Recommended Discount Rate, Growth Rate, and Valuation Methods

Question 1

 

You have been asked to recommend a suitable discount rate for the investment financial model. You are asked specifically to review the cost of equity and the weighted average cost of capital.

(a) Recommend the appropriate choice of discount rate considering only cost of equity and weighted average cost of capital.
(b) Compute the recommended discount rate which you would use to value the company.

Question 2

You are required to assess the growth rate for Oceanic Limited and have been told that the company has gone into a stable growth phase. Appraise the method you will be using and compute the sustainable growth rate. 

Question 3

Your fund manager has asked you to provide some relative valuation numbers specific to equity, book value and sales on a justified basis. You are to compute the following
• Justified P/E
• Justified P/S
• Justified P/BV

Question 4

You have been asked to value the company by using the following methods:
(a) Dividend Model
(b) Free Cash Flow to Equity

Question 5

(a) Recommend which value to use when comparing the Dividend and FCFE methods in Question 4.

(b) Recommend whether the fund should proceed with the proposed acquisition of Oceanic Limited using an appropriate benchmarking tool to demonstrate your understanding of the acquisition.