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Arctic Shores
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== Valuation == === What's the expected return of an investment in the company?edit === The Stockhub users estimate that the expected return of an investment in the company over the next five years is 12x, which equates to an annual return of 67%. In other words, an Β£100,000 investment in the company is expected to return Β£1,302,058 in five years time. The assumptions used to estimate the return figure can be found in the table below. Assuming that a suitable return level over five years is 67% per year or less, and Arctic Shores achieves its expected return level (of 67%), then an investment in the company is considered to be an 'suitable' one. ===What are the assumptions used to estimate the return?=== {| 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 he Stockhub users 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). Arctic Shores has never paid cash dividends, and on 7th February 2022, it said that it currently does not anticipate paying any cash dividends in the foreseeable future. Accordingly, the Stockhub users suggest using the free cash flow valuation method (rather than the dividend discount model). |- |Which financial forecasts to use? | Stockhub |The only available long-term forecasts (i.e. >15 years) are the ones that are supplied by the Stockhub users (the forecasts can be found in the financials section of this report), so the Stockhub users suggest using those. |- | colspan="3" |'''<div style="text-align: center;">Growth stage 1</div>''' |- |Discount rate (%) |30% |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 (%) |70% |Research suggests that a suitable rate for a company in this growth stage (i.e. stage 1) is 70%. |- | 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 (%) | 80% | Research suggests that a suitable rate for a company in this growth stage (i.e. stage 2) is 80%. |- | 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? |Β£21.98 million |The Stockhub users calculate the valuation as of Β£21.98 million (for the calculation, see the 'Arctic Shores Series B valuation calculation' table in this report. However, according to Dealroom.co estimates, the firm valuation is between $30m and $46m ($38 million mean) as of January 2023.<ref name=":2">https://app.dealroom.co/companies/arctic_shores/</ref> The valuation is based on either of: the publicly disclosed value, or an estimate that is based on the last funding round amount, using similar rounds as benchmarks. |- |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, Stockhub suggests that to account for general market cyclicity, it's best to estimate the expected return of the company between now and five years time. |- |Which valuation recommendation method do you want to use? |Relative |There's two main types of valuation recommendation methods, relative and absolute. The relative method determines the investment recommendation relative to other investments (e.g. the investment is "suitable" if it's within say the top 10% of the investment universe in terms of investment returns), whereas the absolute method determines the recommendation based on a fixed return amount (e.g. the investment is "suitable" if it returns 50% or more). Assuming sufficient data, the Stockhub users suggest using the relative method. |- |Which top proportion of the investment universe constitutes a "suitable" rating? |10% |The proportion depends on the user's preference. That said, typically, the higher the proportion, the higher the risk associated with the investment. |- |Which universe of investments do you want to use? |All investments |If the main objective of the user is to maximise investment returns, then the Stockhub users suggest using 'all investments' as the investment universe. |} ===Sensitivity analysis=== The main inputs that result in the greatest change in the expected return of the Arctic Shores investment are, in order of importance (from highest to lowest): #The size of the total addressable market (the default size is $400 billion); #Arctic Shores peak market share (the default share is 0.50%); and #The discount rate (the default time-weighted average rate is 16.50%). The impact of a 50% change in those main inputs to the expected return of the Arctic Shores investment is shown in the table below. {| class="wikitable sortable" |+Arctic Shores investment expected return sensitivity analysis !Main input !50% worse !Unchanged !50% better |- |The discount rate |ccc% |ccc% |ccc% |- |The size of the total addressable market |ccc% |ccc% |ccc% |- |Arctic Shores peak market share |ccc% | ccc% |ccc% |}
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