This is a very important( valuation of companies) test that is in the 21st of aug at 10 am. it will be sent to you at 10 am and would be expecting it back by after 14 hours. i will be attaching the supporting files from lectures and seminar questions and answers once im linked to the tutor. I want the way of the answers to be similar to the ones of the answers in the mock paper attached. where answers would be linked to information of the lectures naturally to show background knowledgethanks
1 Valuation of Companies and Cash Flow Generating Assets MOCK Takeaway Paper (TAP) August 2020 Assessment Submission Guidelines • This MOCK paper consists of TWO (FOUR in the final exam) questions. Each question carries 50 marks (25 in the final exam). • You should attempt ALL questions. • You should print the word count of this assessment on the front page. The maximum word count is 500 per question that is a total of 1,000 (2,000 in the final TAP). • Please note that this is NOT a group assignment. You cannot discuss the questions with others, so the answers to questions must be worked out and written up individually. You may receive reduced or no marks if there are strong similarities between the works handed in by two or more people. • Your answer to each question should INCLUDE the full references of the articles, books and other sources cited. You can present the references at the end of your answer to each question. The bibliography (and any footnotes) are NOT included in the word count. • You should submit your answer file electronically through the "E-submissions" link on the module’s Canvas site WITHIN 24 hours since the release of the exam paper. Please check the module’s Canvas site for the exact date and time of the release of the exam paper. • Late submissions will be treated according to the university regulations. More information on assessment regulations can be found here: http://www.sussex.ac.uk/adqe/standards/examsandassessment/esubmission Word count: --- http://www.sussex.ac.uk/adqe/standards/examsandassessment/esubmission 2 Assessment Questions Question 1: Define the Explicit Forecast Period and the Continuing Value (CV). CV can represent a considerable proportion of any valuation, discuss any related issues. Question 2: Using the appended Airbnb article from the Financial Times, please address the following: 2.1 Explain how the Corona virus may have affected the Airbnb’s valuation. In 2019, the company showed a 35% year-on-year revenue increase, do you think that this is sustainable? 2.2 Why would the changes in market capitalisation of Expedia, Hilton and Booking.com be relevant to Airbnb’s valuation? 2.3 According to a Wall Street Journal report, the company posted a loss for the first nine months of the year of $ 322m. If free cash flow was negative during the period, does this matter to implement a discounted cash flow valuation. What alternatives are there to value loss making companies? 3 4 5 1 Valuation of Companies and Cash Flow Generating Assets MOCK Takeaway Paper (TAP) August 2020 Assessment Submission Guidelines • This MOCK paper consists of TWO (FOUR in the final exam) questions. Each question carries 50 marks (25 in the final exam). • You should attempt ALL questions. • You should print the word count of this assessment on the front page. The maximum word count is 500 per question that is a total of 1,000 (2,000 in the final TAP). • Please note that this is NOT a group assignment. You cannot discuss the questions with others, so the answers to questions must be worked out and written up individually. You may receive reduced or no marks if there are strong similarities between the works handed in by two or more people. • Your answer to each question should INCLUDE the full references of the articles, books and other sources cited. You can present the references at the end of your answer to each question. The bibliography (and any footnotes) are NOT included in the word count. • You should submit your answer file electronically through the "E-submissions" link on the module’s Canvas site WITHIN 24 hours since the release of the exam paper. Please check the module’s Canvas site for the exact date and time of the release of the exam paper. • Late submissions will be treated according to the university regulations. More information on assessment regulations can be found here: http://www.sussex.ac.uk/adqe/standards/examsandassessment/esubmission Word count: --- http://www.sussex.ac.uk/adqe/standards/examsandassessment/esubmission 2 Assessment Questions Question 1: Define the Explicit Forecast Period and the Continuing Value (CV). CV can represent a