Reading 41: Valuation in Emerging Markets-LOS b 习题精选 2011, discounted, investment, currently, research

土豆妮

Session 11: Equity Valuation: Industry and Company Analysis in a Global Context
Reading 41: Valuation in Emerging Markets

LOS b: Evaluate an emerging market company using a discounted cash flow model based on nominal and real financial projections.

 

 

Tim Reynolds, CFA, works for an investment research firm that is currently in the process of analyzing the global marine products industry. Reynolds’ supervisor, Mike Lapke, CFA, expects there to be significant consolidation among the 50 firms in the marine products industry as a result of mergers among its smaller firms. Lapke is particularly interested in how the expected consolidation activity will affect the five largest firms within the industry, which include two U.S. companies, two British companies, and one Japanese firm.

The two U.S. firms are U.S. Marine, Inc., and Atlantic Coastal Products, Inc. The British firms are Royal Crown Industries, LTD and Liontrust, PLC, and the Japanese firm is Bandai Oceanographic Industries, LTD. Currently the total worldwide revenue for this industry is $640 billion. Lapke has collected data for the five firms identified above along with more detailed data of two U.S. firms that he is following more closely.

Company	Revenue (in billions)
U.S. Marine, Inc. (USM)	$64.7
Atlantic Coastal Products, Inc (ACP)	$50.0
Royal Crown Industries, LTD	$45.6
Liontrust, PLC	$37.5
Bandai Oceanographic Ind. , LTD	$18.0

Selected financial data (in billions):

	USM Inc.	ACP Inc.
Sales	$64.70	$50.00
EBIT	9.68	6.00
EBT	7.75	5.84
NI	4.36	4.20
Assets	95.40	73.36
Equity	21.90	28.47
Payout Ratio	0.45	0.65
Required rate of return (r)	15%	11%

 

The three-firm and five-firm concentration ratios are closest to:

Three-firm

Five-firm

A) 74.28% 100.00%

B) 25.05% 33.72%

C) 33.72% 74.28%

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The three-firm (five-firm) concentration ratio represent the collective market share of three (five) firms with the greatest total sales in the industry.

Three-firm concentration ratio	= (64.7 + 50 + 45.6) / 640 = 160.30 / 640
	= 0.2505 = 25.05%
Five-firm concentration ratio	= (64.7 + 50 + 45.6 + 37.5 + 18) / 640 = 215.80 / 640
	= 0.3372 = 33.72%

(Study Session 11, LOS 36.b)

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土豆妮

 

The tangible price-to-earnings (P/E) and franchise P/E values for ACP, Inc. are closest to:

Tangible P/E

Franchise P/E

A) 4.59 6.67

B) 6.67 4.59

C) 9.09 2.08

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Tangible P/E = 1 / r, so, tangible P/E = 1 / 0.11 = 9.09

Franchise P/E is the product of the franchise factor (FF) and the growth factor (G).
That is, Franchise P/E = FF × G.

The Franchise factor is computed as: FF = (1 / r) ? (1 / ROE)

ROE	= NI / equity, so for ACP, ROE = 4.20 / 28.47 = 0.1475
FF	= (1 / 0.11) - (1 / 0.1475) = 9.09 - 6.78 = 2.31

The growth factor, G, is calculated as: G = g / (r ? g)

Where, the sustainable growth rate, g, is calculated as:

g	= retention rate × ROE = (1 ? payout ratio) × ROE
	= (1 ? 0.65) × 0.1475 = 0.052

So, G = 0.052 / (0.11 ? 0.052) = 0.90

Franchise P/E = FF × G = 2.31 × 0.90 = 2.08 (Study Session 11, LOS 36.c)

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Lapke is concerned that the marine products industry may be near full capacity. With this in mind, Lapke asked Reynolds to estimate capacity utilization for the industry based on the manufacturing demand forecast presented below.

