Valuation MethodologyThe valuation for Flextronics is based off an Income Approach and uses a Discounted Cash Flow Analysis (DCF) to compare Flextronics’ current share price in the market to what its financials indicate its value should be. Due to the dependent nature of the DCF on an a Terminal Value, we decided to be as conservative as possible and used a Terminal Growth rate of 1.5%. Cost of DebtThe cost of Debt for Flextronics was calculated first by obtaining the company’s debt rating from Morningstar. The debt rating was “BAA”. Next, data from Moody’s BAA Rated Bond Yield Average, which provides daily averages of all corporations with “BAA” rated debt, was recorded for the past year.
An average was taken of the bond yields over the past year, since a Flextronics’ capital structure has remained fairly consistent. These calculations yielded a cost of debt of 4.42%.
The average interest rate on their long term debt( senior secured) is 3.5% which is a reasonable rate. Weighted Average Cost of Capital (WACC)The Weighted Average Cost of Capital (WACC) is calculated by taking the weighted average cost of debt and equity. For the cost of equity, we used the Capital Asset Pricing Model (CAPM) with the risk-free rate being based on the 10-year treasury notes which provides a value of 2.67%. A bottom-up approach was initially used to calculate Beta, but since Flextronics’ competitors provided inconsistent comparisons, we decided to use Flextronics’ five year average beta of 0.804. A Market Risk Premium (MRP) was taken from KPMG’s MRP report from September 2017.
The cost of equity was calculated to be 7.09%. The after-tax cost of debt was calculated using a cost of debt of 4.42%.
Best services for writing your paper according to Trustpilot
We applied the tax rate of 8.66% to the cost of debt to end up at an after tax cost of debt of 4.04%. Given the capital structure of 77% equity and 23% debt, the Weighted Average Cost of Capital for FLEX is 6.41%. Our Tax Rate is Flextronics’ average tax rate over the past five years. We believe that implications from the recently passed Tax Bill will be negligible because Flex is not incorporated in the U.
S and its facilities are primarily located outside of the U.S. Revenue GrowthRevenue growth is one of the most sensitive aspects of our model, as many of our projections are based off average margins of revenue. Flextronics has experienced slow negative growth on average over the past decade, however growth has turned positive so far in 2018 and is on pace for 5.94% for the full year. Our 2018 growth rate of 5.
94% was calculated by aggregating the first three quarters of reported revenue and an estimate of fourth quarter revenue from Flextronics latest earnings report. Quarter four revenue is projected to be between 6.1 and 6.5 million and we estimate that revenue will be in the middle of this range at around 6.25 million. We then added this to Quarters 1, 2, and 3’s revenues to arrive at a 2018 total revenue of $25,280 million.
For the remainder of the forecast window, we anticipate Flex’s revenue growth to slow down as a result of competitive pressures and shrinking margins. For this reason we have a tapering revenue growth in 2019 through 2022.
