017).
The cost of equity (Re) is calculated by taking into consideration the amount of dividend paid in 2017 and the book value stockholders equity.
To calculate weighted average cost of capital the equity and debt has been used in market value proportion. The market value of equity has been calculated by multiplying the market price of each share as on 31st December 2017 with the number of shares outstanding as on that date (Sofat, 2016).

Weighted average cost of capital (WACC)

 

CAD Millions

2017-12

Proportion

Cost (%)

Proportionate cost (%)

 Long-term debt (Market value)

   18,215.00

         0.3049

           5.638

           1.719

 Total stockholders’ equity (Market value)  

41526.3

         0.6951

         13.773

           9.574

 

   59,741.30

         1.0000

 

         11.293

The discounted cash flow of next five year is calculated below:

All amounts are in CAD millions

 2018-12

 2019-12

 2020-12

 2021-12

 2022-12

Net increase in cash (assumed to grow by 5%)

        216.30

        227.12

           238.47

        250.39

        262.91

Discount rate @11.293%

0.8985291

0.8073546

0.72543157

0.6518214

0.5856805

Discounted expected cash flow

        194.35

        183.36

           172.99

        163.21

        153.98

Particulars

Amount (CAD Millions)

Present value of total cash flow

        867.90

Add: Discounted terminal cash flow

1363.5021

(262.91/11.293% – 5%) x 0.5856805

Value of the firm

    2,231.41

References:
Schueler, A. (2017). A Tool Kit for Discounted Cash Flow Valuation: Consistent and Inconsistent Ways to Value Risky Cash Flows. SSRN Electronic Journal, 3(7), 7-14. doi: 10.2139/ssrn.3132243
Sofat, R. (2016). Strategic financial management (5th ed., pp. 17-163). [Place of publication not identified]: Prentice-Hall Of India.

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