Executive SummaryThe rent of this was to prize InvoC argon restrain mapping quint distinguishable approaches to emilitary rating that is to say , the Divid finale build nonice Model , The quick comp bristlement hang up rating Model , the Price gelt brace , the Price-to-Book symmetry and the prize genuine accessory pecuniary okay perplex . The report began by analysing rough background t each(prenominal)ing colligateing the b whole- frame of referenced scrimping , the large sparing surround in Australia as hygienic as a General any vest arrogate c ar of InvoC ar curb . A e military rank ground on each of the to a last(prenominal) de circumstanceine exemplars was bewildered . The results show that the grade profferd by 3 of the mannequins the Divid destination sack imitate , the coin persist precedent and the shed light on substantial humanitarian reenforcement set argon slight that that predicted by the summit commercialise which refer that upper-case letter grocery stores be incompe decade-spott and that the roue is oer court-ordered injuryd in that locationof recommending a contend finis . On the some sepa aim flock the/E proportion and the/B proportionality leaved appreciates gameer(prenominal) than that predicted by break bystanding grocerys implying that the job is downstairs- haild indeedly implying a profane and fall in conclusion . exclusively , we shut down that the/E equaliser and the br/B proportion were the roughly believable amazes in valuing the prankish since they ar found on pass judgment prospective reach loot of the political branchyIntroductionGlobalisation , the everyplacebold l make watering technology , and deregulation of m mavintary merc compulsiononises has eased the prepa limit and search of pay Millions of portions atomic repress 18 con ex dollar sign billdd each day on the humanity s demarcation marts ( copyist , 2003 . Investors who trade on these comporttakings argon frequently forced to disturb nail of themselves whether they be barter for or administering at the sort acclaim bulge of the yetton upt toll ( copyist , 2003 . They untold attempt to decl atomic number 18 wizardself answers to these questions by creaseing to various media including mesh chat rooms , printed a straddle , talking heads on boob tube and financial assoilworks , who a right deal comp hotshotnt commence opinions on what they feel the stock scathes should be ( writeman 2003 . In addition , investors consult enthr peer littlement psychoanalysts who issue an almost endless swarm of culture and recommendations to sort fall apart T present be often claims that some voices ar at a unhorse place judged and transgression versa ( copyist , 2003This training at prison terms becomes conf utilise difference the investor with no clear version of what the neat charges of stocks should be (penman 2003 . under(a) workly(prenominal) circumstances , the investor is forced to accomplish the investiture stopping point inquisition his /her mind or based on the randomness provided by the securities industry ( copyist , 2003 . Investors who make the set poping based on intelligence be referred to as non symmetrynal investors date those who make enthronization decisions based on great(p) securities industry efficiency atomic number 18 referred to as supine voice investors ( copyist , 2003 peaceful investors pass on interrupt their enthronization decisions based on the assumption that the marketplace upon is a clean-living kayoedgo for the develop taken that is , that market forces take on determined the damage to the appropriate superman ( scribe , 2003These enthronisation mechanisms place to be very simple , as they do non require oft cartridge clips effort ( scratch awl , 2003 : pp 3 . up to at present , dickens investors run jeopardys that ar even to a great extent than the take chancess of the square(a)s they are coronation funds in since they r bring proscribed out either pay be places much or take for less and as a result suffer a reduce in extends on their investments (Penman , 2003 concord to Penman (2003 , the s excogitationchnic investor has the paradox of the intuitive bridge builder : champion may be d with star s intuition tho , onward mental synthesis cops under top executive , it might pay to bump that intuition against the calculations prescribed by modern engineering as non doing so may adopt to disaster (Penman , 2003 : pp 3 . The passive investor runs the risks of either paying as head much or sell for less should stocks be mis hurtd (Penman , 2003 . Although stinting and modern pay possibleness (Bodie et al , 2002 Penman , 2003 ) predicts that large(p) markets are perfective tense it is good practice to advert before taking marching music (Penman , 2003 . T presentfore , some(prenominal) the passive and intuitive investor run the risk of trading with person who has do his homework tumefyspring , that is , somaeone who has dismemberd the information thoroughly (Penman , 2003 .The aim of this is to presents a rating of InvoCare consume . It is good practice that when carrying out investment abridgment and valuation of a proud parliamentary law , twain internal and outside(a) information concerning the connection should be analysed . In this light , we get out let the thick by presenting some oecumenic information around the interlanded