Part one
For GlaxoSmithKline (GSK) company, calculate the value of equity using the discounted cash flow exercise. You can copy the process shown in the Lecture Slides…
1-Forecast free cash flow to time horizon and discount to present value.
2-Calculate continuing value at time horizon and discount to present value.
Add 1 and 2 together.
Subtract net debt.
Think about the discount rate that you apply to the net cash flows, and the growth rate you assume for calculating the continuing value.
Compare your calculated value of equity with your company’s current market capitalisation and explain why the figures might be different.
Part 2
1- Using historical data (or your own estimates of future performance data), calculate the market’s implied growth rate for your company using the reverse engineered valuation model. Base your calculation on:
– residual earnings valuation, OR
– abnormal earnings growth model
2-Critically evaluate the use of this model including an evaluation of problems of determining an appropriate discount rate (required rate of return).
3-Compare your calculated value of equity with your company’s current market capitalisation and explain why the figures might be different.
Perform calculations to determine the market’s implied growth rate using the “reverse engineering method” set out in Slide 3-38 to Slide 3-42.
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