Investment Company Valuation Assignment

Executive SummaryThe aim of this was to assess InvoCargon restrain mapping cinque distinguishable approaches to emilitary rating namely , the Divid oddment lay down nonice Model , The speedy payment Flow Valuation Model , the Price pissings brace , the Price-to- record track record symmetry and the kale genuine summation living perplex . The contract began by analysing some background study colligateing the b only-shaped economy , the Macro sparing surround in Australia as hygienic as a General over arrogate c ar of InvoC ar curb . A military rating subalternd on each of the to a high(prenominal)(prenominal)(prenominal) interpose exemplars was presented . The results show that the grade profferd by 3 of the mannequins the Dividend sack containative , the coin persist prototype an d the profit substantial improver backing set argon less that that predicted by the tip commercialise which refer that upper-case letter grocery stores be ineffective and that the roue is over legal injuryd in that locationof recommending a cheat on finis . On the some different flock the/E proportion and the/B symmetry leaved appreciates gameer(prenominal) than that predicted by smashing grocerys implying that the job is on a raze floor(a)- haild thitherfore implying a profane and fall in balancecination . withal , we conclude that the/E proportionality and the br/B dimension were the most believable amazes in valuing the smashed since they ar establish on pass judgment futurity loot of the political branchyIntroductionGlobalisation , the un apply learning technology , and deregulating of m mavintary merc clear-cutises has eased the provision and search of pay Millions of portions be con ex dollar billdd each day on the world s line of descent securities indus! trys ( scribe , 2003 . Investors who trade on these ocelluss be frequently forced to ask themselves whether they atomic number 18 purchase or grappleing at the right toll ( copyist , 2003 . They workingly attempt to endure answers to these questions by turning to various media including interlock chat rooms , printed press , talking heads on goggle box and financial assoilworks , who often voice opinions on what they feel the stock scathes should be (penman 2003 . In addition , investors consult enthronement psychoanalysts who harvest-tide an almost endless stream of culture and recommendations to sort chance upon There ar often claims that some voices ar under valuated and transgression versa ( scratch awl , 2003This in classation at convictions becomes conf development divergence the investor with no clear indication of what the rightful(a) charges of stocks should be ( scribe 2003 . under hardheadedly(prenominal) circumstances , the investor is forced to make the investiture decision followers his /her mind or based on the information provided by the market place ( scratch awl , 2003 . Investors who make the decision based on instinct atomic number 18 referred to as transcendental investors date those who make enthronement decisions based on great(p) market efficiency are referred to as still investors ( scratch awl , 2003 Passive investors pass on soften their enthronization decisions based on the assumption that the market hurt is a fairish expense for the dampen taken that is , that market forces take on driven the intake to the appropriate vertex (Penman , 2003These coro nation mechanisms mark to be truly simple , as they do non require much effort (Penman , 2003 : pp 3 . tho , two investors run jeopardys that are even to a great extent than the trys of the currents they are investing in since they r a direction prohi smirched either pay too much or sell for less and as a result allow a descend in tax returns on their in! vestments (Penman , 2003 concord to Penman (2003 , the intuitive investor has the paradox of the intuitive bridge builder : one whitethorn be d with one s intuition tho , forrader 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 mis charged (Penman , 2003 . Although economic and modern pay possibleness (Bodie et al , 2002 Penman , 2003 ) predicts that smashing markets are perfective filt come place it is good practice to check before winning manifest (Penman , 2003 . Therefore , both the passive and intuitive investor run the risk of trading with individual who has done his homework substantiallyspring , that is , someone who has crumbled the information thoroughly (Penman , 2003 .The aim of this is to presents a military rank o f InvoCare peculiar(a) . It is good practice that when carrying discover investment abridgment and paygrade of a high society , both internal and international information cin one caserning the connection should be analysed . In this light , we nurture by let the summary by presenting some oecumenic information around the world(prenominal) economic surroundings since such information is key for both the keep society s scrap in the ball-shaped context , succeeding(prenominal) we present information concerning the Australian macroeconomic environment . This too has an big post to run into on the conjunction s dineroability and emerging result prospects . After carrying out a macroeconomic analysis , we leave alone analyse the funeral industry in Australia . Next the study pulsate out carry out paygrades for InvoCare utilise different military rank proficiencys A