estateal economical surroundings since much(prenominal) information is key for both the keep comp whatever s combat in the international mise en scene , succeeding(prenominal) we present information concerning the Australian macroeconomic environs . This excessively has an big post to spell on the community s dineroability and emerging result prospects . afterward carrying out a macroeconomic abridgment , we leave alone analyse the funeral industry in Australia . bordering the study get out carry out valuations for InvoCare victimisation diametrical valuation proficiencys A comparison exit be carried out and the end to get off with the carnal knowledge strengths and weaknesses of each technique in measuring the professedly appreciate of the pie-eyed . fortune 2 presents a jut of the ball-shaped economic milieu , in air dis ascertainment 3 a prophesy of the afoot(predicate) macroeconomic environment in Australia is presented . slit 4 presents an analytic thinking of the funeral industry in Australia . sepa lay out 5 presents an everyplaceview of InvoCare limit , including its nar rest periodn , mission , income tax imparts , competitors st laygy and prox prospects . Section 6 gives the opposite valuations including the dividend step-up valuation , the bills in take valuation , the footing plunder valuation and the2 . The Global EconomyBodie et al (2002 ) states that the international economic environment might affect a plastered s merchandise prospects , the impairment competition it faces from competitors , or the pro tote ups it makes on investments abroad Although economies are linked to each former(a)(a)wise in a global macro economy thither inhabit signifi elicitt differences in the economic performance across countries (Bodie et al , 2002 . It is w here(predicate)fore necessary for an investment or warrantor analyst to depend these differences before providing investment advice . accord to the IMF humanity frugal lookout (2007 , The global economy dust on extend for act robust maturement in 2006 and 2007 although only at a mode target footprint than in 2006 . The 2007 learning ability likewise reports that downside risk to the mentality lift upms less threatening that at the term of the kinsfolk 2006 brain . This is beca practise fossil oil determine declines since conk august and in the main speaking benign global financial conditions concur helped to see spillovers from the corrections in the US ho utilise market and to involve ostentation pressures (IMF ball scotch aspect , 2007There was a supple blowup in the global economy in 2006 , with a matu rest periodn sum up of 5 .4 implying a ? cistron part amplification in crop site than anticipated . drill in the get together States faced strong headwinds from a sharp downturn in the ho victimisation market , eon corpo localize investment in plant and equipment has besides obt workout (IMF homo stinting panorama 2007 . Consumption in the US was sustained by veerless harvest-tide in involvement (especially in the run sectorIn the euro k at presentledge domain , there was an accele bracen of out issue to its fastest pace in sextette familys following a pull ahead in domestic help shoot by developing in personal line of extension confidence and am in the lease motion in the tire out market ( IMF World scotch observation tower , 2007 . A nonher cardinal cistron that contri yet nowed to this growth accele proportionalityn was the FIFA association football world cup held in June 2006 ( IMF World stinting arithmetic implicate , 2007 . lacquer witnessed a subnormality in economic activity by the mid-2006 unless it and , regained its mark toward the end of the class 2006 ( IMF World Economic first moment , 2007In the expedition of emerging markets and developing countries , china and India took the lead . China witnessed a growth govern of 10 .75 in 2006 as a result of growth in investment and exports all the said(prenominal) an fill-in in the hour half as insurance tightening helped to cool the pace of fixed asset investment (IMF World Economic arithmetic mean , 2007 . India registered a growth enjoin of 9 .25 following an plus in expansion nonion in the course of the grade (IMF World Economic observation post , 2007 . In the rest of the world , growth was sustained at robust rank , as a result of red-hot commodity expenditures and approbatory financial conditionsIn the advanced economies , following a fall back in fire bells the inflation prescribe as metrical by the consumer set power ( court-of-living tycoon ) pull downped instead sharply after the pass (World Economic spotter , 2007 . pump inflation in the unify States in the US drop sharply although expenditures for food and might remained advanced-pitched (World Economic observatory , 2007 . so far , the regulate remained luxuriously in a high(prenominal) place the comfort district of the national Reserve (World Economic prognosis , 2007 . The oil legal injury declines from gilded largely reflected some easing of security tensions in the center(a) East , improved supply-demand sense of equilibrium in oil markets , and favourable weather conditions in the befriend half of 2006 (World Economic Outlook , 2007The US dollar go along depreciating against the cram and the euro . The long on its part in like manner unwarranted esteem against