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Alpha Financial Markets Consulting plc
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=== How much can I expect to make from an investment in the company? === ==== What's the expected return of an investment in the company? ==== ccc ==== What are the assumptions used to estimate the return? ==== ==== What are the assumptions used to estimate the return figure? ==== {| class="wikitable" |+ Key inputs !Description !Value !Commentary |- | Which valuation model do you want to use? |Discounted cash flow |Research suggests that in terms of estimating the expected return of an investment over a period of 12-months or more, the approach that is more accurate is the discounted cash flow approach<ref name=":5">Demirakos et al., 2010; Gleason et al., 2013</ref>, so that's the approach that we suggest to use here; nevertheless, for completeness purposes, separately, the valuation of the company is also estimated using the using the relative valuation approach (the valuation based on the relative approach can be found in the appendix of this report). |- |Which type of DCF model do you want to use? |Free cash flow |While Alpha has paid a dividend every year since its public listing (in 2017), at the moment, the growth rate of the dividend varies materially; accordingly, we suggest valuing the business using the free cash flow valuation method (rather than the dividend discount model). Nevertheless, for completeness purposes, separately, the valuation of the company is also estimated using the dividend discount model (the valuation based on the dividend discount model can be found in the appendix of this report). |- |Which financial forecasts to use? | Proactive Investors |The only available long-term forecasts (i.e. >15 years) are the ones that are supplied by us (the forecasts can be found in the financials section of this report), so we suggests using those. |- | colspan="3" |'''<div style="text-align: center;">Growth stage 2</div>''' |- |Discount rate (%) | 15% |There are two key risk parameters for a firm that need to be estimated: its cost of equity and its cost of debt. A key way to estimate the cost of equity is by looking at the beta (or betas) of the company in question, the cost of debt from a measure of default risk (an actual or synthetic rating) and apply the market value weights for debt and equity to come up with the cost of capital. |- |Probability of success (%) | 90% | Research suggests that a suitable rate for a company in this growth stage (i.e. stage 2) is 90%. |- | colspan="3" |'''<div style="text-align: center;">Growth stage 3</div>''' |- |Discount rate (%) | 10% |There are two key risk parameters for a firm that need to be estimated: its cost of equity and its cost of debt. A key way to estimate the cost of equity is by looking at the beta (or betas) of the company in question, the cost of debt from a measure of default risk (an actual or synthetic rating) and apply the market value weights for debt and equity to come up with the cost of capital. |- |Probability of success (%) |100% |Research suggests that a suitable rate for a company in this growth stage (i.e. stage 3) is 100%. |- | colspan="3" |'''<div style="text-align: center;">Growth stage 4</div>''' |- |Discount rate (%) | 10% |There are two key risk parameters for a firm that need to be estimated: its cost of equity and its cost of debt. A key way to estimate the cost of equity is by looking at the beta (or betas) of the company in question, the cost of debt from a measure of default risk (an actual or synthetic rating) and apply the market value weights for debt and equity to come up with the cost of capital. |- |Probability of success (%) | 100% |Research suggests that a suitable rate for a company in this growth stage (i.e. stage 4) is 100%. |- | colspan="3" |'''<div style="text-align: center;">Other key inputs</div>''' |- |What's the current value of the company? |$659 million |As at 26th January 2023, the current value of the Alpha FMC company is $659 million (or Β£554 million). |- |Which time period do you want to use to estimate the expected return? | Between now and five years time |Research suggests that following a market crash, the average amount of time it takes for the price of a stock market to return to its pre-crash level (i.e. the recovery period) is at least three years.<ref>https://www.newyorkfed.org/mediabrary/media/medialibrary/media/research/staff_reports/research_papers/9809.pdf</ref> Accordingly, we suggest that to account for general market cyclicity, it's best to estimate the expected return of the company between now and five years time. |} ====Sensitive analysis==== The three main inputs that result in the greatest change in the expected return of the Alpha investment are, in order of importance (from highest to lowest): # The size of the total addressable market (the default size is $ccc billion); # Alpha FMC peak market share (the default share is ccc%); and # The discount rate (the default time-weighted average rate is 10%). The impact of a 10% change in those main inputs to the expected return of the Alpha investment is shown in the table below. {| class="wikitable sortable" |+Alpha FMC investment expected return