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25743 Advanced Corporate Valuation
Assessment Task 3 – Take Home Examination
Spring 2022
Instructions
This examination is made available online at 9.30am on Thursday 10th November 2022.
Your completed answer file is due at 3.30pm on Thursday 10th November 2022 a Thursday 10th November
2022.nd must be submitted online via the Assignments folder on Canvas.
There are 3 questions. Your answer to each question attempted should commence on a new page and be
appropriately numbered.
The examination is worth 50% of the marks available in this subject. The contribution each question makes to
the total examination mark is indicated in marks or as a percentage.
This examination is an open book examination.
This examination is expected to take approximately 2 hours [3 if an exception] of working time. You are
advised to allocate your time accordingly. Your answer file may be submitted at any time before the due time.
Please allow time to complete the submission process.
Please submit your file in WORD format. Please name your file as follows:
EXAM_subject number_student number e.g. EXAM_25743_12345678
Important Notice – Exam Conditions and Academic Integrity
In attempting this examination and submitting an answer file, candidates are undertaking that the work they
submit is a result of their own unaided efforts and that they have not discussed the questions or possible
answers with other persons during the examination period. Candidates who are found to have participated in
any form of cooperation or collusion or any activity which could amount to academic misconduct in the
answering of this examination will have their marks withdrawn and disciplinary action will be initiated on a
complaint from the Examiner.
Exam answers must be submitted in a WORD document via Turnitin on Canvas. Staff may ask that a student
undertake an oral test to ensure they have completed the work on their own and to assess their knowledge
of the answers they have submitted.
Students must not post any requests for clarification on the Discussion Boards on Canvas. Any requests for
clarification should be directed by email to Tiffany Hutcheson on tiffany.hutcheson@uts.edu.au. Where
clarification is required it will be broadcast by email to all students in the exam group. Tiffany Hutcheson will
be available during the first two hours of this examination from 9.30am to 11.30am.
Teaching materials and exam resources provided to you at UTS are protected by copyright. Students
are reminded that copying or sharing of these materials can constitute misconduct.
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Question 1 – Worth 10 marks
Roosters Sports Limited produces software that analyses the performance of athletes. The operating
income for the company this year is reported to be $17,250,000 subject to an effective tax rate of
23%. It is essential for Roosters Sports Limited to undertake research and development on its
software to ensure the company is competitive with the other companies in the industry. The
benefits from research and development of the software have been estimated to last for up to three
years after it has been undertaken. Rooster Sports Limited just spent $5,000,000 on research and
development on its software, which was less than the $7,500,000 they spent last year and $6,250,000
they spent two years ago.
a. Estimate the value of research and development for Roosters Sports Limited. You must show
how you calculated this value. (Worth 2 marks)
b. Show how the spending on research and development will affect Rooster Sports Limited’s
free cash flows. (Worth 2 marks)
c. List and explain in your own words two other expenses that should be capitalised in a similar
way to research and development. Your explanation will need to explain how these expenses
provide future benefits for Roosters Sports Limited. Your answer cannot be more than one
half of an A4 page. (Worth 2 marks)
d. Explain in your own words how you could estimate the free cash flow for Roosters Sports
Limited if due to the impact of COVID its operating income was negative $17,250,000. Your
answer cannot be more than one half of an A4 page. (Worth 2 marks)
e. Explain in your own words a problem with using the estimation that Rooster Sports Limited
will always benefit from research and development for up to ten years. Your answer cannot
be more than one half of an A4 page. (Worth 2 marks)
Question 2 – Worth 10 marks
This semester you estimated the value of ordinary shares of Harvey Norman Holdings Limited (HVN)
using two techniques, relative valuation and intrinsic valuation (also known as discounted cash
flows).
a. Explain in your own words what multiple you used in your relative valuation and why your
group decided this was the best multiple to use when valuing shares in HVN. Your answer
cannot be more than half an A4 page. (Worth 2 marks)
b. Describe in your own words how your group selected the comparable companies that you
used when estimating the value of HVN’s shares using relative valuation. In your answer you
will need to include a description of one problem that you faced when selecting the best
comparable companies to use. Your answer cannot be more than half an A4 page. (Worth 2
marks)
Teaching materials and exam resources provided to you at UTS are protected by copyright. Students
are reminded that copying or sharing of these materials can constitute misconduct.
