1. Estimate Financial Model Parameters
i. In sales-driven spreadsheet models, many items on the Income Statement and Balance Sheet are a proportion of sales, including (but not limited to):
• Receivables
• Accounts Payable
Determine appropriate forecasts of all relevant sales-related ratios (not just the two above examples) for Webjet. One method is to plot and analyse the historical values to obtain forecasts for the next three years. Alternatively, companies sometimes disclose their own management's forecasts of financial ratios. Therefore, if Webjet provides forecasts then you may use these forecasts in your model. Note: as explained in Question 5 part (i), your financial model must include some additional line items. Therefore, be sure to also develop forecasts for these new line items.
ii. There are other parameters that are not a ratio of sales, such as:
• Depreciation
• Interest expense
• Dividends paid
Determine appropriate forecasts for non-sales-related ratios (not just the three above examples) for Webjet by examining the historical values or making reasonable assumptions.
2. Estimate Discount Rate and Perpetual Growth Rate
To value Webjet from the free cash flows, you need to estimate the weighted average cost of capital (WACC) and the long-run free cash flow growth rate (see Benninga Sections 3.4 and 3.5).
i. You will first need to estimate the cost of equity. If you use the CAPM you must state the values and the source for each variable. Beta may be obtained from a reliable source, or you may estimate your own value. Similarly, explain how you calculate the cost of debt.
ii. Estimate Webjet's WACC.
iii. Read Benninga section 3.4 on the long-run free cash flow growth rate. What is your estimate of this figure for Webjet? You must explain how you obtained your estimate.