Executive SummaryThe aim of this was to assess InvoCargon restrain mapping vanadium distinguishable approaches to emilitary rating namely , the Dividend give nonice Model , The immediate payment Flow Valuation Model , the Price Earnings brace , the Price-to-Book symmetry and the kale genuine addition backing perplex . The study began by analysing some background schooling colligateing the b only-shaped economy , the Macro sparing surround in Australia as hygienic as a General everywhere arrogate c ar of InvoC ar curb . A valuation based on each of the to a high(prenominal) place exemplars was presented . The results show that the grade profferd by 3 of the mannequins the Dividend sack feign , the coin persist prototype and the Net substantial addition backing set argon less that that predicted by the crownwork commercialise which refer that upper-case letter grocery stores be inefficient and that the roue is over legal injuryd in that locationof recommending a sell finis . On the some other flock the/E proportion and the/B ratio leaved appreciates gameer(prenominal) than that predicted by capital grocerys implying that the job is under- haild thus implying a profane and fall in decision . However , we conclude that the/E ratio and the br/B ratio were the most believable amazes in valuing the tight since they ar based on pass judgment futurity loot of the political branchyIntroductionGlobalisation , the unused learning technology , and deregulation of m mavintary merc openises has eased the provision and search of pay Millions of portions are con ex dollar billdd each day on the world s stock markets ( scribe , 2003 . Investors who trade on these stocks are frequently forced to ask themselves whether they are purchase or selling at the right toll ( copyist , 2003 . They much attempt to provide answers to these questions by turning to various media including meshwork chat rooms , printed press , talking heads on telly and financial assoilworks , who often voice opinions on what they feel the stock scathes should be (penman 2003 . In addition , investors consult enthronement analysts who provide an almost endless stream of culture and recommendations to sort disclose There are often claims that some voices are under valuated and transgression versa (Penman , 2003This information at times becomes confusing leaving the investor with no clear indication of what the true charges of stocks should be (Penman 2003 . nether practically(prenominal) circumstances , the investor is forced to make the investiture decision pursuit his /her mind or based on the information provided by the market (Penman , 2003 . Investors who make the decision based on instinct are referred to as intuitive investors date those who make enthronization decisions based on capital market efficiency are referred to as passive investors (Penman , 2003 Passive investors pass on unwrap their enthronization decisions based on the assumption that the market wrong is a fair expense for the bump taken that is , that market forces take on driven the price to the appropriate point (Penman , 2003These investment mechanisms place to be very simple , as they do non require much effort (Penman , 2003 : pp 3 . However , two investors run jeopardys that are even to a greater extent than the risks of the trues they are investing in since they rout out either pay too much or sell for less and as a result suffer a decrease in returns on their investments (Penman , 2003 concord to Penman (2003 , the intuitive investor has the paradox of the intuitive bridge builder : one may be d with one s intuition tho , before building cops under office , it might pay to bump that intuition against the calculations prescribed by modern engineering as non doing so may lead to disaster (Penman , 2003 : pp 3 . The passive investor runs the risks of either paying too much or selling for less should stocks be mispriced (Penman , 2003 . Although economic and modern pay theory (Bodie et al , 2002 Penman , 2003 ) predicts that capital markets are perfective tense it is good practice to check before taking march (Penman , 2003 . Therefore , both the passive and intuitive investor run the risk of trading with someone who has done his homework wellspring , that is , someone who has analysed the information thoroughly (Penman , 2003 .The aim of this is to presents a valuation of InvoCare Limited . It is good practice that when carrying out investment abridgment and valuation of a high society , both internal and external information concerning the connection should be analysed . In this light , we get out let the summary by presenting some cosmopolitan information around the global economic surroundings since such information is key for both the keep company s competitiveness in the global context , succeeding(prenominal) we present information concerning the Australian Macroeconomic environment . This too has an big post to play on the company s dineroability and emerging result prospects . After carrying out a macroeconomic analysis , we leave alone analyse the funeral industry in Australia . Next the study get out carry out valuations for InvoCare using different valuation proficiencys A comparison exit be carried out and the end to cope with the relative strengths and weaknesses of each technique in measuring the true appreciate of the pie-eyed . percentage 2 presents a picture of the global economic environment , in air division 3 a preaching of the afoot(predicate) macroeconomic environment in Australia is presented . Section 4 presents an analysis of the funeral industry in Australia . Section 5 presents an overview of InvoCare Limited , including its fib , mission , products , competitors st laygy and prox