AFIN 102 - Analyse Efficient Electronics Shares - Discounted Free Cash Flow Valuation - Accounting and Finance Assignment Help

Assignment Task:

Task:

As a new junior analyst for a large brokerage firm, your first task is to analyse the shares of Efficient Electronics, a White Goods and Electronic Goods retailer in Australia.

Your manager recommends determining prices based on both the discounted free cash flow valuation method and the comparable P/E ratio method.

You are a little concerned about this recommendation because your finance lecturer has told you these two valuation methods can result in widely differing estimates when applied to real data as the result is very sensitive to your assumptions. He stressed on several occasions that it is essential to motivate these assumptions very well and be self-critical. It would come as no surprise if this turns out to be a major marking criterion for assignments.

Section 1: Executive Summary
The executive summary should state what this report is about, what methods you have used and your recommendations.

Section 2: Macroeconomic and Industry analysis
Efficient Electronics, a White Goods and Electronic Goods retailer in Australia, runs in the same industry as some similar companies currently listed on the Australian Stock Exchange.

Required:
1. Select at least 2 companies that can be used as a proxy to describe the industry where Efficient Electronics is in. Justify your choice carefully.
2. Cite with reference to reliable resources, in your own words, discuss:
a. Performance of the industry over the past 3 years
b. Short-term (up to 5 years) outlook for the industry, including identification of two (2) major risk factors and how does them affect the industry
c. Determine the short-term growth rate for the industry based on the above information
d. Discuss the long-term (beyond 5 years) macroeconomic outlook and use relevant information to determine the long-term growth rate for the industry

Section 3: DCF Analysis
To determine the share value based on the discounted free cash flow method:
1. Forecast the free cash flows using the historic data from the financial statements above to compute the three-year average of the following ratios:
a) EBIT/sales;
b) tax rate (income tax expense/income before tax);
c) property, plant and equipment/sales;
d) depreciation/property, plant and equipment;
e) networking capital/sales.
2. Create an empty timeline for the next five years;
3. Forecast future sales based short-term growth rate discussed in section 2, part 2(c) of this assignment
4. Use the average ratios computed in part (a) to forecast EBIT, property, plant and equipment, depreciation and net working capital for the next five years;
5. Forecast the free cash flows for the next five years using Eq. 10.2;
6. Determine the horizon enterprise value for year 5 using Eq. 10.6 and a long-run growth rate that has been determined in section 2, part 2(d) of this assignment
7. Determine the enterprise value of the firm as the present value of the free cash flows;
8. Determine the share price using Eq. 10.4, with reference to the cash, debt and number of shares outstanding provided in the statements in this case

To facilitate this task, your boss has given you a template to fill in and he suggested you may further explain your calculation in no more than 200 words if necessary.

Section 4: Ratio Analysis 
1. Calculate and estimate of share price for Efficient Electronics based on a comparable P/E ratio, multiply the industry average P/E ratio by the EPS of Ingenious IT.
2. Use a similar method to estimate the share prices of Eager Engineering:
a. P/E to Growth
b. Price to Sales Ratio
c. Enterprise Value/EBITDA
d. Price/EBITDA
3. Discuss the differences in various ratio analysis and which one you believe would be a more accurate measure for Efficient Electronics’s share price.

Section 5: Discussion 
Explain to your manager why the estimates from the two valuations in this case study, the Discounted Cash Flow model vs methods differ. Specifically address the assumptions implicit in the models themselves, as well as the assumptions you made in preparing your analysis.

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