You are an analyst working in a private equity investment company and have been assigned to cover the sustainable food industry for Unity Fund, a private vehicle investment fund.

Your fund is considering the privatization of Oceania Limited, a public listed company on the local stock exchange. This company currently has 92 million outstanding stock available. Company stock is currently trading at $52.20 per share.

Oceania’s financial extract areas are listed below.

Your fund has an observed beta of 1.05 and a debt ratio of 40% with a cost of debt at 6.5%. Typically, your will issue fresh equity to raise capital to acquire new investment targets.

Dividends will grow at 20% in the next two years and will grow at a constant rate of 6% per year from Year 3 onwards. It is anticipated that the Depreciation, Earnings, Working Capital and Capital Expenditure will increase proportionately with Free Cash Flow to Equity (“FCFE”). You have been advised that the FCFE will grow at 20% per year for two years and at 8% per year thereafter.

Your research team has identified that the market risk premium is 6% while the risk-free rate is 4.5%. The Industry Beta is observed to be 1.3. You have requested industry relative ratios for reference and they have provided you with the following:

Industry P/E 18
Industry P/S 5
Industry P/BV 4.5

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 the only cost of equity and a 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.

(c) Calculate the approximate acquisition budget needed to buy up all outstanding shares of Oceanic Limited if the decision is made to proceed.