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Questions: i) A review of the top-down analysis that led to the focus on a particular company. A rational for considering particular economies, industries and companies from within those industries should be provided. ii) A fully explained / justified calculation of the current intrinsic value of the company - established using at least one DCF technique and one relative valuation technique (all figures employed including growth projections to be explained / justified and performance comparisons within industries and / or between countries explained. N.B. illustrative examples used in the lectures / workshops should not be used). iii) As the methods employed in ii) above are likely to result in different valuations, you are required to provide an academic justification of the valuation method(s) you will rely upon. Answers: (i). The top down approach of TMC academy has been illustrated below with the diagram as follows: Figure: Top down analysis (Source: Pheimunittrusts.com. 2016) Global factors: The first aspect of the top down analysis is to consider the global factor, which adds to the increment in the value of the shareholders. The various types of the global factors, which affect the values of TMC Education, include the admission of more number of students from different region of the globe. The company should aim at increasing the intake of the student from varied areas so that the company can look forward positively to the contribution to the global parameters. The institution should also focus on the existing political, situation in that particular region so that the institute can look forward to increase the amount of the increase in intake of the students. It also ensures that then expansion of the institute in the different location is having a stable political situation to support the operations. (Statistics ,2013) Country specific factors: The country specific objective includes the socio political situation, population statistics and the balance of payment situation in the chosen country. This helps the company to eliminate the various types of the aspects, which exists, as a result, of the defaults in the payments made by the monetary and fiscal measures by the existing Government. The company is also able. In this way, the company is able to overcome to the various types of the existing barriers arising due to the country specific factors. (IMF Survey The Global Economy 2016). Sector specific factors The sector specific factor includes the various type of the growth in the valuation and the understanding of the cycles in the relative valuations of the country. The institution should also look forward to the various aspects of the investment opportunities, which exists in counterpart of the different location of the world, which may contribute to the growth of the institute. The growth of the institute can be studied on the basis of the relative growth of the other such institutes located in the adjoining location of the Middle road Singapore region. The company will be able to see the potential growth opportunities, which exist in the growth pattern of the different institutes and the company will be able to define the various styles of the policies of the strategic management, which will contribute to the growth of the institute (Deng et al., 2014). Stock selection: The company further needs to evaluate the stock of the company by the analysis of various types of the qualitative and the quantitative analysis, which include the analysis of the qualitative education of the academy. This further show the several, aspects quality and the quantity on the basis if then number of the intake of the students of the institute of the various types of the adjoining institutes and needs to improve its quality of the education services base on then similar institutes based in Singapore (Deng et al., 2014). (ii). Intrinsic value can be defined as the actual value of a business, asset or stock, which is determined by incorporating all the factors, related to the item. It is not necessary that the intrinsic value and the market value of any item will be equal all the time. Intrinsic value of any company or stock is computed by using various methods techniques. The most common methods to calculate intrinsic value are Discounted Cash Flow Model and Relative Valuation Model (Brigham Ehrhardt, 2013). Discounted Cash Flow (DCF) Model:- Discounted Cash Flow model is the most popular and appreciated model, used for calculating intrinsic value. DCF model use to forecast the profitability of any investment opportunity by estimating the future cash flows. In this process, the projected future cash flows are discounted to estimate