Kohl is a giant departmental store which performs thorough financial analysis to help in financial management. The current capital invested in the firm is 2.185 million dollars which has a weighted average cost of capital which is needed by the firm as at 2010 is 8.010%. This is calculated with equity of 52,340 and a debt amount of 11,142. The final sum is gotten using the after tax weighted cost of equity as 33.95% of the original sum and the cost of capital as 33.95% of the original sum. Using this calculated weighted average cost of capital they can correctly predict the cash flow of the company within the next ten years approximately. Valuation methods employed include the Discounted Cash Flow model; Discounted Abnormal Earnings model; DAROE model; and The Sustainable growth model (Buffet’s model).
Using the discounted cash flow model the expected growth in revenues is 2.25% and an equal growth in depreciation. The operating expenses are projected to increase by 26.70% in the high growth period and to maintain at 11.47% in the stable periods. The firm will maintain its accounts without debt showing zero increase in debt. The current value of the firm is at32.73 million dollars. This is expected to increase with the cumulative weighted average cost of capital projected to move up to 1859.63%. Doing an analysis with the discounted abnormal earnings model we see that the present value (PV) of the economic value added (EVA) is25.91 million dollars with a present value of change in capital of 4.634 million dollars. The PV of EVA has been achieved abnormally with a projected economic value before interest and tax (EBIT) of 13.10 million dollars at years ten. This is achieved with a 4.12% of working capital invested that is projected to achieve a 36.51 million dollar total free cash flow for the firm (FCFF). This value represents both the actual and optimistic value.
Under the discounted abnormal return on equity we will analyse the projected return on equity versus the cost of equity. The value of the firm at the base year is at 32.73 million dollars and it is expected to increase and reach 35.71 million dollars by the tenth year. This is estimated to be achieved within the next ten years by using a 2.25% rate of growth in the rate of revenues. This assumes that the rate of growth in revenues will be constant in high growth period and in stable periods. In this method we look at the projected cash flows, time and the risks. The cash flows are estimated to increase the revenues from 18.80 million dollars to 23.49 million dollars within the ten year time period given in the projection. The operating expenses by the fifth year will be 26.70% of the revenues which will increase from 5 million dollars to 5.47 million dollars. The corporate tax rate is projected to rise to 37.00% of revenues during the good periods. This will have the impact of reducing the net revenue.
The market value of the company’s value of equity per share is at 81,825.01 and the projected market risk premium at 9.06%. The number of outstanding share is 400 which will put the firm in an increased capital expenditure. The long term bond rate is projected as 30.26% without any further investments in capital. The firm is to maintain a constant cost of capital and cost of equity at 33.95% each. The projected earnings before interest and tax are estimated to increase from the current 8.68 million dollars to 13.39 million dollars with a fluctuating rate of returns on capital over the time period. The company has a positive projected trend which will be quite profitable over this time period.
References
James, O., & Moirra C. (2006). Financial analysis: The next step. New York: Axzo Press
Lawrence et al., (2002). Financial Reporting and Analysis (3rd Edition). New York: Prentice Hall
Palepu, K., & Healy, P. B (2008). Business analysis and valuation: Using financial statements (4th Edition). Florence, KY: South-Western, Cengage Learning