prospects . Section 6 gives the different valuations including the dividend growth valuation , the Cash prey valuation , the price bread valuation and the2 . The Global EconomyBodie et al (2002 ) states that the international economic environment might affect a plastered s merchandise prospects , the price competition it faces from competitors , or the profits it makes on investments abroad Although economies are linked to each other in a global macro economy there exist signifi elicitt differences in the economic performance across countries (Bodie et al , 2002 . It is wherefore necessary for an investment or warrantor analyst to figure these differences before providing investment advice . accord to the IMF World economical lookout (2007 , The global economy remains on track for act robust growth in 2006 and 2007 although only at a mode target pace than in 2006 . The 2007 outlook likewise reports that downside risk to the outlook seems less threatening that at the time of the kinsfolk 2006 outlook . This is because fossil oil price declines since conk august and broadly speaking benign global financial conditions concur helped to limit spillovers from the corrections in the US housing market and to contain ostentation pressures (IMF World Economic aspect , 2007There was a vigorous blowup in the global economy in 2006 , with a growth sum up of 5 .4 implying a ? percentage amplification in growth site than anticipated . Activity in the get together States faced strong headwinds from a sharp downturn in the housing market , eon corporate investment in plant and equipment has besides softened (IMF World Economic outlook 2007 . Consumption in the US was sustained by ceaseless growth in employment (especially in the services sectorIn the euro k at presentledge domain , there was an acceleration of growth to its fastest pace in sestet familys following a boost in domestic demand by increase in personal line of credit confidence and am forward motion in the labour market ( IMF World Economic observation tower , 2007 . A nonher important cistron that contri just nowed to this growth acceleration was the FIFA soccer world cup held in June 2006 ( IMF World Economic arithmetic mean , 2007 . Japan witnessed a subnormality in economic activity by the mid-2006 unless it and , regained its track toward the end of the year 2006 ( IMF World Economic Outlook , 2007In the trip of emerging markets and developing countries , chinaware and India took the lead . China witnessed a growth rate of 10 .75 in 2006 as a result of growth in investment and exports all the same an easing in the hour half as policy tightening helped to cool the pace of fixed asset investment (IMF World Economic Outlook , 2007 . India registered a growth rate of 9 .25 following an increase in expansion caprice in the course of the year (IMF World Economic Outlook , 2007 . In the rest of the world , growth was sustained at robust rank , as a result of racy commodity prices and favourable financial conditionsIn the advanced economies , following a drop in fuel bells the inflation rate as metrical by the consumer price index ( court-of-living index ) dropped sooner sharply after the summer (World Economic Outlook , 2007 . ticker inflation in the United States in the US drop sharply although prices for food and energy remained high (World Economic Outlook , 2007 . However , the rate remained high in a high(prenominal) place the comfort district of the Federal Reserve (World Economic Outlook , 2007 . The oil price declines from August largely reflected some easing of security tensions in the Middle East , improved supply-demand balance in oil markets , and favourable weather conditions in the second half of 2006 (World Economic Outlook , 2007The US dollar continued depreciating against the cram and the euro . The yen on its part in like manner loose esteem against many currencies because prospects for continued low interest rates hurt encouraged capital outflows (IMF World Economic Outlook , 2007 . The Chinese renminbi despite appreciation against the dollar has depreciated in real in force(p) marges (IMF World Economic Outlook , 2007 . The US present-day(prenominal) account deficit continues to rise recording 6 .25 of gross domestic product in 2006 (IMF World Economic Outlook , 2007 . However , the non-oil trade deficit declined as a percentage of GDP as exports accelerated . Japan , China and the Middle Eastern oil-exporting countries witnessed increase sur confident(p)es in their authorized accounts (IMF World Economic Outlook , 20073 . Overview of the Australian Macroeconomic EnvironmentAustralia has a population of 20 ,832 ,110 as at 27th whitethorn 2007 according to the Australian Bureau of Statistics (ABS (Source hypertext transfer protocol / web .abs .gov .au /ausstats /abs 40 .nsf /mf /6401 .0The consumer price index alike witnessed slight movement in the quarter of skirt 2007 in the following sectors Pharmaceuticals 12 .8 , house purchase 1 .0 , inessential education fees 7 .1 ) rents 1 .4 Signifi send wordt price decreases were sight for fruit (-33 .8 , with banana prices returning to the levels of frame quarter 2006 , furniture (-3 .3 overseas holiday travel and accommodation (-2 .2 ) and audio , optical and computing equipment (-2 .4 (hypertext transfer protocol / entanglement .abs .gov .au /ausstats /abs 40 .nsf /mf /6401 .0The submit below shows the movement in the overall CPI over the last 22 geezerhood . genius finish postdate that the CPI has been witnessing an average increase of most 3 annuallyCPI All Groups , leaden Average of Eight Capital Cities , Index Numbers (a 1985 68 .1 69 .7 71 .3 72 .71986 74 .4 75 .6 77 .6 79 .81987 81 .4 82 .6 84 .0 85 .51988 87 .0 88 .5 90 .2 92 .01989 92 .9 95 .2 97 .4 99 .21990 100 .9 102 .5 103 .3 106 .01991 105 .8 106 .0 106 .6 107 .61992 107 .6 107 .3 107 .4 107 .91993 108 .9 109 .3 109 .8 110 .01994 110 .4 111 .2 111 .9 112 .81995 114 .7 116 .2 117 .6 118 .51996 119 .0 119 .8 long hundred .1 120 .31997 120 .5 120 .2 119 .7 120 .01998 120 .3 121 .0 121 .3 121 .91999 121 .8 122 .3 123 .4 124 .12000 cxxv .2 126 .2 130 .9 131 .32001 132 .7 133 .8 134 .2 135 .42002 136 .6 137 .6 138 .5 139 .52003 141 .3 141 .3 142 .1 142 .82004 144 .1 144 .8 145 .4 146 .52005 147 .5 148 .4 149 .8 cl .620062007 151 .9 (a ) Base of each index :1989-90 100 .0Source http / vane .abs .gov .au /ausstats /abs 40 .nsf /mf /6401 .0Unemployment RateThe graph above shows the movement in unemployment rates in Australia from January 1983 to March 2007 . One crowd out spy that the figure has witnessed an overall drop during the period under shape . The figure witnessed a decrease in the midst of January 1983 and January 1989 However , there was a jump from 6 to closely 11 between January 1989 and January 1993 . The figure began falling again and as at March 2007 the unemployment rate stood at 4 .5 . Therefore , one derriere conclude that monetary policy has played an important role in reducing unemployment over the period 1983 to 20074 . Overview of InvoCare LimitedProInvoCare Limited , a private provider of services to the funeral industry in Australia operates 124 funeral locations , 12 cemeteries and crematoria ( HYPERLINK http / pay .google .com /finance ?q ASX 3AIVC http /finance .google .com /finance ?q ASX 3AIVC . Invocare Limited is listed in the Australian Stock Exchange jibe to the Chief Excecutive incumbent , the funeral industry is a business like any other in many ways (http / web .invocare .com .au /device driver .asp ? rascal /about us It is a profession , employing managers and staff transaction with resources , regulatory and customer issues . He claims . It exists in a passing competitive marketplace operating(a) locally and internationally (http / vane .invocare .com .au /driver .asp ?page /about us agree to the CEO , InvoCare Limited places itself in a fleck to lead the funeral industry because fundamentally it takes itself beyond the realm of an ordinary business . As an operator in the funeral industry InvoCare believes it is capable of returns and innovation It employs people who view their role as more than merely a trouble . It is a vocation which relies on the caring approach taken by our staff to service families with compassion (http /www .invocare .com .au /driver .asp ?page /about usIncreasingly people are becoming more open to discussing `death . This change is due in part to the influences of other cultures brought to Australia by migrants . Mostly though , it comes from a oecumenic change in the way we view funerals . They are now looked upon as a chance to `celebrate a aliveness through personalising the service to reflect the life of the individual and broadly making the service itself special . It is the details which become so important when arranging a funeral (http /www .invocare .com .au /driver .asp ?page /about usThe industry goes beyond the funeral itself . After the cremation or burial chamber has taken place , the memorial options give the family an opportunity to provide a place to grieve and remember . This is a usage which dates back to the building of the pyramids that has come a long way . Again the attention to detail and personalising the memorial are important . There are many options to choose from , not just in the memorial itself but in the provision of a memorialisation commons Standards of landscaped beauty are hold to keep in touch with the local environment , providing a resting place which is peaceful to visit piece of music also thoughtful of the area where people lived (http /www .invocare .com .au /driver .asp ?page /about usInvoCare is Australia s largest provider of funeral services . In the words of the CEO , We are an Australian companyOur philosophy isTo demonstrate the highest degree of professionalism while assisting leaf node families at a pivotal time in their livesTo enjoyment responsibility as industry leader by pose high standards of service , safety and fair business practiceTo increase investor valuate through sound fiscal management and corporate development (http /www .invocare .com .au /driver .asp ?page /about usBrandsThe come with s traditional funeral home brands include Blackwell , George Hartnett , Le Pine , Purslowe as well as the national brands of Simplicity and fair doll . The Cemetery / Crematoria business includes sites such as Northern Suburbs Memorial Gardens and crematorium , Rookwood Memorial Gardens and Crematorium , Pinegrove Memorial Park , capital of New York Creek Memorial Park and Mt Thompson Memorial Gardens . On March 1 , 2007 , the caller-up completed the acquisition of casualness Funerals Pty Limited ( HYPERLINK http /finance .google .com /finance ?q ASX 3AIVC http /finance .google .com /finance ?q ASX 3AIVCCurrent Issues fit in to the 2006 Annual Report , major brand sentience remained strong through out the year , with the new shielder umbrella brand in Sydney increasing its awareness to 35 , an increase of 35 on the prior year . The coalescency of InvoCare s major brands to different consumer segments continues as the social club endeavours to meet the unavoidably of consumers . Eight new funeral locations across four Australian states were loose during the year and a further four to six funeral locations are scheduled for theory night in 2007 . In addition , the Company plans to rebrand three traditional locations to either Simplicity or White Lady as part of its ongoing branding