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Cost of Capital and Valuation

Cost of Capital and Valuation. Intercontinental Hotel Group IHG. Julia Lassarat February 12, 2014. Agenda. Industry and Firm Overview Calculating Cost of Equity Beta Confirmation Calculating Cost of Debt Calculating Cost of Enterprise Revised Discounted Cash Flows.

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Cost of Capital and Valuation

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  1. Cost of Capital and Valuation Intercontinental Hotel Group IHG Julia Lassarat February 12, 2014

  2. Agenda • Industry and Firm Overview • Calculating Cost of Equity • Beta Confirmation • Calculating Cost of Debt • Calculating Cost of Enterprise • Revised Discounted Cash Flows

  3. Industry Overview • Resilient industry in the face of slowing economic pace • Revenue per available room (RevPAR) is standard performance metric • RevPAR was up 4.5% in 2012 in comparison to 5.9% in 2011 • Highly competitive market • The global hotel market is estimated to be 21.5 million rooms • 7.5 million of these are branded hotel rooms Source: IHG 2012 Annual Report

  4. SWOT Analysis Internal Factors External Factors Positive Factors Negative Factors

  5. Life Cycle Stage: Mature Operating Investing Financing

  6. Cost of Capital Components • Cost of Enterprise Capital • Risk of operations; will adjust due to shift in enterprise activities • Cost of Debt Capital • Risk of default • FEAT/NFL • Costs of Equity Capital • Risk of dividend and share price uncertainty • Is affected by amount of debt outstanding

  7. Finding Beta Google.com Nasdaq.com Investing.money.msn.com Reuters.com Finance.yahoo.com Scottrade.com Ameritrade.com Etrade.com Finance.comcast.net Zacks.com Data.cnbc.com 1.45 0.92 1.43 1.15 1.36 1.39 1.5 1.5 1.51 1.45 1.15 Calculating Cost of Equity Capital Average= 1.33

  8. Is this Beta Appropriate? • Regression Analysis indicates Beta is somewhere between 1.31 and 1.92 • Beta is difficult to estimate • Based on backward-looking information • Assumes equity does not change substantially • Timing differences

  9. Calculating Cost of Equity Capital • rEq= rrf+ [B* (rMkt- rrf)] 9.38%= 3.69%+ [1.32* (8%-3.69%)]

  10. Finding Cost of Debt Capital RNFL= FEAT/Avg(NFL) Pre-tax borrowing rate= Interest expense/ Total Loans and Borrowings

  11. Finding Cost of Enterprise Capital • rEnt= (rD* VD/VEnt) + (rEq* VEq/VEnt) • VD= $955.7 million • Veq= $7,400.12 million • VEnt= $8355.82 million rEnt=[4.75*(955.7/8,355.82)] + [9.38*(7,400.12/8,355.82)] = 8.68%

  12. Discounted Cash Flow at rEnt= 8.68% Yahoo! Finance estimates Enterprise Value at $9.46 Billion

  13. Questions?

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