Hi oooahhh99,I was interested in your observations, particularly...

Hi oooahhh99,

I was interested in your observations, particularly in regard to valuing ATC (sans FNT).

In looking at WACC, I have assumed the following:

INTEREST:
Risk free rate (based on the AU 10-year bond rate) = 5.5%.

EQUITY CONSIDERATIONS:
Beta = 1.4x (your post). My view, it should be closer to 1.8.
Equity risk premium = 3%.

COST OF EQUITY:
Cost of equity = 10% ((3*1.5)+5.5).

COST OF DEBT:
Based on Westpac (parent, to Challenge Bank) Business Overdraft, plus risk margin. Currently, @8.5%.

DEBT RISK MARGIN:
Debt risk margin, assumed, at 50% of equity risk premium (ie: .50*3.0% = 150bp).

TAX EFFECTIVE DEBT:
Tax rate = 30%.
Tax effective debt = 7.0% ((8.5+1.5)*0.70).

BALANCE SHEET DIFFERENTIATION:
Equity = $5.5m (FY02 Annual Report).
Actual Debt = $1.8m (Fy02 Annual Report).
Equity weighting = 75%.
Debt weighting = 25%.

If, however, we include prospective Debt of $4.2m, comprising a repeat of June 02, working capital share raising, plus a 50% weighting increase, then total debt rises to $6.0m. If we then include this at 75% of prospective value, then inclusive debt is $4.5m.

On this basis, the revised, prospective equity weighting = 55%, and the revised, prospective debt weighting = 45%.

(ACTUAL) CAPM WACC CALCULATION:
Equity weighting = 75%.
Cost of equity = 10%.
Debt weighting = 25%.
Cost of debt = 7%.
CAPM WACC = 9.25% ((75*.10) + (25*.07))

PROSPECTIVE CAPM WACC CALCULATION:
Equity weighting = 55%.
Cost of equity = 10%.
Debt weighting = 45%.
Cost of debt = 7%.
CAPM WACC = 8.65% ((55*.10) + (45*.07))

CONCLUSION:
In my view, ATC's CAPM WACC is somewhere in the region of 8.65% to 9.25%. This averages out to ~9.0%.

This would place ATC's fair value at between 12 -18c, based on the $2.8m profit suggestion (sans FNT and, ex-Shanghai, for the next 6- 8 years).

It is likely that these figures may well be challenged by some, but on a curently analysed basis, it is hard to sell how ATC's DCF valuation can get above 20c, or its price target, above 15c (assuming a 25% discount to DCF).

In arrivivng at this conclusion, however, I have not seen any of the roadshow forecasts. So, it may be that you can improve upon my calculations, going forward.