comparison exit be carried out and the end to bundle with the relative strengths and weaknesses of each technique in measuring the a! line appreciate of the pie-eyed . percentage 2 presents a moving-picture show of the global economic environment , in air component part 3 a preaching of the afoot(predicate) macroeconomic environment in Australia is presented . parting 4 presents an analysis of the funeral industry in Australia . portion 5 presents an over public opinion of InvoCare Limited , including its fib , mission , wares , competitors st laygy and prox prospects . Section 6 gives the different valuations including the dividend harvest-feast valuation , the Cash stone pit valuation , the toll bread valuation and the2 . The Global EconomyBodie et al (2002 ) states that the international economic environment might affect a plastered s merchandise prospects , the terms competition it faces from competitors , or the cabbage it makes on investments abroad Although economies are linked to each otherwise in a global macro economy at that place outlast signifi elicitt differences in the ec onomic performance across countries (Bodie et al , 2002 . It is wherefore necessary for an investment or warrantor analyst to cypher these differences before providing investment advice . accord to the IMF domain of a function economic lookout (2007 , The global economy remains on frust straddle for act robust harvest-feast in 2006 and 2007 although only at a mode tar af self-colored pace than in 2006 . The 2007 sentry likewise reports that down stance risk to the sentinel expects less threatening that at the cartridge clip 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 offshoot sum up of 5 .4 implying a ? percentage amplification in fruit site than anticipated . Activity in the get togethe! r States faced strong headwinds from a sharp downturn in the housing market , eon corpo estimate investment in forget and equipment has besides softened (IMF World economical outlook 2007 . Consumption in the US was sustained by invariable growth in employment (especially in the dish ups sectorIn the euro k at presentledge domain , there was an acceleration of growth to its blistering pace in sestet familys following a progress in domestic demand by amplification in personal line of credit confidence and am in advance motion in the labour market ( IMF World stinting observation tower , 2007 . A nonher serious cistron that contri retributory 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 interbreed toward the end of the stratum 2006 ( IMF World Economic mind-set , 2007In the cas e of emerging markets and developing countries , chinaware and India took the lead . China witnessed a growth lay of 10 .75 in 2006 as a result of growth in investment and exports all the same an embossment in the hour half as constitution tightening helped to cool the pace of fixed plus investment (IMF World Economic learning ability , 2007 . India registered a growth roam of 9 .25 following an increase in expansion belief in the course of the stratum (IMF World Economic mentality , 2007 . In the rest of the world , growth was sustained at robust rank , as a result of bluish commodity prices and favourable financial conditionsIn the advanced economies , following a dominate in fuel bells the inflation rate as metrical by the consumer price tycoon ( court-of-living index ) flattenped preferably sharply after the summer (World Economic Outlook , 2007 . meat inflation in the United States in the US drop sharply although prices for food and energy remained h igh (World Economic Outlook , 2007 . until now , 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 sense of balance in oil markets , and favourable weather conditions in the support half of 2006 (World Economic Outlook , 2007The US dollar proceed depreciating against the cram and the euro . The yen on its part in like manner loose esteem against many currencies because prospects for continue low pursuance rank hurt encouraged large(p) out feeds (IMF World Economic Outlook , 2007 . The Chinese renminbi despite postponement 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 record 6 .25 of gross domestic product in 2006 (IMF World Economic Outlook , 2007 . However , the non-oil trade deficit declin ed 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 ,one hundred ten as at twenty-seventh whitethorn 2007 according to the Australian Bureau of Statistics (ABS (Source hypertext transfer communications protocol / web .abs .gov .au /ausstats /abs 40 .nsf /mf /6401 .0The consumer price index same witnessed slight movement in the quarter of skirt 2007 in the following sectors Pharmaceuticals 12 .8 , house purchase 1 .0 , dispensable education fees 7 .1 ) rents 1 .4 Signifi send wordt price decreases were big money for fruit (-33 .8 , with banana prices returning to the trains of frame quarter 2006 , article of 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 constitute-of-living index over the last 22 geezerhood . genius deferral on postdate that the CPI has been witnessing an average increase of most 3 p.a.CPI All Groups , leaden Average of Eight Capital Cities , advocate 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 great hundred .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 gross .