the net present value of the future cash flows to evaluate the potentiality of the investment (DeFusco et al., 2015). The fair value of TMC Education Corporations Ltd. shares is evaluated below by using DCF model. To forecast the future cash flows, the most important factor is growth rate. It can be measured by different techniques. One of the techniques is CAGR Model. The formula of growth rate under CAGR model is as follows: Growth Rate = (EV/BV)1/n 1 Where, EV = Ending value of Investment BV = Beginning Value of Investment n = Nos. of Period The growth rate of TMC Education is calculated in the following table: Free Cash Flows (FCFs) 2014 2013 2012 2011 2010 2009 Net Income/(Loss) Before Tax (3,901,587) (2,809,935) (2,966,943) (2,025,486) 68,437 Add Depreciation 640,375 594,730 594,236 604,082 799,586 Add Interest Expenses 34,056 89,014 18,852 138 7,037 Total EBIT (3,227,156) (2,126,191) (2,353,855) (1,421,266) 875,060 EBIT Growth Rate using CAGR -229.82% Current Assets 3,458,104 4,652,781 3,839,911 3,113,741 6,685,019 6,233,020 Add (Subtract) - Decrease(Increase) in Current Assets (given) 1,194,677 (812,870) (726,170) 3,571,278 (451,999) Current Assets' Growth Rate using CAGR -221.46% Plant, Machinery Equipment 2,057,945 2,388,217 2,195,695 6,586,103 12,792,041 13,367,663 Add (Subtract) - Decrease(Increase) in Plant, Machinery Equipment (given) 330,272 (192,522) 4,390,408 6,205,938 575,622 PPE Growth Rate using CAGR -10.52% Current Liabilities 7,991,374 7,404,077 9,198,913 6,980,002 7,542,612 8,000,115 Add (Subtract) - Increase (Decrease) in Current Liabilities (given) 587,297 (1,794,836) 2,218,911 (562,610) (457,503) Current Liabilities' Growth Rate using CAGR -205.12% The growth rate can be calculated by using AAGR method also. The formula of AAGR is derived by the following formula: Growth Rate = (AGR1 + AGR2 +AGRn) /n Where, AGR = Annual growth Rate n = Number of Periods The growth rate of TM Education, by using AAGR method, is calculated in the following table: Free Cash Flows (FCFs) 2014 2013 2012 2011 2010 2009 Net Income Before Tax (3,901,587) (2,809,935) (2,966,943) (2,025,486) 68,437 Add Depreciation 640,375 594,730 594,236 604,082 799,586 Add Interest Expenses 34,056 89,014 18,852 138 7,037 Total EBIT (3,227,156) (2,126,191) (2,353,855) (1,421,266) 875,060 y/y Growth 51.78% -9.67% 65.62% -262.42% Average Growth -38.67% Current Assets 3,458,104 4,652,781 3,839,911 3,113,741 6,685,019 6,233,020 Add (Subtract) - Decrease(Increase) in Current Assets (given) 1,194,677 (812,870) (726,170) 3,571,278 (451,999) y/y Growth -246.97% 11.94% -120.33% -890.11% Average Growth -311.37% Plant, Machinery Equipment 2,057,945 2,388,217 2,195,695 6,586,103 12,792,041 13,367,663 Add (Subtract) - Decrease(Increase) in Plant, Machinery Equipment (given) 330,272 (192,522) 4,390,408 6,205,938 575,622 y/y Growth -271.55% -104.39% -29.25% 978.13% Average Growth 143.23% Current Liabilities 7,991,374 7,404,077 9,198,913 6,980,002 7,542,612 8,000,115 Add (Subtract) - Increase (Decrease) in Current Liabilities (given) 587,297 (1,794,836) 2,218,911 (562,610) (457,503) y/y Growth -132.72% -180.89% -494.40% 22.97% Average Growth -196.26% As discussed above, the FCFs are discounted for evaluating its present value. Therefore, it is very necessary to determine WACC for discounting the FCFs, as the formula of discounted cash flow is: DCF = FCF/(1+WACC)n Where, n = number of periods The formula of WACC is given below: WACC = (E/V x ke) + [(D/V x kd) x (1-Tc)] Where, E/V = Weighted Average Equity Capital ke = Cost of Capital D/V = Weighted Average Debt Capital kd = Cost of Debt Tc = Tax Rate As per the formula, the WACC of TMC Education is calculated below: Payout ratio = Dividend Per Share / EPS (Basic) FY2014 FY2013 Dividend per share (Do) 0.0597 0.0000 EPS - Basic $ (2.31) (1.71) Payout ratio -2.58% 0.00% Return of Equity = Profit For The Year / Total Equity FY2014 FY2013 S$'000 S$'000 Profit for the year (3,901,587) (2,809,935) Total Equity 17,538,270 21,465,801 Return of Equity -22.25% -13.09% Dividend Growth Rate = Return of Equity x Retention Rate (1-Payout Ratio) FY2014 FY2013 Return of Equity -22.25% -13.09% Retention Rate (1-Payout Ratio) 102.58% 100.00% Dividend Growth Rate (g) -22.82% -13.09% Discounted Rate (ke) = Dividend Per Share (D1) / Value of Stock (P0) + Dividend Growth Rate (g) FY2014 FY2013 Share price 0.069 0.069 FX Conversion Rate into SGD 1 1 Share price - SGD 0.07 0.07 Dividend per share (D1) 0.0461 0.0000 Share price - SGD (P0) 0.0686 0.0686 Dividend Growth Rate (g) -0.2282 -0.1309 Discounted Rate (ke) 44.38% -13.09% 2.3 COST OF DEBT Total Debts FY2014 FY2013 S$'000 S$'000 Non-Current Laibilites: Notes Convertible Bonds - CL Senior note Borrowings 3,243,255 602,829 