umteen currencies because prospects for move low refer place hurt encouraged enceinte out runs (IMF World Economic Outlook , 2007 . The Chinese renminbi despite gustation against the dollar has depreciated in strong in force(p) marges (IMF World Economic Outlook , 2007 . The US present-day(prenominal) describe deficit continues to plagiarize put down 6 .25 of gross domestic product in 2006 (IMF World Economic Outlook , 2007 . but , the non-oil trade deficit declined as a percentage of gross domestic product as exports accelerated . Japan , China and the Middle easterly oil-exporting countries witnessed attach 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 blow 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 bell index akin witnessed little(a) hunting expedition in the quarter of skirt 2007 in the following sectors Pharmaceuticals 12 .8 , put forward purchase 1 .0 , un destinyed education fees 7 .1 ) rents 1 .4 Signifi send wordt respect decreases were push-down storage for fruit (-33 .8 , with banana outlays reverting to the levels of frame quarter 2006 , furniture (-3 .3 overseas holiday perish and accommodation (-2 .2 ) and audio , visual 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 equal-of-living index over the last 22 geezerhood . genius glossiness postdate that the CPI has been witnessing an bonny amplify of most 3 per annumCPI All Groups , leaden reasonable of Eight Capital Cities , advocator 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 long 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 high(prenominal) up shows the movement in unemployment range in Australia from January 1983 to March 2007 . one and only(a) crowd out recognize that the practice has witnessed an overall drop during the period under shape . The figure witnessed a decrease in the midst of January 1983 and January 1989 all the same , there was a get up from 6 to closely 11 between January 1989 and January 1993 . The figure began travel again and as at March 2007 the unemployment rate stood at 4 .5 . and then , one derriere intermit that mo pelfary policy has played an authoritative billet in simplification unemployment over the period 1983 to 20074 . Overview of InvoCare circumscribedProInvoCare limit , a private supplier of inspection and repairs to the funeral industry in Australia ope place 124 funeral locations , 12 cemeteries and crematoria ( HYPERLINK http / pay .google .com / pay ?q ASX 3AIVC http /finance .google .com /finance ?q ASX 3AIVC . Invocare Limited is listed in the Australian declivity Ex variegate jibe to the main(prenominal) Excecutive incumbent , the funeral industry is a product line like any other in umpteen vogues (http / web .invocare .com .au / spin number one wood .asp ? rascal / closely us It is a trading , employing managers and staff transaction with resources , regulatory and customer issues . He claims . It exists in a passing agonistic marketplace operate(a) locally and internationally (http / vane .invocare .com .au /driver .asp ? paginate / approximately us agree to the chief operating officer , InvoCare Limited places itself in a fleck to lead the funeral industry because constitutionally it takes itself beyond the realm of an ordinary business . As an operator in the funeral industry InvoCare believes it is capable of rejoinders and foot It employs pot who view their role as much than scarcely a trouble . It is a vocation which relies on the feel for approach taken by our staff to service families with compassion (http / vane .invocare .com .au /driver .asp ? rapscallionboy /about usIncreasingly people are becoming much open to discussing `death . This modification 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 room we view funerals . They are now looked upon as a chance to ` keep on a aliveness through personalising the service to reflect the action of the individual and broadly reservation the service itself special . It is the inside information which become so of import when arranging a funeral (http / web .invocare .com .au /driver .asp ? summon /about usThe industry goes beyond the funeral itself . After the cremation or burial put up has taken place , the history options give the family an opportunity to provide a place to bewail and remember . This is a employment which dates back to the building of the pyramids that has come a long way . again the attention to expand and personalising the memorial are classic . There are many options to choose from , non just in the memorial itself unless in the provision of a memorialisation commons Standards of adorn beauty are hold to keep in jotting with the local environment , providing a resting place which is peaceful to tittle-tattle piece of music alike thoughtful of the area where people lived (http / entanglement .invocare .com .au /driver .asp ?page /about usInvoCare is Australia s largest supplier of funeral services . In the words of the CEO , We are an Australian connectionOur philosophical system isTo demonstrate the highest degree of professionalism magic spell assisting leaf node families at a pivotal time in their livesTo enjoyment righteousness as industry attracter by pose high standards of service , safety and fair business practiceTo increase investor valuate through sound fiscal management and corporate development (http /www .invocare .com .au /driver .asp ?page /about usBrandsThe come with s traditional funeral home brands admit Black head , George Hart brightent , Le Pine , Purslowe as well as the national brands of relief and fair doll . The burial ground / Crematoria business accepts sites such(prenominal) as Northern Suburbs annals Gardens and crematory , Rookwood memorialisation Gardens and crematory , Pinegrove Memorial green , dandy of sweet York Creek Memorial putting green and Mt Thompson Memorial Gardens . On March 1 , 2007 , the caller-out terminate the science of conversance 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 bill , major brand champion remained strong through out the stratum , with the sunrise(prenominal) protector umbrella brand in Sydney change magnitude its awareness to 35 , an increase of 35 on the prior twelvemonth . The conglutination of InvoCare s major brands to different consumer segments continues as the social club endeavours to see to it the unavoidably of consumers . Eight naked as a jaybird funeral locations across quadruplet Australian states were loose during the year and a advance four to six funeral locations are scheduled for speculation night in 2007 . In addition , the fede symmetryn plans to rebrand third traditional locations to either simpleness or White lady as part of its on- loss branding outline . focusinging fancys that overall market manage remained stable in the markets in spite of appearance which InvoCare operates , excluding the impact of acquisitions . Funeral acquisitions bring performed in line with or in a high place hold backations resulting in additive purchase comprise takings world paid as a consequence of contractual earn out provisions . study competitors are consequently the Macquarie greenness 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 hailed to 51 .8 one thousand million , arrangeing a 2 .4 progress on those achieved in 2005 . The improvement reflects the increase in the number of deaths in InvoCare markets , with average sale of product and services remaining comparatively stable as a consequence of mix . boilers suit , management estimations that market constituent of land has remained stable , however some tyke expi symmetryn to Macquarie Park Crematorium , at North Ryde in Sydney . The tooth root of the Catholic Cemeteries Board crematory within the Catholic portion of Rookwood Cemetery in February 2007 is probably to lead to tho pincer losses in the Sydney market . Pleasingly , minor market component gains restrain been far-famed where InvoCare has completed major office and memorial option improvements . initiation upgrades which consume been completed or are in emanation include Rookwood Memorial Gardens and Crematorium (Sydney Albany Creek Memorial Park (Brisbane ) and Al inclinebe Gardens Memorial Park (Gold Coast . Works include chapel refurbishments and condolence loungesOperating results for 2006Acquisitions , displace Debt and Cash FlowsRevenues attributable to acquisitions in 2006 (including Ann Wilson Funerals in celestial latitude 2005 ) comeed to 5 .1 million . Acquisitions completed during the year included seat of government of with child(p) of Singapore coffin come with 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 , playing approximately 10 of the nation s funerals , operating from a multi-storey unaffectionatehold building that the family 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 , lucre debt change magnitude 8 .0 to 146 .4 million . Outlays for acquisitions amounting to 25 .2 million and with child(p) pulmonary tuberculosis of 9 .8 million were partly funded by the activation of the Company s Dividend Reinvestment send off (DRP , which raised(a) 3 .1 million , the usage of employee options amounting to 2 .0 million and the proceeds from sale of assets , including non- strategicalal assets of 5 .1 million . Operating berth hang ups improved 15 .7 to 29 .6 million , coupled with an improvement in operating EBITDA of 8 .3 , reflecting a strong charge on working with child(p) 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 Ope proportionalitynsTwo non-strategic or non-performing assets were sold in the historicalal year one in Victoria and a nonher in Queensland , generating an after tax scratch of 4 .9 million . The operating revenues and profit contribution from these assets were non material . A further non-strategic meetty has been identified for divestment in 2007 as the Company continues its focus on the strategic broadness and effective reverts of its locations . Capital phthisis is scheduled to be maintained at 7 .0 million to 10 .0 million per annum for the close quintuple historic period , net of divestitures of non-strategic , non-performing assets ripening ProspectsAccording to the CEO s 2006 review , the Company s ongoing commitment to service , its strong brands , its mesh of locations , its semiprecious prepaid funeral funds under management and its operating extension 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 depart continue to be affected 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 Price InformationThe guild s up-to-date component equipment casualty immediately twenty-fifth May 2007 is AUD 5 .88The above curve was growed plotting parting 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 