Debt Valuation

Discuss about the Flight Centre Travel Group Ltd.

Investors are the key part of an organization. These stakeholders assist an organization to raise the funds for betterment of the company. Investor must go through the entire related details before making a decision about investing in a particular company or the industry/ In this report, FLIGHT CENTRE TRAVEL GROUP LTD has been taken into the consideration to understand that how a company could be analyzed through analyzing various technique and methods. For identify the worth of the business, debt valuation management, share valuation technique, intrinsic price of the shares, WACC, share analysis, cost of capital etc studies have been done. Through these calculations, it has been identified that whether the investors must invest into the company or not and if the investors would invest into the company then how much return could be got by the investors.

FLIGHT CENTRE TRAVEL GROUP LTD is an Australian company. This company is the biggest retail travel outlet in the Australian market. Head quarter of the company is in Brisbane, Australia. This company has listed itself in the Australian stock exchange in 1982. The turnover of the company is around $ 20 billion (Home, 2017). This company is currently employing 20,000 people. Around 2,800 stores have been owned by the company in various countries and the performance of the company is stunning.

FLIGHT CENTRE TRAVEL GROUP LTD’s annual reports have been analyzed to identify that how the company raises the funds. In this study, the short term and long term debt of the company has been analyzed initially. The short term and long term debt management of the company is as follows:

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	2017	2016	2015	2014	2013
Long term debt	0	0	0	2	3
Short term debt	56	77	33	43	44

Further, the industry’s data has been analyzed. The following are the short term and long term debt of the competitive company of FLIGHT CENTRE TRAVEL GROUP LIMITEED.

HELLOWORLD TRAVEL LTD
	2017	2016	2015	2014	2013
Long term debt	63	58	28	27	33
Short term debt	0	0	0	1	2

Through this analysis, it has been found that the debt structure of FLIGHT CENTRE TRAVEL GROUP LIMITED is not at all consistent according to the industry standards.

Through the analysis over company and industry’s debt, it has been found that the other companies in the industry are focusing more on the long term debt while the company is focusing on short term debt. At the same time, the increment rate of concerned company of debt is less than the industry rate.

The cost of debt of FLIGHT CENTRE TRAVEL GROUP LIMITED is 0.0263 which express that the company have to pay total 0.0350 parts to the debt holders in terms of interest.

Calculation of cost of debt
Outstanding debt	0
interest rate	5%
Tax rate	0.3
Kd	0.0350

Share Valuation

Thus, through the debt valuation study of the company, it has been analyzed that the performance of the company’s debt is different from the industry. But the performance of the company is depicting positive influences. It has also been analyzed that the total cost of debt of the company is 3.50%.

Further, share valuation study has been performed over the company to analyze the performance of the company in terms of total expenses and the capital structure. The current cost of equity of the company is 4.7041% which depict that the company has to pay total 4.7041% to the shareholders in terms of dividend.

Dividend Discount Model
Dividend expected	0.017505805
Growth rate	5%
Price per share	28.919622
cost of equity	4.7041%

In addition, it has been analyzed that the total revenue of the company has been enhanced from last 4 years. The company is performing well in the market so as the turnover of the company is also enhancing rapidly. The earnings and the revenue of the company are as follows:

	2017-06	2016-06	2015-06	2014-06	2013-06
Revenue	2544	2625	2363	2207	1945

	2017-06	2016-06	2015-06	2014-06	2013-06
Earnings	2.29	2.42	2.55	2.05	2.45

This depict that the performance of the company is quite stable. Currently, the total earnings of the company are 2.29 which are lower than last year but according to the industry performance, company’s performance is stunning.

Further, the value of shares has been analyzed through the P/E model and the constant dividend growth rate model. The calculations of both the techniques are as follows:

Dividend Constant growth Model
Dividend expected	0.02
Growth rate	5%
Discount rate	3.46%
Intrinsic Value	(1.48)
Share Price	28.919622
	Overvalued
	(Morningstar, 2017)
PE Multiple Model
Industry PE ratio	9.76
EPS	2.29
Intrinsic Value	22.35
Share Price	28.919622
	Overvalued

Through both the evaluation, it has been found that the current share price of the company is overvalued. According to the dividend constant growth mode, the intrinsic value of the company is -1.48 and according to the P/E model, the intrinsic value of the shares is $ 22.35. There are various factors which have influenced the shares prices of the company such as discount rate, growth rate, expected dividend, industry P/E ratio etc. The influence of these factors could be shown above (Google finance, 2017).

According to the analysis over both the methods, P/E approach is more reliable as this depends over the external sources management and factors and according to this approach, the intrinsic value of the company is $22.35. Still the share price of the company is overvalued which depict that when the share price of the company get down to $ 22.35 then the investors must buy the share of the company (AFR, 2017).

Lastly, according to various studies, it has been analyzed that for valuing the share price of the company, various other data could also be considered by the investors such as the revenue of the company, dividend approach of the company, policy and strategy of the company, new projects, diversification, new products etc which directly impact over the share price and the performance of the company.  