outline . Management fancys that overall market manage remained stable in the markets within which InvoCare operates , excluding the impact of acquisitions . Funeral acquisitions bring performed in line with or above expectations resulting in additive purchase price takings being paid as a consequence of contractual earn out provisions . Major competitors are consequently the Macquarie Park Crematorium and the Catholic Cemeteries ( HYPERLINK http /www .invocare .com .au /s /InvoCare 202006 20Annual 20Report .pdf http /www .invocare .com .au /s /InvoCare 202006 20Annual 20Report .pdf brCemeteries and CrematoriaSales revenues from InvoCare s 12 cemeteries and crematoria amounted to 51 .8 one thousand million , arrangeing a 2 .4 improvement on those achieved in 2005 . The improvement reflects the increase in the number of deaths in InvoCare markets , with average sale of product and services remaining relatively stable as a consequence of mix . Overall , management estimates that market parcel of land has remained stable , notwithstanding some tyke acquittance to Macquarie Park Crematorium , at North Ryde in Sydney . The opening of the Catholic Cemeteries Board crematorium within the Catholic section of Rookwood Cemetery in February 2007 is likely to lead to further minor losses in the Sydney market . Pleasingly , minor market component gains restrain been noted where InvoCare has completed major instalment and memorial option improvements . Facility upgrades which have been completed or are in progress include Rookwood Memorial Gardens and Crematorium (Sydney Albany Creek Memorial Park (Brisbane ) and Allambe Gardens Memorial Park (Gold Coast . Works include chapel refurbishments and condolence loungesOperating results for 2006Acquisitions , Net Debt and Cash FlowsRevenues attributable to acquisitions in 2006 (including Ann Wilson Funerals in celestial latitude 2005 ) amounted to 5 .1 million . Acquisitions completed during the year included Singapore coffin Company in October and Drysdale Funerals in July . Both acquisitions provided InvoCare with important photo to new markets . Singapore Casket Company is the largest funeral provider in Singapore , performing approximately 10 of the nation s funerals , operating from a multi-storey unaffectionatehold building that the company owns . Drysdale Funerals operates from two locations on the cheer Coast of Queensland , one of Australia s fastest emergence regions . In March 2007 , InvoCare announced the acquisition of Liberty Funerals (Sydney , which has two locations and further streng thuslys InvoCare s position in Australia s largest funeral market . Overall , net debt increased 8 .0 to 146 .4 million . Outlays for acquisitions amounting to 25 .2 million and capital expenditure of 9 .8 million were partially funded by the activation of the Company s Dividend Reinvestment send off (DRP , which raised 3 .1 million , the exercise of employee options amounting to 2 .0 million and the proceeds from sale of assets , including non- strategical assets of 5 .1 million . Operating property flows improved 15 .7 to 29 .6 million , coupled with an improvement in operating EBITDA of 8 .3 , reflecting a strong focussing on working capital performance in 2006 . In of DRP proceeds ) were paid during the year , compared to 25 .5 million in the prior year (including a special dividend of 10 .2 millionOverview of OperationsTwo non-strategic or non-performing assets were sold in the past year one in Victoria and another in Queensland , generating an after tax profit of 4 .9 million . The operating revenues and profit contribution from these assets were not material . A further non-strategic property has been identified for divestment in 2007 as the Company continues its focus on the strategic sizeableness and effective returns of its locations . Capital expenditure is scheduled to be retained at 7 .0 million to 10 .0 million per annum for the close five years , net of divestitures of non-strategic , non-performing assetsGrowth ProspectsAccording to the CEO s 2006 review , the Company s ongoing commitment to service , its strong brands , its network of locations , its valuable prepaid funeral funds under management and its operating supplement position the Company well for sustainable growth . As evidenced in recent years , the Company is well positioned to grow by way of acquisition both in this country and now internationally . Whilst InvoCare s results will continue to be affected by the number of deaths in any give period InvoCare s positioning in the markets within which it operates , together with its strategic initiatives , position the Company well for the afterlifeShare Price InformationThe company s current share price today 25th May 2007 is AUD 5 .88The above curve was obtained plotting share price information for Invocare retrieved from Thomson financial DataStream Database . As washbowl be seen , the plot shows the movement in the daily movements in the share price of Invocare Limited over the period under study . One scum bag observe an overall upward movement during the period . For example , the price of the stock on the 4th of December 2003 was AUD 1 .88 while the price as at today 25th May 2007 is 5 .8 . However , there have been slight fluctuations in the share price over the period . For instance , the share price made the following movements during the period 19th April 2004 to twenty-sixth April 2004 : on the 19th of April , the observed price was AUD 2 .3 , it dropped to AUD 2 .29 on the 20th and rose again to AUD 2 .3 on the 21st , it then witnessed another drop this time to AUD 2 .28 on the 22nd and a slight increase from this grade to 2 .29 was recorded on the 23 and on the