Assume that you are working in the corporate financial advisory services department of a large investment bank and your director (who has read extensively about shareholder value analysis) has asked you to prepare a shareholder value analysis and a short-term valuation report on your chosen company using the following basis for your valuation:

• Planning period is to be set at five years
• A residual value based on constant cash flows from year five onwards (infinite life) will be estimated at the end of this five-year period
• Beta factor to be obtained using current information held on Bloomberg, DataStream or other sources
• FTSE All-share return to be taken as 12%
• Risk free rate to be taken as 5%
• The target capital structure to be set based on the company last financial year (preferably 2018)
• The gross cost of debt over the financing period is to be estimated at 8% per annum
• As for the other key value drivers (forecast sales growth rate, operating margins, tax rate, incremental working capital requirements and incremental fixed asset investment) you are required to decide these yourselves. The director has advised you to review the latest annual report and accounts of your chosen company and use the data therein and other financial journalistic analysis and intelligence that you consider appropriate to help you decide upon the growth levels of your chosen drivers.

Required:

1. Using the information on certain key drivers already given above together with the other key driver figures decided upon by yourselves, prepare a spreadsheet using the shareholder value analysis model to determine a purchase price for your chosen company. A short report explaining how the valuation method works and the purpose of each stage in the spreadsheet calculations should support the model.

2. Review the certain value driver’s assumptions given above and growth levels suggested by you for other drivers and write a brief report justifying or criticising the growth levels of the chosen drivers.