Cost of Capital

Cost of capital is an opportunity cost which refers to the specific investment of a company. This is the cost of the company which has been occurred through investing some amount into various projects with equal risk. The current cost of capital of the company is as follows:

Calculation of WACC
	Price	Cost	Weight	WACC
Debt	0	0.035	0	0
Equity	1429	0.04704	1	0.04704
	1429	Kd	0.04704

This depict that the total cost of the company is 0.04704. The tax rate of the company is 30% according to the government regulations of Australia. In this calculation the cost of debt of the company has been analyzed through using 30% tax rate. Through the calculations, it has been found that the cost of equity of the company is 4.704% and the cost of debt of the company is 3.5% which depict that there is some difference between both the cost, the main reason behind these differences are the tax rate, debt interest rate, growth rate of the share price and the expected dividend by the company (Morning star, 2017).

Current liabilities of a company must not be included in the cost of capital as the main reason behind calculating the cost of capital is to analyze the long term cost of the company. If the current liabilities would be included in that then there would be no meaning to calculate the cost of capital of the company. Further, it the current liabilities would be included in that then it would be easy for the company to calculate the entire cost of the company.

According to the analysis, the major value of the WACC is cost of equity and this could be used in investment decision making by overlooking the capital structure of the company and enhance the part of debt more than the equity so that a proper equation could be set and cost of the company could also be reduced (Google finance, 2017).

Currently, company has diversifies its market into various new countries as well as the new techniques have been adopted by the company to run the business smoothly. Through this, it has been found that the company has enhanced the equity to invest into these projects rather than the debt of the company. Due to which, the risk level of the company has been reduced but at the same time, the cost of the company has been enhanced.

Lastly, the capital structure of the company has been analyzed in context with the industry capital structure and it has also been analyzed that what would be the optimal capital structure of the company. The capital structure of the company is as follows:

Through this analysis, it has been found that both the company and the industry are enahncing the level of equity rather than the debt to enhance and manage the funds of the company. so, the capital strcuture of the company is quite consistent with the industry standards.

The optimal capiatl structure of a company must be accoridng to the industry and economical sitaution of the company, at the same time, the turnover and the perfrmance of the company also matters. Accroidng to this case, the debt and equity ratio of the company must be 4:6 so that the risk level of the company could be in the favor and the cost of the company could also be reduced.

According to the above evaluation, it has been found that the performance of the company is enhancing rapidly and there are more chances of the company to offer high return to its employees in near future. The news articles and various journals depict that the performance of this company would be enhanced in future and as this company is the largest company in the Australian market so it would lead the another companies in the market (Glajnaric, 2016).

According to FT (2017), the performance of the company is becoming better and the company is required to manage the capitals structure in such a manner that the optimal capital structure level could be got by the company (Voelkl and Fritz, 2017). According to (Bui et al, 2016), this company is offering the great return to the investors even in the phase of financial crisis. AFR, (2017) depict that the performance of the company would be better in near future. Company is just required to manage over few financial products to enhance the worth of the company (Oliver and Schoff, 2017). Yahoo finance (2017) depict that share price of the company is overvalued.

Conclusion:

Thus through this analysis, it has been found that the performance of the company is better than other companies in the industry. Still the company is suggested to make some changes into its capital structure and strategies to manage the optimal capitals structure and the share price of the company could be according to the intrinsic value f the company.

References:

AFR. 2017. FLIGHT CENTRE TRAVEL GROUP LTD. Retrieved from https://www.afr.com/research-tools/FLT/company-profile/operational-history available on 3^rd Oct 2017.

AFR. 2017. FLIGHT CENTRE TRAVEL GROUP LTD. Retrieved from https://www.afr.com/markets/buy-hold-sell-flight-centre-harvey-norman-ccamatil-qantas-treasury-wine-20170903-gya397 available on 3^rd Oct 2017.

Bloomberg. 2017. FLIGHT CENTRE TRAVEL GROUP LTD. Retrieved from https://www.bloomberg.com/quote/FLT:AU available on 3^rd Oct 2017.

Bui, S.B.D., Petersen, T., Poulsen, J.N. and Gazerani, P., 2016. Headaches attributed to airplane travel: a Danish survey. The journal of headache and pain, 17(1), p.33.

Glajnaric, M., 2016. The importance of dividend paying stocks. Equity, 30(2), p.6.

Google finance. 2017. FLIGHT CENTRE TRAVEL GROUP LTD. Retrieved from https://finance.google.com/finance?q=ASX:FLT available on 3^rd Oct 2017.

Home. 2017. FLIGHT CENTRE TRAVEL GROUP LTD. Retrieved from https://www.fctgl.com/ available on 3^rd Oct 2017.

Morningstar. 2017. FLIGHT CENTRE TRAVEL GROUP LTD. Reterived from https://financials.morningstar.com/company-profile/c.action?t=FGETF&region=usa&culture=en-US available on 3^rd Oct 2017.

Morningstar. 2017. Hello world travel limited. Retrieved from https://financials.morningstar.com/balance-sheet/bs.html?t=HLO&region=aus&culture=en-US available on 3^rd Oct 2017.

Oliver, J. and Schoff, P., 2017. Agency and Competition Law in Australia Following ACCC v Flight Centre Travel Group. Journal of European Competition Law & Practice, 8(5), pp.321-328.

Voelkl, B. and Fritz, J., 2017. Relation between travel strategy and social organization of migrating birds with special consideration of formation flight in the northern bald ibis. Phil. Trans. R. Soc. B, 372(1727), p.20160235.

Yahoo finance. 2017. FLIGHT CENTRE TRAVEL GROUP LTD. Retrieved from https://finance.yahoo.com/quote/flt.ax?ltr=1 available on 3^rd Oct 2017.