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Assignment Details
- Referencing Styles: APA
- Words: 2000
- Course Code: EFB343
- Course Title: corporate finance
- University: Queensland University of Technology
- Country: AU
Task
To help with your calculations, the lead partner has advised you to make the following assumptions. Broadly speaking, you need to use Target’s past 4 years of financial data to forecast the firm’s future sales, variable cost, fixed cost, depreciation, working capital, and capital expenditure. You then need to work out the Weighted Average Cost of Capital (WACC) which will be used as the discount rate in your free cash flow analysis.
Required:
(a) Calculate Target’s cost of equity using CAPM.
(b) Calculate Target’s cost of debt.
(c) Calculate Target’s WACC.
(d) Provide a thorough justification for your choice of the growth rate after year 4.
Clearly state any other assumptions you have made.
(e) Estimate the years 1-4 free cash flow and the terminal value at the end of year 4.
(f) Find the value of Target.
(g) Compare your valuation with the current share price of Target Corporation (as of today). Based on your evaluation, would you conclude that the company’s stock is overvalued or undervalued?
(h) How would your conclusion in part (g) affect Amazon’s incentive to acquire Target?
(i) Determine how sensitive your valuation is to a ±1% change in the sales growth rate, i.e., the average sales growth rate over the last 4 years. Discuss the impact of such changes on your conclusion.
(j) Discuss any limitations of your analysis. Your discussion should include a critical evaluation of your assumption(s) and those of your lead partner, especially those in relation to the use of the historical data for the year 2020.