Aswath Damodaran 38 Background Information In 2000 Tsingtao Breweries earned

Aswath damodaran 38 background information in 2000

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Aswath Damodaran 38 Background Information In 2000, Tsingtao Breweries earned 72.36 million CY(Chinese Yuan) in net income on a book value of equity of 2,588 million CY, giving it a return on equity of 2.80%. The firm had capital expenditures of 335 million CY and depreciation of 204 million CY during the year. The working capital changes over the last 4 years have been volatile, and we normalize the change using non-cash working capital as a percent of revenues in 2000: Normalized change in non-cash working capital = (Non-cash working capital 2000 / Revenues 2000 ) (Revenuess 2000 Revenues 1999 ) = (180/2253)*( 2253-1598) = 52.3 million CY Normalized Reinvestment = Capital expenditures – Depreciation + Normalized Change in non-cash working capital = 335 - 204 + 52.3= 183.3 million CY As with working capital, debt issues have been volatile. We estimate the firm’s book debt to capital ratio of 40.94% at the end of 1999 and use it to estimate the normalized equity reinvestment in 2000.
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Aswath Damodaran 39 Inputs for the 3 Stages High Growth Transition Phase Stable Growth Length 5 years 5 years Forever after yr 10 Beta0.75 Moves to 0.80 0.80 Risk Premium 4%+2.28% --> 4+0.95% ROE 2.8%->12% 12%->20% 20% Equity Reinv. 149.97% Moves to 50% 50% Expected Growth 44.91% Moves to 10% 10% We wil asssume that Equity Reinvestment Ratio= Reinvestment (1- Debt Ratio) / Net Income = = 183.3 (1-.4094) / 72.36 = 149.97% Expected growth rate- next 5 years = Equity reinvestment rate * ROE New +[1+(ROE 5 -ROE today )/ROE today ] 1/5 -1 = 1.4997 *.12 + [(1+(.12-.028)/.028) 1/5 -1] = 44.91%
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Aswath Damodaran 40 Tsingtao: Projected Cash Flows
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Aswath Damodaran 41 Tsingtao: Terminal Value Expected stable growth rate =10% Equity reinvestment rate in stable growth = 50% Cost of equity in stable growth = 13.96% Expected FCFE in year 11 = Net Income 11 *(1- Stable period equity reinvestment rate) = CY 1331.81 (1.10)(1-.5) = CY 732.50 million Terminal Value of equity in Tsingtao Breweries = FCFE 11 /(Stable period cost of equity – Stable growth rate) = 732.5/(.1396-.10) = CY 18,497 million
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