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Hi Everyone
In my project I am calculating the free cash flow of a private company and then using the dividend model to get the business value
When discounting the free cash flows at the cost of equity I have no idea what is an appropriate figure to use for cost of equity. Has anyone done this before? could you give me some pointers please as I am not sure how I should know what return the shareholders expect.
Another problem is that the growth of the business is 67% as it is a fast growing young company. And this large growth gives me a negative business value. Is there another suitable method anyone could suggest?
Thank you for your help in advance.
@williams1977 – you are doing a RAP for a BSc not a dissertation for your Masters so don’t over complicate things for yourself. I doubt anyone has done this before and as it is probably unnecessary I suggest you focus more on linking your SWOT, PESTLE & business analyses to your financial analysis as that will be more important to getting a pass. The markers look for clear explanations of what has gone on not arbitrary figures. Surely a business value is more appropriate for a flotation and not relevant for comparator analysis anyway? Don’t go there as you making life more difficult than it is 🙂
Hello Trephena
Thank you for the advice but I think if I just explain a little more you will understand how I am using the model.
My project is on the company Wonga. There is a piece of legislation which will cap the amounts they can charge when they give out loans.
My project will analyse the operational and financial effects. I am using a Porters value chain and five forces to analyse the opertional effects. And to analyse financial effects I will value the firm using free cash flow.
The proposed legislation by the government explains that they expect the legislation to decrease Wongas revenue by 40% so using this data I am valuing the Wonga business now as it is. And then value it after the revenue had decreased by 40%
Does this approach sound OK? You say the model is not relevant but I think it is in this context?
@williams1977 – my apologies I assumed that you were doing T8 (the choice of 65-70% of students) whereas presumably you are doing T3 An assessment of the potential impact of an aspect of impending legislation on the operations and financial position of an organisation? In which case what you are proposing sounds a very good way of doing this. The comments about Porter’s 5Fs that I have made on the forum also tend to be exclusive to T8 as in the evaluation for that topic it is difficult to tie in the actual financial results as easily to the Porter’s model as it is to a SWOT/PEST(LE).
As long as your workings are clear (put the nitty-gritty if they are complex in Appendices so the reader can see the wood from the trees), you explain the approach to your analysis and rationale well, then I would expect your findings to follow on logically. Therefore the conclusions you draw from this should be reasonable. (The problem with some topics is that students do not adopt a proper step by step approach and they end up making statements which are not supported by evidence. Therefore the conclusions are not valid and the marker gives them a fail for E & A as the whole thing does not hang together).
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