Describe your approach and which factors have been key considerations in deriving these forecasts.Compute the reinvestment rate (IR) historically, in the explicit period, and in the continuing value calculation.

Valuation assignment

General

The main valuation assignment is a comprehensive enterprise DCF-valuation according to the principles in KGW (2020) plus a relative valuation according to the principles in SB (2014). Implementing the Economic Profit and Cash-Flow-to-Equity valuation methods, are not requirements.

Case company

The case company is SCA, paper and pulp company headquartered in Sweden. On Canvas you find financial statements going back to 2010 as well as the most recent annual report.

To complete the valuation, we will have to use information in the footnotes of this annual report. Guidelines are published on Canvas concerning which parts of the footnotes you are expected to use.

Contents of the report

The valuation assignment is about convincing us that your valuation is the correct one. Generally, you should motivate assumptions regarding key value drivers and back those up with suitable arguments and analyses. You should also interpret outputs carefully, drawing on the course literature, and show an analytical mindset.

In the report, include the following sections:

 Section 1 is an introduction in which you briefly present the company and provide general background (history, markets, strategies, and so on).

 Section 2 analyses the sources of historical revenue growth. To the extent possible, separate between organic and acquired growth.

 Section 3 benchmarks the firm’s historical performance. Use the appropriate definition of ROIC for this purpose. Include the cost- and capital efficiency ratios for the firm being valued.

Compare the performance with suitable benchmarks. You are not required to calculate the performance of the peer firms yourselves, you may rather use financial ratios available in Factset.

 Section 4 discusses the revenue growth forecast and the assumptions needed to derive an operating margin for the explicit forecast period.

Describe your approach and which factors have been key considerations in deriving these forecasts.

 Section 5 analyses the firm’s reinvestment needs. Compute the reinvestment rate (IR) historically, in the explicit period, and in the continuing value calculation.

Interpret any change you might see over time, and try to assess to what extent acquisitions are impacting the numbers you see.

 Section 6 discusses cost of capital. Defend your assumptions regarding the key inputs for both cost of equity and cost of debt. Don’t forget to discuss the capital structure weights.

 Section 7 discusses the continuing value assumptions. Carefully motivate the assumptions that went into this calculation.

 Section 8 presents your scenarios. Describe the key dynamics of each scenario (best- expected-worst) and how this translates into model assumptions.

 Section 9 contains a discussion of the enterprise- and equity value statements. For each item in these statements, discuss whether it is assumed to be equal to book value or whether you have replaced that with an estimate of the market value (and how that was obtained).

 Section 10 contains your key assumptions and conclusions from the relative valuation. Make sure that you address how you have considered performance differences (the companion variable) in your relative valuation.

 Section 11 summarises the report. State your main conclusions and reflect on the difference between your valuation and the current share price.

In addition, there are certain requirements for your Excel model, listed below:

DCF-valuation

 Statements of NOPAT; Invested capital; and FCFF for at least ten years in the past.

(Note: since FCFF uses changes in balance sheets there will be one less observation compared to the other reorganized statements.)

 Reconcile NOPAT and Net income. Also reconcile the balance sheet with IC. You do not have to reconcile FCFF with funds to investors.

 Create enterprise- and equity statements that show line-by-line which items you have included. For each item (or where applicable), in the column to the left you present the book value of the item. This is to highlight whether your entry in the enterprise- and equity statements is a book value or whether it has been replaced by an estimate of market value.

Relative valuation

 Use data available on the five competitors to carry out a relative valuation

 For this purpose, evaluate the EV/EBITAadj-multiple recommended by KGW (2020),
the Price-to-Earnings multiple and one more multiple of your choice.

 To create the multiples, use the financial data for the peer group that has been made available on Canvas. To construct the multiples, build up the enterprise value of the peers from the liability side. Fetch the most recent market cap data from Factset or Yahoo Finance.

 Assign a multiple that you think is appropriate given the performance of SCA vis-à-vis its competitors. At a minimum, you should consider ROIC as a companion variable. Be as explicit as possible about this link in your model.

 Based on the above, derive a value for SCA’s equity capitalization

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