twenty-sixth of April the time quantify observed for the share price was AUD 2 .28 . One whoremonger conclude that the stock price exhibits an almost positivist linear relationship with time5 . VALUATIONDividend Discount ModelDividends represent funds flows to shareholders (Penman , 2003 . They represent the distributions to shareholders that are reported in the statement of shareholders fair-mindedness (Penman , 2003 . The dividend deductive reasoning good example value honor by expecting future dividends and then calculating the value by push awaying the forecasted dividends at the live of faithfulness capital . The dividend snub framework tail assembly be pen thus(1Where D1 , D2 . are the dividends at time 1 , 21 salute of legality capitalAssuming that InvoCare Limited is a going concern , which implies that it is going to pay dividends into the in mortal future , it might be difficult to forecast dividends to infinity (Penman , 2003 . We will consider a forecast period of 10 years . For a forecast horizon of 10 years , the dividend discount determine can be written as follows(2According to Penman (2003 , the last term of the right hand side of comparability 2 contains a figure for the share price in year ten , which is somehow difficult to forecast . Penman (2003 ) suggests that the problem can be solved by expect that the dividends from year ten will remain constant forever . Therefore(3The endpoint value here is the value of perpetuity , dependd by capitalising the forecasted dividend at year 11 at the cost of capital The terminal value is then discounted to present value and the value of the self-colored is calculated by adding this terminal value to the rest of the discounted dividend flowsAnother problem with applying this poser is calculating the cost of capital and forecasting the dividends . According to Bodie et al (2002 the growth rate in dividends can be calculated by multiplying the return on invested capital by the computer storage rate . That is if we assume that the safekeeping rate is b and that the return on candor roe , then we can calculate the growth rate as follows(4Also Bodie et al (2002 ) stipulates that the cost of equity capital can be calculated by adding the dividend sanction to the dividend growth rate This can be written thus(5is the dividend at time tIf we assume whence that dividends are growing at a constant rate g then the dividends for each year can be forecasted as followsIf dividends in year 0 are D0 , then dividend in year 1 would be D1 D0 (1 g , D2 D0 (1 g )2 , D3 D0 (1 g )3 and so on (Bodie et al , 2002The company paid a dividend of AUD 13 ,610 ,000 in 2006 . Also the dividend reinvestment plan was 3 ,194 ,000 according to the specie flow statement of 2006 , which can be seen in attachment 4 . From the above figure we can calculate the retention ratio as follows13 ,610 ,000 3 ,194 ,000 16 ,804 ,000 . Therefore the retention rate b , is exist to 3 ,194 ,000 /16 ,804 ,000 0 .19 . The company has a return on equity of 51 (EPS /BPS 0 .247 /0 .476 ) based on selective information from the balance saddlery . The share price of the company in at the end of 2006 was AUD 5 .57 (based on the data from Thomson DataStream database . development the above figure we can calculate the growth rate in dividends by providing inputs to comparison 4 and 5 aboveg 0 .51 x 0 .19 0 .0969To calculate the dividend yield , we motivating to calculate a value for the dividend per share . The simoleons per share was 24 .7cents which amounts to AUD 0 .247 and the number of shares outstanding can be calculated by dividing the gelt by the loot per share . This is done as followsNumber of shares outstanding 24 ,074 ,000 /0 .247 97 ,356 ,275 . Therefore the dividend per share is given by13 ,610 ,000 /97 ,356 ,275 0 .14The dividend yield is then given by 0 .14 /5 .57 0 ,025From the prior , the rate of return on the stock is therefore given by the dividend yield plus the growth rate in dividends which is given by0 .025 0 ,0969 0 .1219 12 .2We can now apply these figures into the chemical formula to value the equity of InvoCare as at December 2006 by substituting the necessary inputs into comparability 3 aboveTable 1 below presents the value for InvoCare after applying the model dividend discount model in equating 3 . We can observe that the value calculated here is AUD 2 .24 whereas the price observed for the stock on the 29th of January 2006 was 5 ,57 . The dividend discount valuation here is implying that the stock is overpriced and thus is in compliance with a sell decisionAccording to penman (2003 ) the dividend discount model is not plausible because dividends are a means of distributing value and not value creationPrice Earnings ValuationAccording to Bodie et al (2002 , much of the discussion of stock market valuation centres around the price to cyberspace multiple , the ratio of price per share to kale per share , which is commonly referred to as the/E ratio . A formula for inferring the value of the company can be come upd by assuming that the value of the company is equal to the present value of the firm without growth plus the present value of growth opportunities (Bodie et al , 2002 . This is done by capitalising network at the equity cost of capital and adding the present value of the growth opportunities . Mathematically(6By rearranging equivalence 6 , one can observe how growth opportunities are reflected in/E ratios . That is(7(Bodie et al , 2002-g (Bodie et al , 2002 . We know that dividends equal the lolly that are not reinvested in the firm : D1 E1 (1-b . g ROI x b . According to (Bodie et al , 2002 ) substituting this into the dividend growth model , we can obtain a value for the company as follows(8This implies