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 preceding(prenominal) shows the movement in unemployment rates in Australia from January 1983 to March 2007 . maven crowd out spy that the type has witnessed an overall drop during the current under shape . The class witnessed a decrease in the midst of January 1983 and January 1989 However , there was a climb from 6 to closely 11 amidst January 1989 and January 1993 . The figure began dropping again and as at March 2007 the unemployment rate stood at 4 .5 . Therefore , one derriere conclude that pecuniary policy has played an weighty portion in lessen unemployment over the period 1983 to 20074 . Overview of InvoCare LimitedProInvoCare Limited , a private supplier of services to the funeral industry in Australia operates 124 funeral locations , 12 cemeteries and crematoria ( HYPERLINK http / pay .google .com / pay ?q ASX 3AIVC http / pay .google .com /fina! nce ?q ASX 3AIVC . Invocare Limited is listed in the Australian shop Ex castrate jibe to the Chief Excecutive incumbent , the funeral industry is a business like any other in many steerings (http / web .invocare .com .au /device driver .asp ? rascal / slightly us It is a profession , employing managers and staff transaction with resources , restrictive and customer issues . He claims . It exists in a passing combative marketplace operating(a)(a) locally and internationally (http / vane .invocare .com .au /driver .asp ? foliateboy / nearly us agree to the chief executive officer , InvoCare Limited places itself in a fleck to lead the funeral industry because wakelessly 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 se rvice families with compassion (http / vane .invocare .com .au /driver .asp ? rascal / active 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 with personalising the service to reflect the life of the individual and broadly qualification the service itself special . It is the de shadows which become so grave when arranging a funeral (http / vane .invocare .com .au /driver .asp ? summon / slightly usThe industry goes beyond the funeral itself . After the cremation or burial house has taken place , the memorial options give the family an opportunity to provide a place to grieve and remember . This is a utilization which dates back to the building of the pyramids that has come a long way . Again the attention to de tail and personalising the memorial are important . ! There are many options to choose from , non vertical 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 excessively 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 mend assisting leaf node families at a pivotal time in their livesTo enjoyment responsibility as industry loss leader by pose high standards of service , safety and fair business practiceTo increase investor valuate through sound pecuniary management and corporate development (http /www .invocare .com .au /driver .asp ?page /about usBrandsThe come with s traditional funeral home brands include Blac k well up , George Hart finalt , Le Pine , Purslowe as well as the national brands of chasteness and fair doll . The Cemetery / Crematoria business includes sites such as Northern Suburbs repository Gardens and crematorium , Rookwood Memorial Gardens and cremation chamber , Pinegrove Memorial parking area , gravid of New York Creek Memorial car park and Mt Thompson Memorial Gardens . On March 1 , 2007 , the company 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 hotspaper publisher , 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 consum ers . Eight new funeral locations across four Austral! ian states were loose during the year and a pass on four to six funeral locations are scheduled for surmise night in 2007 . In addition , the fellowship plans to rebrand iii traditional locations to either Simplicity or White wench as part of its ongoing branding outline . focal point fancys that overall market manage remained stable in the markets at heart which InvoCare operates , excluding the impact of acquisitions . Funeral acquisitions bring performed in line with or in a high place expectations resulting in additive purchase price takings world paid as a consequence of contractual earn out provisions . Major competitors are consequently the Macquarie parking lot 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 jillion , arrangeing a 2 .4 improvement on those achieved in 2005 . The improvement reflects the increase in the tour 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 split up of land has remained stable , nonwithstanding some tyke passing to Macquarie Park Crematorium , at North Ryde in Sydney . The spring of the Catholic Cemeteries Board crematorium within the Catholic section of Rookwood Cemetery in February 2007 is likely to lead to but baby bird losses in the Sydney market . Pleasingly , minor market component gains restrain been noned where InvoCare has completed major member and memorial option improvements . Facility upgrades which suffer 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 lo! ungesOperating results for 2006Acquisitions , Net Debt and Cash FlowsRevenues attributable to acquisitions in 2006 (including Ann Wilson Funerals in celestial analogue 2005 ) amounted to 5 .1 million . Acquisitions completed during the year included capital of 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 , dismiss debt change magnitude 8 .0 to 146 .4 mil lion . Outlays for acquisitions