Corporate Financial Management
Key task and word count (or equivalent) For this assignment, you will produce a valuation report for Next plc. The report will include a valuation model, a critique of the key methodologies employed, and justification of the key inputs used to value Next plc. (2,000 words (+/- 10%).
Assignment Details and Instructions
Assignment Scenario Quanto Associates is a company with a proven track record in providing valuation services to multinational corporations. In your role as a Valuation Consultant at Quanto Associates (QA), you have been commissioned by the board of Next plc to produce a report justifying an appropriate valuation figure for the company.
Individual Assignment Components
1. Valuation Model Produce a company valuation using a free cash flow valuation model. The model should incorporate estimates of the following;
• Return on invested capital (ROIC)
• Cost of capital (combining the Risk Free, Risk Premium and Beta)
• Horizon or competitive advantage period
• Growth
• Reinvestment required
This section of the report should be included as an Appendix to the written element of the report. An Excel based valuation model template will be provided as a basic template for students to develop.
The marks for the valuation model are awarded as follows;
– Presentation
– Model Accuracy
– Cost of Capital Calculation
– Perpetuity Calculation
– Reinvestment Calculations
– Sensitivity Analysis
– When constructing the valuation model students should carry out some sensitivity analysis to assess the impact that any changes in estimates will have on their valuation. – Evidence of sensitivity analysis should be included in the form of additional valuation models (x 4) included as appendices.
2. Report
The written element of the report should contain three distinct sections (Section A, B & C).
Section A
In your role as Valuation Consultant at QA;
1. You will comment briefly on the valuation you have produced (using the valuation model) and compare your valuation figure with any other current valuation figure available , and;
2. You will be expected to fully justify the estimates used in your model regarding the following key elements;
• The horizon period chosen
• The difference (spread) between ROIC and the Cost of Capital both during and after the horizon period
• The expected future growth both during and after the horizon period
Justification should be provided with reference to a combination of theoretical literature, company, and industry specific factors. It is vital that justification comes from a combination of these sources.
Section B
In your role as Valuation Consultant, you will be required to;
1. Write a critique of the valuation methodology employed (e.g., free cash flow / discounted cash flow valuation methodology)
2. Briefly write a critique of any two alternative valuation methodologies.
Justification should be made with reference to a wide range of relevant theoretical literature.
Section C
In your role as Valuation Consultant, you will be required to;
1. Write a critique the model used to estimate the Cost of Capital e.g. CAPM and;
2. You will be required to justify the estimates used, both in the Horizon Period and the Perpetuity Period in respect of;
• the risk-free rate
• the risk premium
• Beta
Issues surrounding the Cost of Capital model (CAPM) and the difficulties in estimating inputs to the model should be fully explored with reference to relevant theoretical literature.
Specific requirements
Students will be required to base any figures or estimates used on Next plc. Students should assume, for the purposes of the assignment, that Next plc is an all equity-financed company.
Students may wish to structure the report as follows:
Section A – 500 words +/-10% (25% of total word count)
Section B & C – 1,500 words +/-10% (75% of total word count)
General requirements
– Word limit: 2,000 words +/- 10% (excluding company valuation calculation, bibliography, references, tables, headings, sub-headings and appendices).
– The report should include Harvard referencing.
– The report is to be completed on an individual basis.