Projections for the year ending:	2008	2009	2010
Available capacity (in 100,000 units)	450	492	496
Expected demand (in 100,000 units)	275	308	360

Based on his forecasts, the industry capacity utilization for 2008 and 2010 is closest to:

2008

2010

A) 62.60% 72.58%

B) 61.11% 72.58%

C) 72.58% 61.11%

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The formula for capacity utilization is: capacity utilization = expected demand / available capacity

Capacity utilization for 2008 is: 275 / 450 = 61.11%

Capacity utilization for 2010 is: 360 / 496 = 72.58%. (Study Session 11, LOS 38.e)

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土豆妮

During his research, Reynolds has observed that many of the firms in the marine products industry are concerned about the impact that new technology will have on their future profitability. Specifically, these firms are afraid that the competition resulting from new technologies will reduce their market share. Based on this observation, what stage of the industry life cycle are the firms in the marine products industry most likely in?

A) Growth.

B) Mature.

C) Decline.

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For mature industries, the threat from new technologies is whether competitors that employ new technologies will have a competitive advantage. In this situation, firms that do not use the new technologies will either have to adopt the new technologies or acquire their competition in order to survive. (Study Session 11, LOS 38.b)

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土豆妮

In addition to evaluating the five largest firms in the marine products industry, Lapke has asked Reynolds to conduct a valuation of a smaller firm, one that is domiciled in an emerging market. They both agree that the emerging market firm’s value should be estimated as the present value of the company’s expected future free cash flows discounted at the appropriate weighted average cost of capital. They do not, however, agree on the appropriate method for incorporating country risks into the analyses. Lapke believes that the discount rate should be adjusted to reflect country risk, but Reynolds holds the opinion that cash flows should be adjusted. During their discussion, the following two statements are made.

Reynolds' comment:	The evidence on this issue suggests that country risks are best incorporated into the valuation process by adjusting the cash flows in a scenario analysis rather than including them in the discount rate.
Lapke's comment:	Regardless of whether we adjust the discount rate or the cash flows to reflect emerging market risk, both the nominal and real cash outflow associated with net working capital should be computed as the change in nominal and real cash outflow from net working capital, respectively.

With respect to these statements:

A) both are correct.

B) only Lapke is correct.

C) only Reynolds is correct.

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土豆妮

Wavington Enterprises is headquartered in an emerging market nation that is expected to have 27% inflation over the next year. Charleston Johnson expects the local government to be successful in bringing inflation under control, and anticipates that it will fall to 20% in the second year and 10% in the third year, where he expects inflation to stabilize. Johnson predicts that by year 3, Wavington will have nominal free cash flow of $187 million growing at 4% annually in real terms. In view of his optimistic outlook, he is considering an investment in Wavington, and has calculated the real WACC for Wavington at 8%. The nominal continuing value of Wavington in year 3 is closest to:

A) $4,862.

B) $4,675.

C) $4,250.

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The nominal growth rate for Wavington in the steady state is (1.10 × 1.04) – 1 = 14.4%. The nominal WACC in the steady state is (1.10 × 1.08) – 1 = 18.8%. The nominal continuing value for Wavington in year 3 is:

nominal continuing value = FCF₃ × (1 + nominal growth rate) / (nominal WACC – nominal growth rate)
nominal continuing value = 187 × (1.144) / (0.188 – 0.144)
nominal continuing value = 213.9 / (0.044) = 4,862

土豆妮

Wavington Enterprises is headquartered in an emerging market nation that is expected to have 27% inflation over the next year. Charleston Johnson expects the local government to be successful in bringing inflation under control, and anticipates that it will fall to 20% in the second year and 10% in the third year, where he expects inflation to stabilize. Johnson asserts that the financial ratios of Wavington will be the same in both the real and nominal approaches. With regard to this statement, Johnson is:

A) correct because the underlying operations of the firm are unaffected by valuation methodology.

B) incorrect because cash flow forecasts in real terms are generally more accurate than cash flow forecasts in nominal terms.

C) correct because the rate of inflation used in calculating the components of financial ratios is the same for all components.

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In general, the ratios based on cash flow forecasts in real terms are accurate while ratios based on nominal forecasts are incorrectly estimated.