Bvfa Essay

1639 Words Jun 22nd, 2016 7 Pages
Table of Contents 1. Perspective analysis ………………………………………….2 2.1 Forecasting……………………………………………….2 2.2 Valuation …………………………………………………3 2.3 Sensitivity analysis……………………………………….4 2. Application……...…………………………………………….4 3.4 Challenges and opportunities…………………………..4 3.5 Recommendations……………………………………….5 Reference List…………………………………………………….6 Appendix………………………………………………………….7

1.Prospective Analysis

Based on the reformatting financial statement, this report will use the forecasting template designed by Nissim and Penman (2001) to forecast the future financial performance of David Jones. The valuation of the firm is provided subsequently and the underlying key assumptions are considered for
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The discount rate applied in valuation is weighted average cost of capital (WACC), a blend of the cost of equity and the after tax cost of debt. The WACC is 12%, calculated as Re x E/V + Rd x (1 - corporate tax rate) x D/V. A constant growth rate beyond the terminal year is estimated to be 3%, which is consistent with 3% long-term growth in the economy.

* Discount Dividend Model (DDM)
DDM uses the present value of forecasted future dividends as the value of the company’s equity ( Palepu & Healey, 2013). DJS’s share price is AUD 2.17 under DDM, which is slightly lower than the market share price of AUD 3.91. It indicates that DJS’s stock price might be overvalued. This may be caused by the shareholders’ expectation of continuously receiving high dividend. However, dividend does not necessarily link to the value added of a firm, so it is necessary to use other models for verification before making the judgment of overvaluation. (Table 3)

* Residual Operation Income Model (ROIM)
ROIM uses the properties of accrual accounting that recognize value added ahead of cash flows and provides a more specific understanding of how DJS using operating assets to realize the appreciation of the firm by using the cost of capital to the firm, WACC, to discount the forecasted NOPAT and NOA. This approach gives a even lower share value of 2.04 than that under DDM approach. This confirms that the share

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