MscBA 2012 - Advanced Corporate Finance Coursework-2

Tottenham Hotspur plc Case Study Analysis

MscBA – Master in Science of Business Administration Advanced Adva nced Corporate Finance – Professor Helena Pinto de Sousa

April 2012

Agenda  Case Study Introduction  Valuation for the Base Scenario 

Discounted Cash Flow (DCF) Valuation



Adjusted Present Value (APV) Valuation



Is Tottenham Hotspur PLC fairly valued? The Rationale.

 DCF Valuation for the new likely scenarios 

To build the new stadium



To sign a new striker



To build the new stadium and sign a new striker

 Final wrap-up



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 Final wrap-up



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 Final wrap-up

Case Study Introduction

— As it is described throughout the case, Tottenham Hotspur Football Club is contemplating a bold move for the organization and

this requires a significant investment in physical assets. They want to gain competitive advantage, as some of their key competitors have achieved, and they want to strengthen their financial stability and long-run success. — The organization believes that one way to acquire it is through the construction of a new stadium. They want to accommodate

more people and they believe that they will be able to increase the club expected attendance revenue and sponsorship revenues. Besides, these added revenues would allow the club to compete more competitively in the acquisition market for superstar international players. The club’s success does not only depend on financial resources and the team’s expected improvement would also contribute to their success, both cultural and financial. Therefore, besides constructing a new stadium they are considering strengthening their position in the player acquisition market. — The main goal of the case is to evaluate these assets, in order to understand the relevance of the stadium’s construction and how

the club can proceed in the player acquisition market to be able to benefit from it. This implies to understand the impact of these decisions in the value of the company, to compare it with the initial scenario, to determine the impact in terms of the company stock valuation and also to study the market reaction when one or both of them are pursued. Only through this analysis it is possible to determine if these strategies are rational and reliable.



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 Final wrap-up

Valuation for the Base Scenario Main assumptions considered (I)

1 2 t i b i 2 h x E ( 2 3 1 0 2 / 2 4 1 / 1 3 5 S I S Y L 6 A N A S 7 E B R O 8 F m o 9 r f o f n 10 I

EV - Forbes Net Debt/EV

156 0,12

Revenue - Forbes

75

Operating Income

5

Avg. Points (98-07)

51

Avg. Net Goals (98-2007)

-1,9

Net Debt (Market Value)

18,72

Debt (Market Value) - Estimated

45,01

Equity (Market Value) - Estimated

137,28

Operating Income

5

7 0 0 2 / 2 1 / 1 3 A T ) A 4 D d T n E a K 1 t R i A i b M h x d E n ( a G N I T N U O C C A

11

Excess Cash (Accounting)

26,29

12

Company Tax Rate (t)

35%

13

Interest (£M)

2,26

14

Tottenham Equity (Levered) Beta

1,29

15

Tax free rate - Rf

16

(1 - t)

65%

17

Market Capitalization (Accounting)

128,2

18

Taxes (£M)

0,19

19

Long-term Debt (Accounting)

43,08

20

Leverage Ratio (L)

0,25

4,57%

Valuation for the Base Scenario Main assumptions considered (II)

Main assumptions (1) Enterprise Value (EV)

Measure of the company's value and it is often used for evaluating the entire firm. It is the market cap of the firm, mi nus the cash, plus the debt – EV = Equity + Debt - Excess Cash. This value can be found in the case, E xhibit 2. (3) Revenue

Amount of money that is brought into a company throughout its business activities, during a specific period. It can be define as the gross income figure from which costs are subtracted to determine net income. This value can be found in the case, E xhibit 2. (4) Operating income

Amount of profit realized from a business's operations after taking out operating expenses and depreciation. This value can be found in the case, E xhibit 2. (7) Net debt

Measure of a company's ability to repay all its debt if it was called immediately. Since we know the value of the Net Debt/EV ratio (2) and EV (1), we computed Net Debt by multiplying (2)x(1).

(8) Debt (Market Value)

We estimated the value of the debt adding the value of the Net Debt and the value of the Excess Cash since we know that Net Debt (7) = Debt (8) – Excess Cash (11) and both (7) and (11) are known. For this type of analysis we have to use the market value of the debt. (9) Equity (Market Value)

We computed the value of the Equity by subtracting the value of the EV and the Net Debt. Using the formula EV(1)=Equity(9)+Debt (8)– Excess Cash (11) we can deduct (9) as we know all t he other values. (10) Operating income

This value can also be found in the case’s financial reports - Exhibit 5, Tottenham Pro Forma Income Statement – as it matches the value of the EBITDA for the current year. (11) Excess Cash

The value of excess cash can be found in Tottenham Balance Sheet Exhibit 4 – under the item Cash and Equivalents. It can be defined as the income derived from mortgages or other assets backing a bond that is in excess of what is needed to retire the bond.