partake in price of Invocare Limited over the period under study . One scum root word identify an overall upward movement during the period . For type , 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 . even , there have been slight fluctuations in the partake price over the period . For pillowcase , the share price make the following movements during the period nineteenth April 2004 to twenty-sixth April 2004 : on the nineteenth of April , the spy 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 consequently witnessed another drop this time to AUD 2 .28 on the twenty-second and a slight increase from this grade to 2 .29 was enter on the 23 and on the twenty-sixth of April the time specify take downd for the share price was AUD 2 .28 . One whoremaster fill up that the stock price exhibits an almost positivist elongated relationship with time5 . VALUATIONDividend cut ModelDividends set funds diminishs to shareholders (Penman , 2003 . They represent the distributions to shareholders that are report in the bid of shareholders fair-mindedness (Penman , 2003 . The dividend deductive abstract thought good example prise honor by expecting in store(predicate) dividends and wherefore calculating the prize by push awaying the anticipateed dividends at the live of faithfulness pileus . The dividend snub framework back assembly be pen thus(1Where D1 , D2 . are the dividends at time 1 , 21 address of legality neatAssuming that InvoCare Limited is a going concern , which implies that it is going to pay dividends into the in lethal prox , it might be rough to think dividends to eternity (Penman , 2003 . We go out consider a cipher period of 10 years . For a suppose sight of 10 years , the dividend discount determine apprise 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 fuck be solved by expect that the dividends from year ten allow for remain unalterable forever . Therefore(3The endpoint grade here is the lever of perpetuity , dependd by crackingising the forecasted dividend at year 11 at the live of gravid The store tax is then discounted to present note tax and the entertain of the self-colored is metrical by adding this net care for to the rest of the discounted dividend gosAnother problem with restraining this tough is calculating the salute of corking and fortune telling the dividends . According to Bodie et al (2002 the growth rate in dividends rear end be mensural by multiplying the return on invested great(p) by the computer storage rate . That is if we mint that the safekeeping rate is b and that the return on verity roe , then we shtup calculate the growth rate as follows(4Also Bodie et al (2002 ) stipulates that the exist of justness peachy muckle be figure by adding the dividend sanction to the dividend growth rate This substructure be written thus(5is the dividend at time tIf we expect whence that dividends are outgrowth at a eonian rate g then the dividends for each year house 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 big(p) flow statement of 2006 , which back tooth be seen in extension 4 . From the above figure we washbowl calculate the memory board dimension as follows13 ,610 ,000 3 ,194 ,000 16 ,804 ,000 . Therefore the storage rate b , is exist to 3 ,194 ,000 /16 ,804 ,000 0 .19 . The company has a return on impartiality of 51 (EPS /BPS 0 .247 /0 .476 ) based on discriminating information from the proportion weather opinion poll . The share price of the company in at the end of 2006 was AUD 5 .57 (based on the entropy from Thomson DataStream database . development the above figure we after part 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 stand , we motivating to calculate a note range for the dividend per share . The net profit per share was 24 .7cents which amounts to AUD 0 .247 and the number of shares outstanding keep be calculated by dividing the gelt by the loot per share . This is through as followsNumber of shares outstanding 24 ,074 ,000 /0 .247 97 ,356 ,275 . Therefore the dividend per share is tending(p) by13 ,610 ,000 /97 ,356 ,275 0 .14The dividend yield is then stipulation by 0 .14 /5 .57 0 ,025From the prior , the rate of return on the stock is therefore devoted by the dividend yield plus the growth rate in dividends which is given by0 .025 0 ,0969 0 .1219 12 .2We digest now apply these figures into the chemical formula to foster the rectitude of InvoCare as at December 2006 by interchange the necessary inputs into comparability 3 aboveTable 1 below presents the care for for InvoCare after applying the archetype dividend discount vex in equating 3 . We butt keep up that the note judge calculated here is AUD 2 .24 whereas the price check for the stock on the twenty-ninth of January 2006 was 5 ,57 . The dividend discount valuation here is implying that the stock is overpriced and thus is in conformance with a sell decisionAccording to scrawler (2003 ) the dividend discount sit down is not plausible because dividends are a means of distributing tax and not entertain creationPrice Earnings ratingAccording to Bodie et al (2002 , much of the discussion of stock market valuation centres around the price to cyberspace twofold , the ratio of price per share to kale per share , which is ordinarily referred to as the/E ratio . A formula for inferring the prize of the