Question 3

The following questions are related to the group assignment task of valuing CSL Ltd (Hereinafter referred to as the CSL)

(a) The EV/EBITBA of CSL has changed from 29.3x in FY2016 to 24.9x in FY2017, and it is expected to be 19.9x in FY2018, 17.9x in FY2019, and 15.8x in FY2020. What are the implications of such trend in CSL’s EV/EBITBA multiple for firm’s growth? Does this trend imply a SELL recommendation?

(b) In the most recent financial year, has CSL seen an increase or decrease in its operating earnings? Has this led to any increase or decrease in the dividends paid? Discuss your answer.

(c) CSL has a very strong position in one of its core business segments due to supply issues affecting its competitors – identify this core business segment? Please explain clearly how and why a change in this status could affect CSL’s earnings?

(d) Mary has calculated the cost of capital (WACC) for CSL to be 7.1%, using an after-tax cost of debt of 2.8% and a cost of equity of 7.5% (there are no preferred shares in the company). What is the debt-to-capital ratio implied in Mary’s WACC calculation?

(e) Using the information from part (d), what is the levered beta used by Mary if the current risk-free rate is 2.7% and the risk premium is 5.6%? How do you interpret the value of this levered beta? What is the unlevered beta of CSL if the tax rate of the company is 30%?

(f) CSL has reported an R&D expense (in millions) of $366 for the most recent financial year FY2017. Assuming an amortizable life of research assets of five years, the R&D expenses over the previous 5 years were: $427 (FY2016), $466 (FY2015), $463 (FY2014), $614 (FY2013), and $645 (FY2012). What is CSL’s total value of research assets and the amortization of R&D expense?