Homework for Advanced Corporation

Market Information Lab Exercise

Zhouhao shi

NET ID zhouhao2

Part 1-DCF

1. Projected sales of the company over next seven years:

The data I used was the estimation of STLD from the Capital IQ software, and the data of year 2023 I calculated based on using the average growth rate of first six predicted years to get the result. The reason I didn’t take the data from year 2014 to 2015 is that they are very negative and varies differently from the data of predicted year, maybe something happened in year 2017 and made a great impact on the sales revenue.

1. Projected EBITDA/Sales margin and predicted EBITDA over next seven years:

   The data I used was same as the first question. The method I used was the average of past six years estimation of EBITDA/Sales margin.

1. Estimated free cash flow over next seven years:

1. I will use the growth rate equals to 1.44%. This rate is calculated based on the average of increased rate of FCFS during year 2016 to year 2023, which means I set the future growth rate equals to the average growth rate of first seven estimated years.

1. The WACC is 7.59%. The data I used was as before, then I figure out the bond rating of STLD from The Moringstar. The rating is BB+, and I assumed the debt beta is 0.15 between BB and BBB. Then I applied CAMP to calculated the after tax debt cost of capital equals to 1.79%. Finally I got the WACC using the cost of equity which equals to 9.26%, getting the result of WACC.

1. The NPV is 16481 million. I used each estimated years’ FCFs and discounted rate equals to the WACC, as well as the terminal value to get the NPV.

1. Equity value is 14966 million, and stock price is 61.75. The answer in (f) is the EV of the company, then use the formula equity = EV – debt + cash to get the equity, then divided by number of shares to get the stock price.

1. The stock price is sensitive to long run growth rate, because when the rate decreased to 0, stock price changes to 52.65; when rate changes to 3%, stock price changes to 78.19. The stock price is sensitive to equity beta, when equity beta changes to 1, stock price changes to 89.24; when beta changes to 2, stock price changes to 44.24. The stock price is also sensitive to market risk premium, when risk premium changes to 4%, stock price changes to 77.6;when risk premium changes to 6%, stock price changes to 51.04.

PART-2 Comps

The three companies I choose is

1. Stock price/EPS

We assume the industry Stock price/EPS is the average of these four companies’ Stock price/EPS, which is 95.84. and we can calculate the estimated price of STLD using stock price = EPS of STLD * Stock price/EPS = 149.5.