FAQ Corporate Financial Management Assignment
Where can I find the ‘correct’ Horizon Period?
The term ‘correct’ is open to a significant amount of debate in this context.
The starting point for deciding on the Horizon Period is to read the article ‘Common Errors in DCF Models’. It contains a clear idea as to what the minimum Horizon Period could be. This is one perspective.
The article ‘Thoughts on Valuation’ identifies a number of qualitative factors that might help you to arrive at an additional understanding on what might be appropriate for a company like Tesco plc.
Where can I find the ‘correct’ growth figure?
What metric best captures growth? Is there a commonly accepted growth measure?
The article ‘How to choose between growth and ROIC’ acts as a starting point for considering this issue. The chapter on growth from Koller is a more detailed consideration of factors driving growth.
Your challenge is to apply some of these factors to Tesco plc based on your understanding of the company’s current position.
Additionally, the narrative elements of the Tesco plc Annual Report will give some perspectives on growth.
You can also look at data providers (Morningstar, Reuters, Bloomberg, FT, Digital Look, Yahoo) measures of growth for Tesco plc across a number of financial metrics, which may also help you to gain some perspective.
Where can I find the ‘correct’ ROIC figure?
The article ‘How to choose between growth and ROIC’ acts as a starting point for considering this issue.
The base data given to you with the assignment contains a ROIC of % this is based on the most recent growth in Operating Profit. You can use this figure if you wish, but justification is required as to why you think is most appropriate.
Where can I find the ‘correct’ Cost of Capital?
- Risk free rate – Damodaran is a good starting point in determining what the best measure to use is.
- Risk Premium (EXMR – RF) – Damodaran is a good starting point in determining what is the best measure to use. Additionally, the survey carried out by Fernandez provides an additional perspective, so too does the ACCA article.
- Beta – Damodaran is a good starting point in determining what the best measure to use is.
Where can I find the Operating Profit number?
The figure to use in Year 1 of your FCF model is £2,250m. Everyone will start their model from this point (see Base Data).
Will the growth, ROIC, and Cost of Capital be the same after the Horizon Period?
The spread or the difference between ROIC and Cost of Capital will be significant during the Horizon Period. During the perpetuity phase of your model, the spread may narrow. This can happen due to the ROIC reducing on its own, the Cost of Capital increasing on its own, or through both variables moving. You have to decide what you feel is most appropriate and justify it accordingly.
In terms of growth, you need to decide if during the perpetuity period when the business is not performing as well as it has done during the Horizon Period what would be the most appropriate impact on growth.
What is the maximum word count for the assignment?
The maximum word count is 2,000 words + / – 10%. Students should utilise this allowance fully.
What can I use appendices for?
Given the word count restrictions mentioned above you may need to include additional evidence of research in the appendices.
You will also need to include evidence of sensitivity analysis in the appendices.
Resist the temptation to fill the appendices with irrelevant information. Only items that are specifically referred to in the report should be included. Do not ‘bulk up’ the Appendices with a multitude of irrelevant documents or screen prints.
How can achieve a good mark in this assignment?
Produce an accurate model in a format appropriate for a board-level business report (there are some marks available for presentation. Resist the temptation to reproduce the template given in tutorials – you will lose some marks. Some consideration should be given to the presentation of the report itself e.g. via the incorporation of sub-headings.
Produce a report evidencing breadth and depth of research of both valuation and the company itself. I expect to see multiple sources of evidence – theoretical perspectives beyond those of Mauboussin and Damodaran. The report should address all of the requirements contained in the assignment brief.
Look at the Assessment Criteria element of the assignment brief and evaluate your report against the criteria specified before submitting the final report. If you feel you have comfortably met the criteria specified to get the highest grade (70+ %), then submit the report. If not, go through your report and take remedial action in the appropriate areas. I look forward to receiving the completed assignments.