that the price earnings ration is given by(9Looking at equation 9 one can observe that when the roe is greater than the cost of capital the price earnings ratio is higher and vice versa Also when the retention rate b is high the price earnings ratio is high This is consistent with a situation where the firm has good investment opportunities because its reinvestment rate will be high and thus it will be practical to have high price earnings ratios (Bodie et al 2002 . We can therefore conclude that firms with high growth opportunities will have high price earnings ratios since their ROE and retention rates will be high . However , the price earnings ratio can only be high if the ROE exceeds the cost of capital . Where the cost of capital is higher than the ROE , the price earnings ratio will be minify if the reinvestment rate is increased . Under such circumstances investors will prefer that the firm pays out more dividends than reinvest them to earn a rate that is demoralise than the cost of capital (Bodie et al , 2002We can apply equation 8 above to establish a value for InvoCare . The ROI of InvoCare Limited for 2006 was 51 , its retention rate is 19 and its cost of capital calculated introductory is 12 .2 . The company had earnings per share of AUD 0 ,247 . Substituting in equation 8 we getP2006 0 ,247 (1- .19 (0 .122-0 .51 x 0 .19 AUD 7 ,97The price earnings valuation presents a higher value than the dividend growth model . It is higher than the price of AUD 5 .7 as at 29th December 2006 . This implies a buy and hold decision Table 1 . Valuation of InvoCare Limited Using the Dividend Discount Model 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017EDPS0 ,14 DPS Growth rate 9 .
69 Forecast of DPS0 ,153566 0 ,168447 0 ,184769 0 ,202673 0 ,222312 0 ,243854 0 ,267484 0 ,293403 0 ,321834 0 ,353019 0 ,387227Discount rate1 ,122 1 ,258884 1 ,412468 1 ,584789 1 ,778133 1 ,995065 2 ,238463 2 ,511556 2 ,817966 3 ,161758 3 ,547492Capitalisation rate 0 ,122 PV0 ,136868 0 ,133806 0 ,130813 0 ,127887 0 ,125026 0 ,122229 0 ,119494 0 ,116821 0 ,114208 0 ,111653br 1 .238804 CV 3 ,17399PV of CV1 .003869 2 .242673 Price-to-Book Ratio ValuationThe price-to- hold up ratio is the ratio of the price per share divided by the book value per share . Since analysts view book value as a useful banknote of value , they often encompass the price to-book-ratio as an indicator of how aggressively the market determine the firm (Bodie et al 2002 . According to Penman (2003 , book value do not measure value correctly but the missing value is ultimately realised in the future earnings the book values farm . Since shareholders buy earnings , the higher the expected earnings relative to the book value , the higher the price-to-book ratio (Penman , 2003By using fundamental analysis , the valuation is anchored in the financial statements (Penman , 2003 . Book value recognised in the balance sheet provides an anchor on which the investor can carry out his valuation . Using the Gordon Growth model or constant growth dividend discount model , we can derive a formula for valuing the equity as follows(10Defining the return on equity (ROE EPS0 / Book Value of Equity , the value of equity can be written as(11(http /pages .stern .nyu .edu adamodar /New_Home_Page /lectures /pbv .htmlBased on the information above , the growth rate in dividends is 3 .3 and the payout ratio is 81 whereas the book value per share is AUD 0 .476 The cost of equity capital is 12 .2 as earlier calculated . From above we can substitute to get the price of the company as at 2006 as followsP2006 0 .476 x 0 .51 x 0 .81 x 1 .0969 (0 .122-0 .0969 AUD 8 .59One can also observe that the price-to-book ratio provides a higher value than the dividend growth model . Although the value is higher than that provided by the price earnings ratio , it is not significantly different like is the case for the dividend growth model . The value here is also higher than the observed market value of AUD 5 .57 . This again implies that the stock is currently undervalued and therefore it is consistent with a buy and hold decision . In addition , the return on equity (ROE ) is higher that the required rate of return . This implies that increasing investment in book value will lead to a higher price to book value . If the ROE is higher than the required rate of return increasing book value leads to a higher price-to-book ratio and thus a higher value . Conversely , when the ROE is less than the required rate of return , increasing the book value leads to a level price-to-book ratio and thus a lower value . Under such circumstances , investors will prefer that the company pays out more dividends since there appear to be no utile investment opportunities that can measure up to their required rate of returnCash Flow Valuation ModelThe free notes flow model values the equity by discounting the expected future cash flows to equity using the cost of equity capital . The clog with this method acting is estimating the free cash flows . The inputs aimed to estimate free cash flows include earnings , capital expenditures , taxes , and working capital . According to Penman (2003 the free cash flow model for valuing equity can be written as follows(12stands for the value of debt at the beginning of the period . C-I stands for free cash flows and represents the cash flows to the firm that can be used in get interest bearing securities (Penman , 2003 InvoCare is currently planning an increase in capital expenditures to be between AUD 7million to AUD 10million annually over the next four years It is also anticipating the opening of four to six new funeral locations every year . The opening of a new funeral location brought additional