ACC306 Cost Accounting Assignment OZ Assignments

ACC306 Cost Accounting Assignment OZ Assignments

ACC306 Cost Accounting Assignment OZ Assignments

ACC306 Cost Accounting Assignment OZ assignmentsCalculation of free cash flows

The free cash flows of the company will be calculated after deducting all the cash outflows for cash invested in various operations of company from cash inflows from those operations (Tuominen, 2015). The following table shows the calculation for the same:

Calculation of free cash flow

Year

Cash Inflow

Cash Outflow

Net cash flow from operations

2006

2014

300

1714

2007

2057

380

1677

2008

2095

442

1653

2009

2107

470

1637

After 2009

 

 

1637

Calculation of enterprise value:

This is represented as an enterprise valuation method based on which the attractiveness of an opportunity of investment in a company is analyzed. The method utilizes the future cash flows of the company while making certain projections about them and then discounting them using an appropriate discounting rate in order to arrive at the present value of those cash flows from the company. However if the cash flows become constant after a certain point of time then Gordon’s method is used in order to estimate the long term valuation of company (Berzkalne & Zelgalve, 2014).

In this case there is no growth in the cash flows of the company after year 2009 and therefore no growth opportunity is used to increase the cash flow of the company.

Calculation of enterprise value

Year

Cash Inflow

Cash Outflow

Net cash flow from operations

P.V factor (9%)

Present value of cash flows

2006

2014

300

1714

0.917

1571.738

2007

2057

380

1677

0.841

1410.357

2008

2095

442

1653

0.772

1276.116

2009

2107

470

1637

0.708

1158.996

After 2009

 

 

1637

 

18188

Enterprise value

23605

Working Note:

Applying Gordon’s model we get,

Value = D1/Ke

= 1637/.09 = 18188

ACC306 Cost Accounting Assignment OZ assignments

Calculation of equity value:

The equity value of the company can be represented as the current market value of the common stock of company in current business scenario. The equity value thus represents the current market price of the share of company multiplied by the number of equity shares outstanding of the company (Abhayawansa, et. al., 2015). 

Equity value of company = Number of shares outstanding * Share price per share

= 369 million shares * $47 = $17343 million

ACC306 Cost Accounting Assignment OZ assignments

In this case the cash flows will increase at the rate of 3% perpetually for the indefinite number of years and thus the growth in cash flow will be 3%.

Calculation of free cash flow

Year

Cash Inflow

Cash Outflow

Net cash flow from operations

2006

2014

300

1714

2007

2057

380

1677

2008

2095

442

1653

2009

2107

470

1637

After 2009

 

 

Growth at the rate of 3% every year

Calculation of enterprise value:

The enterprise value in this case will be calculated by applying Gordon’s model for analyzing the growth opportunity of the company for unlimited number of years (Abhayawansa, et. al., 2015). It considers the opportunity of growth in cash inflows and then the value of enterprise is calculated. 

Calculation of enterprise value

Year

Cash Inflow

Cash Outflow

Net cash flow from operations

P.V factor (9%)

Present value of cash flows

2006

2014

300

1714

0.917

1571.738

2007

2057

380

1677

0.841

1410.357

2008

2095

442

1653

0.772

1276.116

2009

2107

470

1637

0.708

1158.996

After 2009

 

 

Growth @ 3% every year after 2009

 

28100

Enterprise value

33517

Working Note:

Here in this case cash inflows of the company will be increased by 3% after 2009 perpetually for indefinite number of years and therefore growth factor will be considered in this case (Toll & Hering, 2017).

Applying Gordon’s model we get,

Value = D1/Ke – g

= 1686/ (.09-.03) = 28100

Calculation of equity value:

Equity value of company = Number of shares outstanding * Share price per share

= 369 million shares * $47 = $17343 million

ACC306 Cost Accounting Assignment OZ assignmentsValue of share –The value of share is represented the worth of share or the value represented by it in current market conditions and scenarios by considering the enterprise value. The same is calculated by dividing the enterprise value by the number of common outstanding shares of the company (Solovyev, 2016).

Value per share= Enterprise value/ No. of shares outstanding

= $23605 million / 369 million shares = $63.970 per share.

Value to price ratio –It is represented by the ratio of value of share of the company and the price of share of company in the market.

Value to price ratio= Value per share: Price per share

= 63.970:47

ACC306 Cost Accounting Assignment OZ assignmentsValue per share= Enterprise value/ No. of shares outstanding

= $33517 million / 369 million shares = $90.83 per share

Value to price ratio= Value per share: Price per share

= 90.83: 47

ACC306 Cost Accounting Assignment OZ assignmentsMethod 1:

Free cash flow = Net operating income after tax – net financial expenses – net payment to shareholders of company

= 2740.1 – 147.1 – 3405.9 = $813 million

Method 2:

Free Cash Flow = Net Operating Profit after Taxes (NOPAT) - Net investment in operating capital

Calculation of free cash flow

Particular

Amount($)

Net operating profit after tax

2740.1

Less: Net investment in operating capital

 

Increase in operating assets

1260.8

Increase in financial assets

11.9

Add: Net cash inflow from operating capital

 

Increase in operating liabilities

84.6

Increase in financial obligations

2101

Cash flow fromoperations

3653

b. Calculate free cash flow.

The free cash flows in this case will be calculated by deducting the interest payments after considering the tax benefit by them from the cash flows of the company from a certain period of time. Also the cash invested in different investing activities will also be considered for the same (Solovyev, 2016).

Free cash flow = Cash flow operations – Interest payments after tax – cash outflow on investing activities

= 2429 – (142.4*.634) – 898

= 2429 – 90.28 – 898

= $1440.72 million

References:

1.Abhayawansa, S., Aleksanyan, M. and Bahtsevanoglou, J.  (2015). The use of intellectual capital information by sell-side analysts in company valuation. Accounting and Business Research, 45(3), pp. 279-306.

2.Berzkalne, I. and Zelgalve, E. (2014). Intellectual capital and company value. Procedia-Social and Behavioral Sciences, vol. 110, pp. 887-896.

3.Solovyev, V. (2016). Comparison of discounted cash flow andeconomic valueadded valuation methods: Protect company LLC.

4.Toll, C. and Hering, T. (2017). Valuation of Company Merger from the Shareholders’ Point of View. The Amfiteatru Economic Journal, vol. 19(46), pp. 836-836.

5.Tuominen, S. (2015). Brand Valuation–Comparison of two Valuation Methods. In Proceedings of the 2008 Academy of Marketing Science (AMS) Annual Conference . Springer, Cham. pp. 128-132.