From the data you have been given as well as your research and analysis, determine the forecast or...

Question

From the data you have been given as well as your research and analysis, determine the forecast or expected cash flow or dividends necessary to value the target company. Carry out a fundamental (Discounted Cash Flow) valuation of the share price of your chosen companies and present the results in a summary table for the firm including the control premium you believe is necessary. Conduct a relative valuation of your firms also. Your valuations need to include a sensitivity analysis.

If you believe there are synergies but are having difficulty quantifying, then you can assume a 10-25% improvement in the target company operating income as a result of the merger. Clearly indicate your valuation range with and without synergies and discuss this valuation range contrasting it to the market price

Preeta · Accepted Answer

The following calculations have been carried out on the company Domain. The annual report of 2019 has been analyzed to answer the followings:
Question 1:
Cost of capital = [(E/V)*Re]+[(D/V)*Rd*(1-Tc)]
where:
E=Market value of the firm’s equity
D=Market value of the firm’s debt
V=E+D
Re=Cost of equity
Rd=Cost of debt
Tc=Corporate tax rate
Here, E = 1,289,658
D = 162,540
V = 1,452,198
Re = 1.51 (Calculated below)
Rd = 4.82 (calculated below)
Tc = 13.45 (Annual report)
Cost of capital = [(1,289,658/1,452,198)*1.51]+[( 162,540/1,452,198)*4.82*(1-0.1345)]
Cost of capital = 2.67
And, Cost of equity (Re) = Rf + β [E(m)-R(f)]
Where,
R(f) = Risk-Free Rate of Return
β = Beta of the stock
E(m) = Market Rate of Return
[E(m)-R(f)] = equity risk premium
In this case, R(f) = 1.3(Trading Economics)
β = 1.05 (Market Watch)
E(m) = 1.5 (Simply wall Street)
Re = 1.3 + 1.05 (1.5-1.3)
Re = 1.51
​And, Cost of debt (Rd) = [I*(1-Tc)/D]*100
Where, I = Total interest incurred
Tc = Corporate tax rate
D = Total Debt
In this case, I = 9,050 (annual report)
Tc = 13.45 (Annual report)
D = 162,540 (annual report) 
Rd = [9,050*(1-0.1345)/162,540]*100
Rd = 4.82
So, cost of capital is 2.67.

From the data you have been given as well as your research and analysis, determine the forecast or expected cash flow or dividends necessary to value the target company. Carry out a fundamental...

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