Summary of business Founded in 1981, FLT is an Australian...

 Summary of business

Founded in 1981, FLT is an Australian based travel agency headquartered in Brisbane, Queensland. The Company had its IPO in 1995 and had a revenue of AUD 2.64B for FY2016. The company has almost 3000 stores in 14 countries. Although the bulk of FLT's revenues come from airline ticket sales, it also generates revenues from a number of other services within the travel industry, such as cruise lines, car hires, and hotel accommodation.

APPENDIX A

Table below contains information on the historic earnings per share (EPS) and dividend per share (DPS) for the company. Using the information in the table, calculate the expected dividend growth rate of the company. Answer in the box provided (10 MARKS).
 

(A) Historical growth rate (5 marks)

(B)   Sustainable Growth Rate for 2016 (5 marks)

Assuming that the Return on Equity (ROE) for Flight Centre is 18.7% for the year 2016, calculate what is sustainable growth rate of the company? Answer in the box provided.

Calculate Beta (β) for Flight Centre. Answer in the box provided (5 marks).

Assume standard deviation of market returns = 0.25, standard deviation of FLT stock's returns is 0.45 and correlation coefficient of market returns and returns on FLT stock is 0.69.

Calculate required rate of return for the stock using CAPM Model and the following information. Answer in the box provided (5 marks).

Assume that the market risk premium is 7.25 %. The 10-year Treasury bond rate is 3.00%. Use beta you calculated in answering Question 2.

In this section you are required to do financial ratio and cash flow analysis using the balance sheet, income statement and summary cash flow information provided in Appendix A.

Financial Ratio and Cash Flow Analysis.

 (A) Calculate the following financial ratios for 2016. Use only year-end values (DO NOT use average values) (30 marks).

(B) Calculate the ROE for FLT using the DuPont model. Clearly show your workings (3 marks).

(C) Measures of Cash Flow (12 marks)Using the financial statements calculate the following two measures of cash flows for 2016. Answer in the box provided by clearly showing your workings. Use a tax rate of 30%.

Free Cash flow to the Firm (FCFF) (6 marks)

Free Cash Flow to the Equity (FCFE) (6 marks)

Valuation

(A) Using the multi-stage dividend discount model (DDM), calculate the value of FLT shares. Use scrap paper for your workings (15 MARKS).

Assume that dividends in the next three years (starting from year 2017) will grow at a rate of 13% annually. Further, it is assumed that dividends will grow at a rate of 11% for the next four years (year 4 to 7). Thereafter it is assumed that the company will grow at a constant growth rate of 7% per annum. The last dividend paid (for 2016) is $1.52. Assume a required rate of return of 12%.

Clearly show the following:

Present Value of First Stage (4 marks)

Present Value of Second Stage (5 marks)

Present Value with constant growth rate (5 marks)

Stock Intrinsic Value (1 marks)

(B) Using the following data, calculate the equity value of FLT share (value per share). Answer in the box provided (10 MARKS).

Assume that FLT has FCFF of $ 150 million and FCFE of $ 200 million for the last financial year (since the last financial year had many unusual items, we ignore the FCFF/FCFF calculated earlier and use projected values instead). Both FCFF and FCFE are expected to grow at a constant rate of 7% per annum indefinitely. FTL's required rate of return of equity is 12% and the before tax cost of debt is 7%. The company expects a target capital structure consisting of 20% debt financing and 80% equity financing. The tax rate is 30%.  Use book value of long-term debt. FLT has 100 million outstanding common shares.

Clearly show the following:
 

FCFE (4 Marks)

FCFF (6 Marks)

(C) P/E Valuation

The EPS for Flight Centre for 2016 was $2.42 and dividend payment - $1.52. Using fundamental trailing P/E multiple method, calculate the value of the stock by assuming that earnings will grow at a constant rate of 8% per annum indefinitely. FTL's required rate of return is 12% and before tax cost of debt is 7%. Assume that FLT will maintain the current dividend pay-out ratio. (5 marks)

STOCK RECOMMENDATION

Based on the stock value calculated in question 5 (A), 5(B), and 5(C), estimate your target price for FLT Share. Considering the current market price, briefly justify your investment recommendation for FLT. Write your answer in the box provided (5 MARKS).

The current market price of the stock is $35.68.

Please show:

Target Price (3 Marks)

Recommendation (2 Marks)