STC’s company valuation
By using three different valuation methods (APV, WACC, Trading Com.), as an investor, we believe we should pay $3700 for the entity.
As an equity investor, the IRR we expect to realize is 4% and the expected multiple of capital is 1.21
Which one is better? WACC vs. APV vs. Trading comps analysis
Each of the three methods provides special coverage on specific assumptions. Both WACC and APV are considered fundamental models because they provide the “intrinsic” enterprise value while trading comps uses public trading comparable companies to provide convenience relative measurements. In particular, WACC is a strong model for companies with no significant change in future capital structure. APV on the other hand, is a good get-around for companies that have uncertain leveraged position or subject to major capital structure adjustment. Trading comps are good for fast and convenience estimates and yet subject to significant inaccuracy because it cannot provide company-specific analysis.
We believe that APV is the best model for STC evaluation. Firstly, we are not provided with enough information about its target capital structure, nor any clue about its future financing policy, so it is reasonable to NOT use WACC to assume static capital structure; Secondly, we are not provided with STC’s costs of debts. We do have STC’s interest expense and total debt figures, but they only serve as an approximation for the STC’s annual costs of debts and are NOT representative of STC’s marginal cost of debt. Finally, APV produces the most conservative enterprise value among all three given the limited information we are provided.
(For detailed calculations, please refer to the excel worksheet, tab “Q1”)
Key drivers for this valuation and assumptions:
• Forecasted Revenue: In order to predict the free cash flow of Swedish Tower Company (STC), we initially have to forecast its revenue on a reliable basis. From the perspective of Broadcast Industry,...