sensitive analysis !Main input !10% worse !Unchanged !10% better |- |The size of the total addressable market |To be added |To be added |To be added |- |Alpha FMC peak market share |To be added |To be added |To be added |- |The discount rate |To be added |To be added |To be added |} {| class="wikitable" |+Key inputs !Description !Value !Commentary |- |Which valuation model do you want to use? |Discounted cash flow |Research suggests that in terms of estimating the expected return of an investment over a period of 12-months or more, the approach that is more/most accurate is the absolute valuation approach, so that's the approach that we suggest using to determine the estimated value of the company. |- |Which type of discounted cash flow model do you want to use? |Dividend discount model |The policy of Alpha FMC is to pay out approximately half of adjusted profit after tax. Accordingly, we suggest using the dividend discount model (DDM), which is one of the most common discounted cash flow models. |- |How many distinct stage of growth do you want to use? |Two stages |For simplicity, we have used two stages here. |- |What is the transition between the two growth stages? |Smooth |We suggest a smooth transition, and, therefore, we suggest using the H-Model. |- |What is the expected lifespan of the business? |Perpetual |Again, for simplicity, we have assumed that the business continues forever. |- |What is the expected initial growth rate of dividends? |32.5% | |- |What is the expected constant growth rate in dividends? |3% |We note that the gross domestic product (GDP) growth rate in the last 20 years (2001 to 2022) is around 3% per year for the global economy, and around 2.25% for the United Kingdom. Since the company's inception (i.e. eight years ago), the median dividend of the company is 1.57%. Further information about the company's dividend pay-outs can be found in the appendix section of this report. |- |What is the half life of the initial dividend growth rate? |7.5 years |We suggest using 7.5 years. |- |Which financial forecasts to use? |Proactive Investors |Here, we have used the forecasts of Proactive Investors. |- |What is the required return on equity? |9.479% |For estimating the required return on equity, we used the Capital Asset Pricing Model (CAPM), which provides an economically grounded and relatively objective procedure for required return estimation, and, therefore, it has been widely used in valuation. The calculation of the required return on equity (and the reasons behind the calculation) can be found in the table below. |- |What's the current value of the company? |454.88 pence per share |As at 18th January 2023, the current value of Alpha FMC is 454.88p per share. |- |Which time period do you want to use to estimate the expected return? |Between now and five years time |Research suggests that following a market crash, the average amount of time it takes for the price of a stock market to return to its pre-crash level (i.e. the recovery period) is at least three years. Accordingly, we suggest that to account for general market cyclicity, it's best to estimate the expected return of the company between now and five years time. |} {| class="wikitable" |+ |} ==== Sensitive analysis ==== The three main inputs that result in the greatest change in the expected return of the Alpha investment are, in order of importance (from highest to lowest): #The initial growth rate (the default rate is cccx); # The terminal growth rate (the default rate is $ccc million); and #The discount rate (the default time-weighted average rate is 10%). The impact of a 10% change in those main inputs to the expected return of the Alpha investment is shown in the table below. {| class="wikitable sortable" |+Sirius investment expected return sensitive analysis !Main input !10% worse !Unchanged !10% better |- |The initial growth rate |To be added |To be added |To be added |- |The terminal growth rate |To be added |To be added |To be added |- |The default rate |To be added |To be added |To be added |} {| class="wikitable" |+Cost of equity (%) !Input !Input value !Additional information |- |Risk-free rate (%) |3.591% |Here, the risk free rate is the US 30 year treasury bond, and is calculated as at 1st February 2023. Research suggests that for the risk-free rate, it's best to use one that has the same or similar maturity to the estimated remaining lifespan of the company. Here, we have assumed that the estimated lifespan of the company is 50 years, so we have used the longest maturity, which is 30 years. |- |Beta |1.139 |Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward-looking, it is logical to adjust the raw beta so it more/most accurately predicts a future beta. |- |Equity risk premium (%) |7.98% |Research suggests that for the region of equity risk premium, it's best to use one that is the same or similar to the region of the beta market portfolio. Here, the region of the beta market portfolio is the world/global, so we have used the world/global region for the equity risk premium, and is calculated as at 5th January 2023. |- |Cost of equity (%) |12.68% |Cost of equity = Risk-free rate + Beta x Equity risk premium. |}
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