Current Lailibilies: Bank debts and current portion of long term debts 1,248,223 1,049,996 Convertible bonds - CL Senior note - CL Trade and otherpayables 6,743,151 6,354,081 Borrowings Total Debts 11,234,629 8,006,906 Cost of Debt (kd) = Finance / Total Debts FY2014 FY2013 S$'000 S$'000 Finance Costs 34,056 89,014 Total Debts 11,234,629 8,006,906 Cost of Debt (kd) 0.30% 1.11% 2.4 WEIGHTED AVERAGE COST OF CAPITAL (WACC) Capital Structure = Equity + Debts FY2014 FY2013 S$'000 S$'000 Issues Capital (E) 17,538,270 21,465,801 Total Debts (D) 11,234,629 8,006,906 V = E + D 28,772,899 29,472,707 Calculation of Weighted Average Cost of Capital (WACC) = (E/V x ke) + [(D/V x kd) x (1-Tc)] FY2014 FY2013 E/V 60.95% 72.83% ke 44.38% -13.09% D/V 39.05% 27.17% kd 0.30% 1.11% 1-Tc (1-17%) 83% 83% WACC 27.15% -9.28% (iii). From the above discussion, it is very much clear that different valuation methods use to evaluate an investment by different parameters. Hence, the outcomes of the valuation processes do not tally with each other. In the above table, both the DCF Model and Relative Valuation Method are demonstrated under two different factors. For DCF Model, the growth rates are determined under two different techniques. The relative valuation model is also demonstrated by using two ratios. Different Techniques of DCF Model:- As discussed above, the growth rate, required for calculating the DCF, is computed under two different techniques Compound Annual Growth Model (CAGR) and Average Annual Growth Rate Model (AAGR). In CAGR model, the growth rate is calculated by using the ending value and the beginning value of the investment. It can be defined as the smoothest yield rate of any return. It is easy to calculate. It is very effective for ascertaining growth rates of historical prices. It should be noted that CAGR model does not incorporate the risk factors, associated with an investment (Bierman Jr Smidt, 2012). AAGR model is another simple model, used for growth rate ascertainment. This model considers the year-to-year growth rate to derive the average growth rate for a certain period. Therefore, the growth rate under this model reflects the growth trend of the investment. However, as it is determined by considering all the annual growth rates over a period, if in any particular period, the growth rate is abnormally high or low, that creates impact on the average growth rate (Balassa, 2014). It is always better to consider the CAGR model for any long-term investment. It helps to predict the future value better than AAGR. In the above calculation, the fair value of the shares derived from CAGR is equal to the market value, whereas, as per AAGR model, the fair value is SG$0.04, which is lower than the market value. Thus, it proves that, for DCF model, growth rate under CAGR helps to provide the accurate outcomes (Dolvin et al., 2012). Different Techniques for Relative Valuation: Relative valuation can be ascertained by using two different ratios P/E Ratio and EV/EBITDA Ratio. P/E ratio is the most common metrics for investment appraisal. It provides the input to evaluate the shares by the earnings of the company. It should be noted that many companies use to manipulate the accounting returns for showing higher P/E ratio. Moreover, it only considers profits and does not incorporate cash flows (Hirshleifer et al., 2013). EV/EBITDA ratio includes cash flows and overall value of the company. Therefore, it provides more accurate overview of the financial position. It has been observed that for negative profits or net losses, this ratio does not provide proper evaluation (Pinto et al., 2015). In this scenario, most of the companies are having net losses. Therefore, the average EV/EBITDA of TMC Education is not showing proper figures. Hence, for this particular case, P/E Ratio is considered as the better alternative for relative valuation. Comparison between DCF Model Relative Valuation Model: DCF model consider the discounted future cash flows for determining the present value of shares. It incorporates the discount factor and also the time value of money. Therefore, investor, using DCF model, can forecast about the future earnings of the investments. The relative valuation model depends on the industrial benchmark or the competitors financial performance. It depicts the fair value of the share, which is more market driven (Penman, 2015). An investor always prefers such evaluation model, which can provide him the overview on future performances of the investment. Hence, from this point of view, DCF analysis is the better alternatives, as it depicts how much an investor can earn from any investment in the future (Spronk et al, 2016). 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