We made our forecast based on historical dividends our future expectation on

We made our forecast based on historical dividends

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We made our forecast based on historical dividends, our future expectation on the economic climate and expected future attributes of the company. It was extremely difficult to forecast the future growth rates as Transurban was an unusual company which paid out higher dividends per share relative to its earnings per share. However we did manage to forecast Transurban’s future growth rates and growth phases. Sensitivity analysis was also conducted after the intrinsic value was computed. The purpose of the sensitivity analysis was to test the significances of our forecasted and calculated inputs. The sensitivity analysis concluded that the accuracy of the forecasts and calculations would play a significant part in deriving our intrinsic values, hence the importance of conducting research of great integrity (GIGO - Garbage in garbage out). Our analysis formulated by the dividend discount model derived an intrinsic value of $5.48 and suggest that Transurban shares are trading at a discount of 3.1%, based on the market price of $5.31 as of the 15/4/2011. Since the share price is trading at a discount the analysis using this model concludes that the market share price for Transurban is undervalued and we would expect the market to correct this in the future. The dividend discount model we believe is a suitable model for the purpose of analysing Transurban’s share price as the company has been paying consistent dividends and we believe they will continue to do so in future periods. 9.2 Free Cash flow to Equtiy Model (FCFE Model) The discounted FCFE model is computed a similar the dividend discount model however for the FCFE model we use free cash flow to equity per share available to shareholders instead of dividends paid to shareholders. Both models are discount cash flow models. In this model we are also required to forecast the future FCFE. In forecasting future growth rates for FCFE we have based our forecasted of the dividend growth rates and historical FCFE growth rates. Our forecasted growth phases are the same as the forecasted growth phases for dividends, however we expect the growth rates on FCFE to growth at a higher rate than the dividend growth rates. We justify this analysis in section 8.2.1 of this report.
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79 | P a g e The sensitivity of the forecast and calculations were also analysed and produced similar results to the sensitivity analysis done on the dividend discount model. The sensitivity analysis concludes that the inputs used for deriving the company’s intrinsic value is sensitive and requires forecasting to the highest degree of integrity. The intrinsic value of Transurban share was $5.45 this suggests that its share price is trading at a discount of 2.5688% when compared to the market price of $5.31 as of the 15/4/2011. This indicates that the market is undervaluing Transurban’s share and we expect that the market will correct this at some point.
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