revenues of AUD 5 .1million in 2006 , therefore opening four new funeral locations annually will mean an additional revenue of AUD 20million . The consumer price index has been witnessing a rise of about 3 annually Information about the company s beta is not readily available , thus it is difficult to estimate the required rate of return using the capital asset pricing model (CAPM . We therefore assume that the cost of equity capital remains at 12 .2 as earlier calculated using the dividend yield and growth in dividends . The company also experienced a growth in earnings before interest taxes and depreciation of 3Based on the above information we can establish a forecast of cash flows for the company and consider a forecast period of 5 years and discount them using the company cost of capital . To calculate the cost of capital we use up for the firm we will need to do this by calculating the weighted average cost of capital (rWAAC ) and use it in valuing the cash flows to the firm . We will later deduct a value for the debt of the firm to get the value of equity as stated in equation 12(13Where S is the value of equity , B is the value of debt , rs is the cost of equity capital and rB is the cost of debt . The value of equity is 46 ,360 ,000 as shown on the balance sheet for 2006 while the value of debt is 303 ,210 ,000 . The cost of equity capital is 12 .2 and the company s weighted average interest rate (cost of debt ) was 6 .39 . We can use this information to calculate the weighted average cost of capital by substituting in equation 13 aboveThus5 .5we can use the above information to value the cash flows as follows 2006 2007E 2008E 2009E 2010E 2011E 2012EFree Cash Flowp Growth rate1 .06Discount rate1 ,055 1 .113025 1 .174241 1 .238825 1 .30696PVp 1CV9Capitalisation rate0 .055PV of CV78Debt08Number of Shares outstandingValue per share3 .6599588 One can observe that the model is AUD 3 .66 , which is also less that the figure observed for 2006 of 5 .7 . we also conclude that this is consistent with a sell decisionNet tangible asset backing modelValuation professional often use the balance sheet as a base for establishing the value of the company . This is often done by taking into consideration all tangible assets less intangible assets and liabilities . The residual amount is then divided by the shares outstanding to get the tangible value per share ( HYPERLINK http /www .valuecruncher .co .nz /wordpress /wp-content /uploads /2006 /10 /val uation_feltex_140906 .pdf http /www .valuecruncher .co .nz /wordpress /wp-content /uploads /2006 /10 /valu ation_feltex_140906 .pdf . The tangible asset model is a valuation method from the write up perspective . It is often affected by accounting apportionments such as depreciation method used . Applying the model to InvoCare Limited we obtain the value as in the table below :0Intangible assetsLiabilities -0 -0Specific balance sheet items Cash5717000 Value per share1 Again , we see that the value is lower than the one reported on the market on the 29th of December 20066 . ConclusionWe have provided the value of InvoCare Limited using five different methods of valuation as at December 2006 . We find that of the methods take on an exact value equal to that reported on the market as at December 31st 2006 . The Dividend growth model , the Cash Flow model and the Net tangible models produce values which are lower that the one reported on the market . However , the net tangible asset model provides the smallest value of 1 .02 . According to Penman (2003 , the value equation and the balance sheet equation are of the same form but differ in how the assets , liabilities , and equity are measured . The measure of stockholders equity on the balance sheet , the book value of equity typically does not give the intrinsic value of what the equity is expenditure (Penman , 2003 : pp 39 . Similarly , the net assets are not measured at their values (Penman , 2003 : pp 39 . Penman (2003 ) stipulates that if assets were measured at their values , then there would be no need for analysis since the value of the firm would simply be inferred from the balance sheet . Since the accountant cannot calculate the intrinsic value of the firm , it is a necessity for fundamental analysis to be carried out in to bring out the true value of the firm (Penman , 2003 Fundamental analysis is the method of analysing information , forecasting payoffs from that information , and arriving at a valuation based on those forecasts (Penman , 2003 : pp 74-75 . Penman (2003 : pp 39 ) calls the difference between the intrinsic value of the firm and the book value the intrinsic premium . Accordingly intrinsical premium Intrinsic value of equity - Book value of equity The dividend discount model also reported a value of which is a bit higher than that reported by the net tangible asset backing model Dividends according to Penman (2003 ) are not relevant to value . For the dividend discount model to be practical the forecasting has to be done over finite horizons (Penman , 2003 . The DDM requires forecasting of dividends up to a forecast horizon plus a terminal price (Penman 2003 . However , payoffs are not sensitive to the dividend component since a stock that pays more dividends will ultimately pay a lower terminal price (Penman , 2003 . As the firm pays out cash , the share price drops by this amount reflecting that value has left the firm (Penman , 2003 . According to Penman (2003 ) any change in dividends will be exactly offset by a change in share price thus indicating that paying dividends is a zero-NPV activityFrom the foregoing Penman (2003 ) concludes by drawing our attention to the so-called dividend brain-teaser which states that