We have used the WACC method to determine the value APN News & Media (APN) by discounting future unlevered cash flows to the present value with the WACC,

Authors Avatar

           

Valuation

We have used the WACC method to determine the value APN News & Media (APN) by discounting future unlevered cash flows to the present value with the WACC, as it is a levered firm.

Weighted Average Cost of Capital (WACC) is calculated taking into account the relative weights of each component of the capital structure. This method discounts the unlevered cash flow by the weighted average cost of debt and equity of the firm.

Calculation of WACC

Step 1.        Calculating rd or rate of return on debt

The cost of debt for APN can be determined by using the following formula:

Cost of Debt =         Interest Bearing Borrowings & Long Term Debt

                                Financial Charges

We have extracted current and non-current borrowings and financial charges figures from the latest audited financial year end report being 2009:  

We note that there are 2010 audited half year financial reports available however we do not believe this represents an appropriate length of time to determine the cost of debt.

Step 2. Calculating re or rate of return on equity

The rate of return on equity is determined by using the Capital Asset Pricing Model (CAPM). The formula for CAPM is as follows:

Re = Rf  + β(RM-Rf)

Where,

RF is current yield on 5 year treasury bonds which are considered to be risk free securities as they are backed by the government, the risk associated with this instrument is negligible. We have taken the risk free rate on 11 January 2011, for our calculation which is at 5.33% (RBA).

RM is the return on the S&P/ASX 200 Index. For our calculations, a market risk premium (RM-Rf) of 8% is used which is commonly used as a standard figure in CAPM calculations.

The beta of APN is determined by using regression analysis (refer to Appendix A: Regression analysis APN) and uses the continuously compounded returns of APN and the S&P/ASX 200 Index for a period of 5 years using monthly data.

The intercept and the slope of the characteristic line are solved in Excel which give us the following values:

APN has a moderate beta of 1.2761 which is considered to be in the defensive range. Defensive stocks hold up in difficult economic conditions because demand does not dramatically decrease as it may in other sectors. Defensive stocks tend to lag behind the rest of the market during economic expansion because demand does not increase as dramatically in an upswing.

The CAPM model can also be used to determine the cost of equity, thus the calculation of Re is as follows:

Re = Rf + β (RM - Rf)

= 5.33 + 1.2761 * (8)

Re = 15.54 %

Step 3.        Calculating market value of equity

The market value of equity can be calculated by multiplying the number of shares with the market price of each share. The formula is as follows:

Join now!

Market Value of equity (E) = Share Price * Number of Shares

For our calculations we have used the closing price as at 24 January 2011, which was $ 1.79 and confirmed the number of shares on issue with the Company Secretary of APN News & Media.

Step 4.        Calculating the total value of the firm

The total value of the firm is given by the sum of its debt and equity.

Value of the Firm (V) = Value of debt (D) +Value of Equity (E), thus:

Step 5. Calculating WACC

WACC is determined by using the ...

This is a preview of the whole essay