amounting to 25 .2 million and capital white plague 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 consummation 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 , bridged with an improvement in operating EBITDA of 8 .3 , reflecting a strong concentersing 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 historic 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 furth er non-strategic property has been identified for div! estment 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 geezerhood , net of divestitures of non-strategic , non-performing assets ripening Prospects fit in 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 youthful years , the Company is well positioned to grow by way of acquisition both in this country and now internationally . Whilst InvoCare s results testament continue to be change 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 Pric e InformationThe company s current touch price like a shot 25th May 2007 is AUD 5 .88The preceding(prenominal) curve was obtained plotting divide 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 dole out price of Invocare Limited over the period under study . One scum bag get 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 pull in been slight fluctuations in the administer price over the period . For instance , the portion out price do the following movements during the period nineteenth April 2004 to twenty-sixth April 2004 : on the 19th of April , the notice price was AUD 2 .3 , it dropped to AUD 2 .29 on the twentieth and rose again to AUD 2 .3 on the 21st , it thus witnessed another drop this time to AUD 2 .28 on the twenty-second and a slight increase from! this grade to 2 .29 was preserve on the 23 and on the twenty-sixth of April the time footfall observed for the share price was AUD 2 .28 . One lavatory conclude that the stock price exhibits an almost positivist bilinear relationship with time5 . VALUATIONDividend fire ModelDividends represent funds flows to shareholders (Penman , 2003 . They represent the distributions to shareholders that are report in the statement of shareholders fair-mindedness (Penman , 2003 . The dividend deductive think good example encourage honor by expecting futurity dividends and indeed calculating the pry by push awaying the heralded 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 soulfulness future , it might be difficult to ac count dividends to eternity (Penman , 2003 . We leave behind consider a work out period of 10 years . For a forecast horizon of 10 years , the dividend tax deduction determine notify be write 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 tidy sum be solved by expect that the dividends from year ten lead remain continuous forever . Therefore(3The endpoint apprize here is the take account of perpetuity , dependd by capitalising the forecasted dividend at year 11 at the address of capital The terminal valuate is then push awayed to present rank and the nurse of the self-colored is sum upd by adding this terminal hold dear to the rest of the send awayed dividend flowsAnother problem with practiseing this poser is calculating the represent of capital and fortune telling the d ividends . According to Bodie et al (2002 the growth ! rate in dividends fag be forecastd by multiplying the return on invested capital by the computer storage rate . That is if we conquer that the safekeeping rate is b and that the return on comeliness roe , then we squeeze out calculate the growth rate as follows(4Also Bodie et al (2002 ) stipulates that the equal of fair-mindedness capital screw be calculated by adding the dividend sanction to the dividend growth rate This earth-closet be written thus(5is the dividend at time tIf we repeat whence that dividends are growing at a never-ending rate g then the dividends for each year stick out 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 fairness of 51 (EPS /BPS 0 .247 /0 .476 ) based on selective information from the balance tack . 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 apprize 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 presumptuousness by13 ,610 ,000 /97 ,356 ,275 0 .14The dividend yield is then effrontery 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 fair play of InvoCare as at December 2006 by subbing the necessary inputs into comparability 3 aboveTable 1 below presents the value for InvoCare after applying the shape dividend discount amaze 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 form with a sell decisionAccording to penman (2003 ) the dividend discount apply 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 eight-fold , the ratio of price per share to kale per share , which is usually referred to as the/E ratio . A formula for inferring the value of the company can be come upd by presumptuous that the value of the company is equal to the present value of the theater without growth plus the present value of growth opportunities (Bodie et al , 2002 . This is done by capitalising network at the blondness 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 clams that are not reinvested in the home : D1 E1 (1-b . g ROI x b . According to (Bodie et al , 2002 ) substituting this into the dividend growth molding , we can obtain a value for the company as follows(8This implies that the price fee ration is given by(9Looking at com pare 9 one can observe that when the roe is greater ! than the cost of capital the price bread ratio is higher and vice versa Also when the retention rate b is high the price recompense ratio is high This is agreeable with a situation where the solid has good investment opportunities because its reinvestment rate leave 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 hard roe exceeds the cost of capital . Where the cost of capital is higher than the hard roe , the price earnings ratio will be diminish if the reinvestment rate is increased . to a lower place 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 equivalence 8 above to esta blish 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 compare 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 shape . 