AFIN102-Finance I

Case Study

This is a fictitious event and business created exclusively for use in this assignment. As a new junior analyst for a large brokerage firm, your first task is to analyse the shares of HeartyHealthcare, a healthcare provider in Australia.

Your manager recommends determining prices based on both the discounted free cash flow valuation method and the comparable P/E ratio method.

You are a little concerned about this recommendation because your finance lecturer has told you these two valuation methods can result in widely differing estimates when applied to real data as the result is very sensitive to your assumptions. He stressed on several occasions that it is essential to provide very strong justification for these assumptions. It is also very important to be self-critical. It would come as no surprise if this turns out to be a major marking criterion for assignments.

You did some research online and you have discovered the following financial information:


Key Financial Information

1.5-year Government bond rate: 3.0%

2.Market Risk Premium: 5%

3.Beta for HeartyHealthcare: 0.7

4.Yield on the company’s long-term debt: 5%.

As you are a new employee, you are unsure where to start. Therefore, your manager has given you some guidance and a framework to begin with.

Section 1: Executive Summary

The executive summary should state what this report is about, what methods you have used and your recommendations.

Section 2: Macroeconomic And Industry Analysis

HeartyHealthcare, a healthcare provider in Australia, competes with similar companies that are currently listed on the Australian Stock Exchange.


1. Select at least 2 similar companies from the same industry as HeartyHealthcare. Justify your choice carefully.

2. Discuss the following in your own words. Use references where appropriate:

a. Performance of the industry over the past 3 years

b. Short-term (up to 5 years) outlook for the industry, including identification of two (2) major risk factors and an explanation of how these affect the performance of the industry

c. Forecast the short-term growth rate for the industry based on the above information

d. Discuss the long-term (beyond 5 years) macroeconomic outlook and use relevant information to forecast the long-term growth rate for the industry

Section 3: DCF Analysis

Use excel to determine the share value based on the discounted free cash flow method:

1. Use the historic data from the financial statements above to compute the three-year average of each of the following ratios:

a) EBIT/sales;

b) tax rate (income tax expense/income before tax);

c) property, plant and equipment/sales;

d) depreciation/property, plant and equipment;

e) net working capital/sales.

2. Create an empty timeline for the next five years;

3. Forecast future sales based on the short-term growth rate discussed in section 2, part 2(c) of this assignment

4. Use the average ratios computed in part (3.1) to forecast EBIT, property, plant and equipment, depreciation and net working capital for the next five years;

5. Forecast the free cash flows for the next five years using Eq. 10.2;

6. Determine the horizon enterprise value for year 5 using Eq. 10.6 and a long-run growth rate that has been determined in section 2, part 2(d) of this assignment



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