The value of a firm’s stock is calculated by forecasting free cash flow to the firm (FCFF) or free cash flow to equity (FCFE) and discounting these cash flow back to the present at the appropiate required rate of return. FCFF or FCFE are the appropriate models to use when 1) the firm doesn’t pay dividend, at all or pays out fewer dividends than dictated by its cash flow, 2) free cash flow tracks profitability, or 3) the analyst takes a corporate control perspective.
Table 1: Estimating cost of equity
|Inputs||Initial phase||Terminal phase|
|Long term riskfree rate||5,50%||5,50%|
|Market Equity Premium||4,40%||4,40%|
|Country Equity Risk Premium||4,20%||3,00%|
|Total Cost of Equity||15,96%||14,22%|
Note: Risk-free rate is the geometric mean yields on long-term government bonds in the period 1926 – 2010. Investor typically use the Large Company Stock geometric mean return minus Long-Term Government Bond return as their characterization of the historical Market Equity Premium, which for 1926-2010 is 4,4%.
Source: Ibbotson® SBBI®, 2011 Classic Yearbook: Market Results for Stocks, Bonds, Bills, and Inflation, 1926–2010 (Chicago: Morningstar, 2011).
The value beta in the initial phase is determined by the increased average beta 32 companies from Europa in the agricultural sector by 0,36. The reason for the increase of the exitence of off balance sheet items which relate to guarantees and warranties for the parent company, and the fact that the ratio of debt to the company the subject of analysis is 0,51, while the average amount of this ratio for companies in Europe operating in the agricultural sector 0,3385. The assumption is that there will be a slight decrease in the terminal phase of the beta to 0,96 as it will relieve the company off balance sheet liabilities.
Source: CapIQ & Bloomberg.
In the initial phase of the current used in the country risk premium of 4,20%, while the assumption that in the terminal phase will decrease the risk, the rate of 3,00%, that is the level of risk Croatia.
Premiums for the size of the company are certain judgment.
Table 2: Estimated FCFE and estimates fundamental growth rate in 000 RSD
|Current Net Income||1,217,420|
|Current Capital Spending||1,768,978|
|Change in Working Capital||-186,681|
|New Debt Issued – Debt Repayments||1,626,768|
|Book Value of Equity||13,002,855|
|Expected Growth rate||-0.03|
Table 3: Calculating the PV of FCFE during initial phase in €
|Inputs / Years||2011||2012||2013||2014||2015||2016|
|Expected Growth rate||0,97||0,97||0,97||0,97||0,97|
|Cost of Equity||0,16||0,16||0,16||0,16||0,16|
|Sum of present value||40,587,158|
Table 4: Calculating the terminal price and Value of equity in €
|Expected Growth rate||5,50%|
|Cost of Equity||14,22%|
|PV of Terminal Price||67,107,660|
|Reinvestment rate in terminal phase||0,55|
|ROE in terminal phase||17,00%|
|PV of FCFE during initial phase + PV of Terminal value||107,694,818|
|Value of equity||112,660,159|
|Current share price||4,18|
|Number of shares||14,895,524|
|Estimated Value/ share||7,56|
Note: EUR/RSD 117,3571