Page 2 of 4
c. Explain in your own words how the bargaining power of buyers and threat of new entrants
would have an impact on the future profitability of the industry that HVN operates in. Your
answer cannot be more than half an A4 page. (Worth 2 marks)
d. Describe in your own words how your group estimated the growth rates that you used in your
discounted cash flow valuation of HVN. In your answer you will need to explain why your
group felt this was the best approach to use when estimating the growth rate. Your answer
cannot be more than half an A4 page. (Worth 2 marks)
e. If you were asked to value a company, explain in your own words whether you would use
relative valuation, intrinsic valuation or both. In your answer you must explain two reasons
for your decision. Your answer cannot be more than half an A4 page. (Worth 2 marks)
Question 3 – Worth 30 marks
The number of companies in the Australian retail clothing industry is always changing. Roosters
Active Wear Limited is a company that has been in the industry since 1975. Analysts have forecasted
that the growth rate of the company will stabilise in three years’ time. At their annual general
meeting, Rooster Active Wear Limited announced that its sales revenue was $500 million, current
earnings before interest and tax $152 million and its net income $108 million. The yearly growth rate
of sales revenue, operating income and net income is the same. The 270 million shares issued by
Rooster Active Wear Limited are currently trading at $30 each. The level of equity in Roosters Active
Wear Limited is $1,625 million and accounts for 65% of total capital. The unlevered beta of Roosters
Active Wear Limited is 1.3 while its synthetic cost of debt is 6.75%. Australian equity market return
is 5.75% while the average ten-year Treasury Bond yield is 2.75%. Currently sales revenue is growing
at 15% per annum but this growth is expected to decrease by 75% when the growth of Rooster Active
Wear Limited stabilises. In the stable growth period the unlevered beta is expected to be 1. The
financial statements of Roosters Active Wear Limited indicate that each year non-cash working
capital is 25% of the sales revenue. Currently the capital expenditure undertaken by Roosters Active
Wear Limited is $50 million while depreciation is $10 million. The capital expenditure and
depreciation are expected to grow by 10% per year and in three years’ time the level of capital
expenditure will be the same as depreciation. Cash holdings of the company are $10 million with
interest of $2 million being earnt on the invested cash.
a. Calculate the free cash flows to the firm for the two years during the high growth period and
the third year when the growth rate stabilises. You must show how you did your calculations.
(Worth 8 marks)
b. Explain in your own words three reasons why a company’s high growth period can be longer
than other companies in the industry. Your answer cannot be more than half an A4 page.
(Worth 2 marks)
Teaching materials and exam resources provided to you at UTS are protected by copyright. Students
are reminded that copying or sharing of these materials can constitute misconduct.
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c. Explain in your own words how the reinvestment needs of Roosters Active Wear Limited are
different during the high growth period and stable growth period. Your answer cannot be
more than half an A4 page. (Worth 2 marks)
d. Calculate the discount rates that you will use when estimating the intrinsic value of the
company. You must show how you did your calculations. (Worth 8 marks)
e. Explain in your own words how this company’s synthetic cost of cost would have been
calculated and why it might be being used instead of an actual cost of debt. Your answer
cannot be more than half an A4 page. (Worth 2 marks)
f. Calculate the intrinsic value per share of the company and provide a buy, sell or hold
recommendation for shares in the company. You must show how you did your calculations.
(Worth 6 marks)
g. After doing your valuation in (f) you realise that the firm reinvestment rate should have been
higher in the high growth period than the one you calculated. Explain in your own words how
this would have influenced the intrinsic value of the company. In your answer you must
include one reason for this higher firm reinvestment rate. (Worth 2 marks)
Teaching materials and exam resources provided to you at UTS are protected by copyright. Students
are reminded that copying or sharing of these materials can constitute misconduct.
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