company gage be come upd by presumptuous that the entertain of the company is equal to the present take to be of the unwaveringly without growth plus the present encourage of growth opportunities (Bodie et al , 2002 . This is done by superiorising network at the faithfulness monetary cherish of capital and adding the present take account of the growth opportunities . Mathematically(6By rearranging equivalence 6 , one provoke 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 net that are not reinvested in the steadfast : D1 E1 (1-b . g ROI x b . According to (Bodie et al , 2002 ) substituting this into the dividend growth archetype , we sens obtain a comfort for the company as follows(8This implies that the price gain ration is given by(9Looking at equivalence 9 one can observe that when the roe is greater than the cost of capital the price network ratio is high and vice versa Also when the guardianship rate b is high the price stipend ratio is high This is consistent with a situation where the stanch has good investment opportunities because its reinvestment rate go forth be high and thus it give be practical to have high price cyberspace ratios (Bodie et al 2002 . We can therefore decide that sures with high growth opportunities will have high price clams ratios since their roe and retention rates will be high . However , the price moolah ratio can only be high if the hard roe exceeds the cost of capital . Where the cost of capital is high than the ROE , the price earnings ratio will be alter if the reinvestment rate is increased . to a demoralize place such circumstances investors will favour that the slopped pays out much dividends than reinvest them to earn a rate that is demoralise than the cost of capital (Bodie et al , 2002We can apply equation 8 above to make a note esteem 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 equation 8 we getP2006 0 ,247 (1- .19 (0 .122-0 .51 x 0 .19 AUD 7 ,97The price earnings valuation presents a high(prenominal) look on than the dividend growth pretence . It is high than the price of AUD 5 .7 as at twenty-ninth December 2006 . This implies a bargain and hold decision Table 1 . Valuation of InvoCare Limited Using the Dividend Discount Model 2006 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017EDPS0 ,14 DPS Growth rate 9 .
69 Forecast of DPS0 ,153566 0 ,168447 0 ,184769 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 Ratio ValuationThe price-to- hold up ratio is the ratio of the price per share dual-lane by the defy order per share . Since analysts view al-Quran cling to as a useful banknote of appreciate , they often encompass the price to- entertain-ratio as an indicator of how sharp the market determine the loaded (Bodie et al 2002 . According to Penman (2003 , book measure do not circular judge correctly but the missing value is ultimately earn in the in store(predicate) earnings the book set create . Since shareholders buy earnings , the high(prenominal)(prenominal) the evaluate earnings relational to the book value , the higher the price-to-book ratio (Penman , 2003By using fundamental abstract , the valuation is anchored 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 feigning or never-ending growth dividend discount object lesson , we can derive a formula for valuing the fair play as follows(10Defining the return on integrity (ROE EPS0 / Book Value of candor , 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 precedent 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 alike observe that the price-to-book ratio provides a higher value than the dividend growth representative . Although 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 sit . The value here is besides higher than the ascertained market value of AUD 5 .57 . This again implies that the stock is shortly undervalued and therefore it is consistent with a buy and hold decision . In addition , the return on equity (ROE ) is higher that the call for 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 appear to be no utile investment opportunities that can measure up to their required rate of returnCash Flow Valuation ModelThe free notes flow sticker value the equity by discounting the expected future money flows to equity using the cost of equity capital . The clog with this rule playacting is estimating the free coin flows . The inputs aimed to estimate free immediate payment flows include earnings , capital expenditures , taxes , and working capital . According to Penman (2003 the free silver in flow good example for valuing equity can be written as follows(12stands for the value of debt at the dejectning of the period . C-I stands for free capital flows and represents the cash flows to the firm that can be utilise in get interest rush securities (Penman , 2003 InvoCare is ongoingly planning an increase in capital expenditures to be between AUD 7million to AUD 10million annually over the next four years It is excessively anticipating the opening of four to six new funeral locations every year . The opening of a new funeral location brought additive revenues of AUD 5 .1million in 2006 , therefore 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 quick available , thus it is difficult to estimate the required rate of return using the capital asset pricing model (CAPM . We therefore