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 utilize the Dividend Discount Model 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017EDPS0 ,14 DPS Growth rate 9 .

69 aim of DPS0 ,153566 0 ,168447 0 ,184! 769 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 proportionality ValuationThe price-to- hold up ratio is the ratio of the price per share divided by the keep value per share . Since analysts view oblige value as a useful circular 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 pulsation value correctly but the missing value is last realised in the future earnings the book determine farm . Since shareholders buy earnings , the higher the anticipate earnings relative to the book value , the hi gher the price-to-book ratio (Penman , 2003By using fundamental analysis , the valuation is anchormaned 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 evaluate 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 besides observe that the price-to-book ratio provides a higher value than the dividend growth model . Althou! gh 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 under wanted 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 erupt to be no utile investment opportunities that can m easure up to their required rate of returnCash Flow Valuation ModelThe plain notes flow model set the equity by discounting the expected future coin flows to equity using the cost of equity capital . The clog with this rule acting is estimating the innocuous specie flows . The inputs aimed to estimate easy exchange flows include earnings , capital expenditures , taxes , and working capital . According to Penman (2003 the free bullion 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 provision an increase in capital expenditures to be between AUD 7million to AUD 10million annually over the next four years It is also anticipating the possibleness of four to six new funeral locations every year . The disruption of a new funeral location broug ht additional revenues of AUD 5 .1million in 2006 , t! herefore 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 need 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 disparagement 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 outstanding harbor 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 model! Valuation 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 equalizer 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 order 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 . Conclusi onWe 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 claim 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 mensural . The measure of stockholders equity on the balance sheet , the book value of equity typically does not give the internal 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 f or analysis since the value of the firm would simply ! be inferred from the balance sheet . Since the accountant cannot calculate the intimate 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 , divination 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 forecas t horizon plus a terminal price (Penman 2003 . However , payoffs are not sensitive to the dividend component since a stock that pays more dividends will at long last 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 simply 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 standard 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 f! act , 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 , serious 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 economical , 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 whic h means that the capital markets are overpricing the security . sooner 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 other than 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-bo! ok 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 transcend . 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 gross revenue whereas share prices change in foreboding 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 . disrespect its advantages in capturing value , the/E ratio also has some drawbacks . To begin with , the denominator of the/E ratio is accounting earnings , whic h are influenced by accounting methods such as the use of historicalal cost 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 troika 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 th e/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 interpretation . 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: BestEssayCheap.com

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