considerable proportion of any valuation, discuss any related issues. Indicative answer The objective of a discounted cash flow valuation is to estimate an equity value of a given company. Equity is a perpetuity (no end date), and therefore to make a discounted cash flow valuation we need to estimate cash flows in perpetuity. By conducting a detailed analysis not only of the company as such, but also of its operating environment (e.g., through Porter’s Five Forces and SWOT), we can gain a good understanding its operations and thus make forecasts of the various components constituting its free cash flows (FCF). However, we will only have information to forecast the FCF for a limited period, as the further out in the future we go, the less precise will the information be. Therefore, we will need to split the forecasts into two periods: • The Explicit Forecast Period, and • Continuing Value. The explicit forecast period should be as long as possible. In Lecture 5a, we note that McKinsey argue that the period could be up to 15 years. If need be it could be subdivided into two periods, During the second period, only a few key variables like revenue growth, profit margins… would be forecast. 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 2 0 1 8 2 0 1 9 2 0 2 0 2 0 2 1 2 0 2 2 2 0 2 3 2 0 2 4 2 0 2 5 2 0 2 6 2 0 2 7 2 0 2 8 2 0 2 9 2 0 3 0 2 0 3 1 2 0 3 2 2 0 3 3 2 0 3 4 2 0 3 5 Estimated FCF Explicit Forecast Period Continuing Value 3 The time span when the FCF can be forecast in detail is the Explicit Forecast Period and is limited in time to say T periods ahead. We will thus discount each periodic FCF at the company’s WACC: But in any case, the Explicit Forecast Period should be long enough so that that its end, that is time T, the firm should have reached a mature stage in its development, that is the steady state. At time T, we will not have detailed information to be able to forecast all components which constitute FCF, and therefore we will need to make a general assumption about the perpetual growth of FCF, and therefore we need some stability in the firm’s operations to make a credible assumption. The FCF during the CV will be treated as a growing perpetuity and as argued in Lecture 5b, the formula can be rewritten in terms of the Key Value Drivers: Continuing Value? = 1 (1 + ????)? ( ???????+1 (1 − ? ?????) ???? − ? ) The total value of a firm’s operations is thus the sum of the value during the Explicit Forecast Period and the CV (two stage valuation): Value = FCF1 1 + WACC + FCF2 (1 + WACC)2 + FCF3 (1 + WACC)3 + ⋯ + FCF? (1 + WACC)? + 1 (1 + WACC)? ( NOPLAT?+1 (1 − ? RONIC ) WACC −? ) Value = FCF1 1 + WACC + FCF2 (1 + WACC)2 + FCF3 (1 + WACC)3 + ⋯ + FCF? (1 + WACC)? 4 In most valuations, the CV represents a considerable proportion of total value. Indeed, we ultimately are estimating the value of equity, which is a perpetual instrument. And even though we said that the Explicit Forecast Period should be as long as possible, it will still be shorter than the CV which covers the perpetual time span from the end of the Explicit Forecast Period. Therefore, the values of these cash flows will be much higher. Making the correct assumptions thus matters. Issues to consider include: • As previously suggested, be sure that the firm has reached steady state. • Make sure that growth rate and the return on invested capital (RONIC) during the CV are realistic. These are key inputs which will significantly impact the CV. These assumptions can for instance reflect industry dynamics. • Adjust forecast to the CV period and not simply extrapolate from the last period of the Explicit Forecast Period. 5 Question 2: Using the appended Airbnb article from the Financial Times, please address the following: 2.1 Explain how the Corona virus may have affected the Airbnb’s valuation. In 2019, the company showed a 35% year-on-year revenue increase, do you think that this is sustainable? 2.2 Why would the changes in market capitalisation of Expedia, Hilton and Booking.com be relevant to Airbnb’s valuation? 2.3 According to a Wall Street Journal report, the company posted a loss for the first nine months of the year of $ 322m. If free cash flow was negative during the period, does this matter to implement a discounted cash flow valuation. What alternatives are there to value loss making companies? Indicative answer Question 2.1 Consequences of the Corona virus include/have included lockdowns and travel restrictions in several major economies. This has severely affected the hospitality sector where Airbnb operates, resulting in a sharp decrease of Airbnb’s overnight accommodation bookings (90%