equity value is based on future dividends but forecasting dividends over a finite horizon does not give an indication of value . The dividend discount model fails the branch criterion for a practical analysis (Penman 2003 . Therefore , we have to forecast something else that is tied to value creation (Penman , 2003 . The model fails the second criterion-validation-also (Penman , 2003 . Dividends can be observed after the fact , so a dividend forecast can be validated for trueness (Penman , 2003 . However , a change in dividend from forecast may not be related to value at all , just a change in payout policy , so ex-post dividends cannot be validation of a valuation (Penman , 2003If Penman s analysis are true , then we conclude here that the dividend discount model industrious in valuing InvoCare Limited could not produce the true value of InvoCare and thus lookout for other valuation methods Otherwise , we need more tests to be carried out on the dividend discount model to test its validityThe third model that was employed was the cash flow model , which also produced a value lower than that given by the capital markets . If we assume capital markets to be efficient , then we can conclude that the cash flow model is wrong . On the other hand , if we assume that capital markets are not efficient large , then we can conclude that the cash flow model has provided the true value for InvoCare which means that the capital markets are overpricing the security . Before we conclude , let us turn to Penman (2003 ) once more . According to Penman (2003 , analysts forecasts earnings earlier than cash flows because of accruals accounting . In principle , accruals capture value added in operations rather than cash flows (Penman , 2003 . Accruals also treat investments differently from cash accounting to remedy the problems in forecasting free cash flow (Penman , 2003 . Following from the latter , we can also conclude that , the true value of InvoCare should certainly be higher than that forecasted than the cash flow model . If capital markets are efficient , it should be equal to the figure reported at year end 2006 Having discussed the models that produced a lower value than predicted by capital markets , we now turn to the models that produced a value higher than that predicted by the capital markets namely the Price-earnings ratio and the Price-to-book ratio . The price earnings ratio produced a value of 7 .79 while the price-to-book ratio produced a value of 8 .59 . The two values seem to be quite close although the value provided by the price-to-book ratio is higher than that for the Price-earnings ratio . Both models also produce values higher than those produced by the capital markets implying that the capital markets are underpricing the stocks . Under such circumstances one would expect arbitrage opportunities to occur . However , before we conclude , we will take a closer look at each of the models . According to Penman (2003 current earnings is a proper measure of value added from current sales whereas share prices change in anticipation of value to be added in earnings from future sales as well . The/E ratio therefore compares the value of expected future earnings (in the numerator ) to the current earnings (in the denominator . Despite its advantages in capturing value , the/E ratio also has some drawbacks . To begin with , the denominator of the/E ratio is accounting earnings , which are influenced by accounting methods such as the use of historicalal costs in depreciation and inventory valuation (Bodie et al , 2002 . In times of high inflation , historic cost depreciation and inventory costs will lam to under represent true economic values , since the backup man cost of both goods and capital equipment will rise with the general level of prices (Bodie et al , 2002The price-to-book value on its part is also based on expected future earnings . According to Penman (2003 ) shareholders buy earnings . Thus the higher the expected earnings relative to book value , the higher the br/B ratio (Penman , 2003To conclude , we can see that , we have valued InvoCare Limited , using five different approaches and appoint that three of the approaches , namely the dividend discount model , the cash flow model and the net tangible asset backing model suffer from a lot of flaws and therefore are not very suitable for providing the true value of the firm . The/E ratio and the/B ratio are the most plausible methods for valuing the firm since they are based on future earnings of the firm . However , they too have a a couple of(prenominal) drawbacksAppendixAppendix 1Appendix 2Appendix 3Appendix 4Bodie Z . Kane A , Marcus A . J (2002 . Investments . 5th Ediction McGraw-HillPenman S . H (2003 . Financial Statement Analysis and Securities Valuation . SecondInternational version . McGraw-HillIMF World Economic Outlook , 2007Thomson Financial DataStream DatabaseHYPERLINK http /finance .google .com /finance ?q ASX 3AIVC http /finance .google .com /finance ?q ASX 3AIVCHYPERLINK http /www .invocare .com .au /driver .asp ?page /about us http /www .invocare .com .au /driver .asp ?page /about usHYPERLINK http /pages .stern .nyu .edu adamodar /New_Home_Page /lectures /pbv .html http /pages .stern .nyu .edu adamodar /New_Home_Page /lectures /pbv .htmlHYPERLINK http /pages .stern .nyu .edu adamodar /pds /fcfe .pdf http /pages .stern .nyu .edu adamodar /pds /fcfe .pdfHYPERLINK http /www .rba .gov .au /Statistics /AlphaListing /index .html http /www .rba .gov .au /Statistics /AlphaListing /index .html p...If you want to get a full essay, raise it on our website:
Ordercustompaper.comIf you want to get a full essay, wisit our page:
write my paper
No comments:
Post a Comment