Tottenham Hotspur Plc

Tottenham Hotspur plc.

        Tottenham Hotspur plc wants to build a new stadium in order to accommodate more patrons and increase revenue in order for the team to stay competitive when acquiring new players. The issue at hand is if the new stadium is necessary or not. First, analysts need to perform a discount cash flow (DCF) analysis on the project. DCF is a method which evaluates how attractive an opportunity investment is. In order to find the DCF, analysts would take the future free cash flows (from their projections) and discount those values to arrive at the present value of the project. When discounting, the FCF should be discounted using the weighted average cost of capital method (WACC). The value after calculating the discount would need to be higher than the investment cost in order for the firm to consider the project.

        To put the steps into formulas, we would first calculate the WACC from the projected future free cash flows, WACC = rd(1- t)*[D/(D+E)] + re*[E/(D+E)], where the return on debt would be the risk free rate. And E is equal to market value of equity+net debt, re= rf+βe(rm-rf). After calculating the WACC, we can find the FCF by EBIT*(1-t) – CAPEX - ΔNWC+Depreciation. Changes in net working capital are due to accounts receivables and accounts payable being volatile due to its sensitivity to sales changes. After finding the current free cash flows and the WACC we can use these values to find the DCF.

        If we are trying to find the DCF under the assumption that the team will continue to use the current stadium and the current player acquisition strategy analysts can use the multiples analysis. This valuation theory states that if assets are similar than they should sell at similar prices. Under such assumptions we can compare the EV/EBIT multiples of Tottenham Hotspur to other teams in the league. Any negative numbers cannot be considered and will be ignored. Since this is the issue, we cannot use this method even though it is easier and we must use the DCF. If we decide to build a new stadium or acquire a new player for the team the best method would still be the discounted cash flow method. Analyst would generate new FCF from the exhibits provided and calculate the values for each scenario separately or together.