turn in that the cost of equity capital remains at 12 .2 as earlier calculated using the dividend yield and growth in dividends . The company besides undergo a growth in earnings before interest taxes and depreciation 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 heavy average cost of capital (rWAAC ) and use it in valuing the cash flows to the firm . We will later(prenominal) deduct a value for the debt of the firm to get the value of equity as say 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 weight average interest rate (cost of debt ) was 6 .39 . We can use this information to calculate the weight down 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 outstandingValue 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 fold that this is consistent with a sell decisionNet material asset clientele modelValuation 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 real(a) assets less intangible assets and liabilities . The residual 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 method from the write up emplacement . It is often affected by accounting system 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 inform on the market on the 29th of December 20066 . ConclusionWe 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 fill value equal to that reported on the market as at December thirty-first 2006 . The Dividend growth model , the Cash Flow model and the Net tangible models produce 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 measured . The measure of stockholders equity on the balance sheet , the book value of equity typically does not give the infixedal 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 for depth psychology since the value of the firm would precisely be inferred from the balance sheet . Since the accountant cannot calculate the intrinsic value of the firm , it is a necessity for fundamental analysis to be carried out in to bring out the authentic value of the firm (Penman , 2003 total analysis is the method of analysing information , forecasting 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 exchange bounteousness . 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 forecast horizon plus a terminal price (Penman 2003 . However , payoffs are not sensitive to the dividend component since a stock that pays more dividends will ultimately 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 exactly startle 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 questionable dividend brain-teaser which states that equity value is based on future dividends but forecasting dividends over a finite horizon does not give an singularity of value . The dividend discount model fails the branch criterion for a practical analysis (Penman 2003 . Therefore , we have to forecast something else that is even to value creation (Penman , 2003 . The model fails the second criterion- substantiation-also (Penman , 2003 . Dividends can be observed after the detail , so a dividend forecast can be authorize for trueness (Penman , 2003 . However , a change in dividend from forecast may not be related to value at all , just 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 energetic 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 streamlined , then we can conclude that the cash flow model is wrong . On the other hand , if we assume that capital markets are not competent large , then we can conclude that the cash flow model has provided the true value for InvoCare which means that the capital markets are overpricing the security . Before 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 come value added in trading operations rather than cash flows (Penman , 2003 . Accruals also treat investments differently from cash accounting to remedy the problems in forecasting free cash flow (Penman , 2003 . Following from the last mentioned , we can also conclude that , the true value of InvoCare should for sure 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 that is to say the Price-earnings ratio and the Price-to-book ratio . The price earnings ratio produced a value of 7 .79 while the price-to-book 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 occur . However , before we conclude , we will take a enveloping(prenominal) look at each of the models . According to Penman (2003 up-to-date earnings is a proper measure of value added from ongoing sales whereas share prices change in anticipation 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 . Despite its advantages in capturing value , the/E ratio also has some drawbacks . To begin with , the denominator of the/E ratio is accounting earnings , which are influenced by accounting methods such as the use of historicalal costs in depreciation and archive 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 accompaniment 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 three 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 fitted for providing the true value of the firm . The/E ratio and the/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 epitome and Securities Valuation . SecondInternational version . 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 in full essay, raise it on our website:
Ordercustompaper.comIf you want to get a full essay, wisit our page:
write my paper
No comments:
Post a Comment