Valuation of Sainsbury - Research Paper Example

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Valuation of Sainsbury

The average growth rate in net income over the five years is calculated as 18%. This rate is higher than the estimated cost of equity. For this reason this figure has been ignored.
The risk free rate is taken as 3.65%. The beta of the company available from the financial website ‘Reuters’ is taken as 0.71. The beta of the company is less than one indicating that it is a defensive investment (Bodie, et al., 2009, p.312). In other words the share price of the company increased or decrease less than in proportion to the market movements (Business Valuation Resources, LLC, 2007, p.171). The market risk premium is taken as 5% and the rate of tax is taken as 30%. Here the market risk premium is the excess return offered by the market over and above the risk free rate of return. When this figure is adjusted with the market beta it gives the risk premium of the stock (Hunt, 2009, p.44). This assumption is based on the logic that any rise in sales is accompanied by a corresponding increase in capital expenditure and depreciation. It is because to enhance the level of production the company will have to invest in fixed assets. If the investment in the fixed assets increases there will also be a matching rise in the level of depreciation. The forecasted current assets and current liabilities are also assumed to maintain their proportion to sales. As the sales grow by 5.32% even the working capital of the company is expected to rise by the same proportion. ...
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In the paper “Valuation of Sainsbury” the author analyzes the valuation techniques like FCFE approach and the relative valuation approach justifying the acquisition bid. The low valuation of the company exposes it to dangers of potential takeover target…

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