FINM7044 Applied Valuation

Semester 1, 2015
Assignments #2

Due date: By 4pm, Friday 24 April 2015

Submission: This assignment is to be submitted in hard copy together with an email for your
supporting spreadsheets. The file name of the spreadsheets file should indicate the assignment
number and group number such as Assignment2_Group12.xlsx.
Writing: Use an 11pt or 12pt font size, and 1.5 or double-line spacing throughout your
document. Do not include any abstract/executive summary or reference list. Use this question
cover page as the cover page of your Word file document.

Student Group # __________

First Name

Last Name

Student Number

Question 1 (35 points)

The table below contains recent information extracted from the financial statements of Focus Ltd (in
millions, unless stated otherwise):

Revenue
EBITDA
EBIT
Net profit
Assets
Debt
Stockholders equity
Earnings per share (in cents)
Dividends per share (in cents)

2010
$1,549
$410
$350
$210
$3,500
$945
$1,550

2011
$1,610
$460
$400
$245
$3,360
$1,020
$1,600

2012
$2,040
$510
$450
$280
$3,450
$850
$1,600

46
34.5

49
36.75

56
42

Stock in Focus Ltd is currently trading at $8.36 per share, and the firm has 500 million shares on issue.
Focus also intends on paying dividends into the future, and has no intention of changing its dividend
payout ratio in the future. The earnings not paid out as dividends in a given year are reinvested into the
company to fund expansion. The expected growth rates in earnings per share over the next 5 years are:
5.1%, 4.6%, 4.1%, 3.6% and 3.1% respectively. The debt and equity levels are also expected to remain
constant (i.e. the same as their 2012 values), forever. The corporate tax rate is 30%
(a)

Estimate the free cash flow to the firm (FCFF) for Focus Ltd for each of the 5 years from 2013 to
2017. In doing so, assume that the depreciation and interest expenses in each of these years is
expected to be the same as in 2012, and that capital expenditure each year equals the depreciation
expense plus the reinvested earnings. Also assume that there is no change in working capital over
the period.

(b)

Calculate the firm value and equity value of Focus Ltd, assuming a weighted average cost of
capital of 10.95%, and a growth rate in FCFF after 2017 of 3.1% p.a. forever.

With everything included, the answer should not exceed two pages.

Question 2 (65 points)

This is a minicase of financial forecast. Analyse this minicase and answer all questions. The firms
financial statements information is provided in the excel file, Spreadsheets_for_Assignment2.xlsx.
With everything included, the answer should not exceed four pages.

China Huiyuan Juice Group Limited

On September 3, 2008, the Coca-Cola Company offered to buy China Huiyuan Juice Group, the
nations largest juice maker (which was listed on Hong Kong Stock Exchange), for 17.92 billion
Kong Kong dollars in cash. The acquisition was halted by Chinese regulator. On March 18,
2009, the Ministry of Commerce (MOC) announced that Coca-Colas bid to acquire Huiyuan
failed to meet the countrys anti-monopoly law. Huiyuan gained 149 percent from the time
before the offer announcement to the day before the ministrys announcement.
In mid 2008, in preparation for negotiation with Coca-Cola for a possible deal, the chief
financial officer (CFO) of Huiyuan, Mr. Francis Ng, worked to evaluate the fair value of his
company. He started with financial forecast. In this question, suppose you are the CFO working
on the three-year financial forecast for the period of 2008-2010. With the provided balance
sheets and income statements of the years 2005-2007, answer all questions. Corporate income is
expected to be taxed at the marginal tax rate of 25%. Both common stock and long-term debt
will remain unchanged during the forecast period.
(a) Complete the forecast table using historical average percentages of sales wherever
applicable. Use overdrafts (adding a line in current liabilities) to meet any need for external
capital. Huiyuan will keep its cash level at HK$352 million or higher. The base interest rate
of 3% will apply to overdrafts and cash, and the interest rate on Huiyuans long-term debt
will be 7.5%. Interest expenses are determined based on debt and cash levels at the year
beginning. Show your forecast results and explain the formulas you use to calculate interest
expense, cash, overdrafts and external fund needed.
(b) Huiyuans working capital will change in proportion to sales, following its average
percentage of sales over the period of 2005-2007. Determine Huiyuans free cash flows
(and cash flow components) for each forecast year. Show your results and explain your
FCF numbers for 2009 and 2010.
(c) Determine total assets, earnings per share, return on equity, and the ratio of total debt over
total assets in year 2010 for each of the following (constant) growth rates of sales: 10%,
14%, 18%, 22%, and 26%. The firm has constant 1,365,068,000 shares outstanding.
Furthermore, if the cost over sales ratio can also be a constant of 50%, 55%, 60%, 65% or
70%, respectively, determine the external fund needed (Hint: you can use excels data
table function to simplify the calculation). Show your results and explain the patterns of
the debt-to-assets ratio, EPS and ROE along with sales growth.