Valuation for the Base Scenario Main assumptions considered (III)

Main assumptions

(12) Tax rate (t)

The value of the company tax rate can be found in the case, E xhibit 1. This is the rate at which the business is taxed on income. (13) Interest

This value can be found in the case – Exhibit 5, Income Statement – and it is related to the current year. It is the fee that is paid for the use of borrowed assets as a form of compensation to the owner. (14) Equity (levered) Beta (Bl)

It measures the total corporate risk that is the sum of the business and financial risks. Tottenham equity beta, also known as levered beta, can be found in Exhibit 1. (15) Tax free rate (Rf)

The value of the 20-year risk free rate is given in the case, Exhibit 1. This is the tax associated with the long-term obli gations. (16) (1-t)

Since we already know the value of the tax rate (12), we only need to deduct it from one.

(17) Market Capitalization

Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size. The value can be found in the Balance Sheet, under Liabilities and Stockholder Equity. (18) Taxes

The value of the taxes paid, during the current year, can be found in Exhibit 5, Income Statement. (19) Long-term debt

Long term debt is the amount of loans and financial obligations that last over one year. This value can be found in the Balance Sheet under the item long-term debt and deferred interest, net of current portion (20) Leverage Ratio (L)

The leverage ratio was estimated using the formula: (8)/[(8)+(9)] = Debt/(Debt + Equity) . This measures how much of the organization is financed by the debt holders.

Valuation for the Base Scenario

Determining company Betas and Discount rates for 2007 (I) Today: 31 of December 2007 21

(D/E)

32,79%

22

Cost of Debt (rd)

23

Market Expected Return (rm)

10,49%

24

Market Premium (rm - rf)

5,92%

25

Debt Beta (Bd)

0,08

26

Unlevered Beta (Bu)

1,08

27

Opportunity Cost of Capital (ru)

5,02%

10,94%

Define assumptions (21) Debt-to-equity ratio (D/E)

The debt-to-equity ratio indicates the relative proportion of the shareholders’ equity and debt that is used to finance company's assets. It was calculated dividing the market value of debt (8) by the market value of equity (9); (22) Cost of debt (Rd)

We computed the cost of debt using the market value of the debt (8), and not the accounting value, because the WACC is computed using the marginal cost of the debt and its market value. Thus, we divided the amount of the interest and the market value of the debt – (13)/(8). 5,02% is the effective rate that the company pays on its current debt; (23) Market Expected Return (Rm)

28

Equity Cost (re) - Method 1

12,21%

29

Equity Cost (re) - Method 2

12,21%

30

Adjusted Cost of Capital

10,00%

31

WACC

10,00%

The way we computed the Rm will be explained in slide 11; (24) Market Premium (Rm-Rf)

Market premium is given by the difference between the expected return on a market portfolio and the risk-free rate. Therefore, we computed it using the following formula: (23)-(15).


Determining company Betas and Discount rates for 2007 (II) Main assumptions

(25) Debt Beta (Bd)

(28) Equity cost (Re)

The value of the debt beta, that measures the risk of the company’s defaulting on its debt, was computed by:

The value of the equity cost, that is the return that the stockholders require for the company, was computed by:

Cost of debt – Risk-free rate/ Market Premium = (Rd-Rf)/(Rm-Rf)

Ru+(1-t)*(Ru-Rd)*(D/E)

(26) Unlevered Beta (Bu)

The value of the unlevered beta, that measures the business risk, was computed by:

(29) Equity cost (re)

We also computed the equity cost using the formula: R f + Bl*(Rm-Rf)

[Bl+Bd*(1-t)*(D/E)]/[1+(1-t)*(D/E)] (27) Opportunity cost of capital (Ru)

The opportunity cost of capital, that is the expected return that the company is giving up by investing in the project rather than in a different investment activity, was computed by: R f + Bu*(Rm-Rf)

(31) Weight ted Average Cost of Capital (WACC) In order to compute the company’s cost of capital, in which each

category of capital is proportionately weighted, we used the given formula: Re*(1-L)+[(1-t)*Rd*L]

Valuation for the Base Scenario Assumption for the expected Market Return (rm)

We have analysed FTSE historical data in order to estimate a Market Return to be considered

FTSE Historical Data

2003

2004

2005

2006

2007

1st January (Open) value

3940,40

4476,90

4814,30

5681,50

6220,80

31st December (Last) value

4476,90

4814,30

5681,50

6220,80

6456,90

Total Yearly Variation

536,50

337,40

867,20

539,30

236,10

Yearly % of Change

13,62%

7,54%

18,01%

9,49%

3,80%

Average to Year @ 2003

13,62%

10,58%

13,05%

12,16%

10,49%

Average to Year @ 2007

10,49%

9,71%

10,43%

6,64%

3,80%

SOURCE: http://www.forexpros.com/indices/uk-100-historical-data

― We have proceeded as follows:

― Checked for the Index Valuation at the beginning and end of each year from 2003 to 200 7; ― Computed the yearly variation and the implicit return (Variation/Open Value); ― Computed averages and decided to consider a full average for the 5 years: 10,49%. ― Note: It is possible to realize, however, that the there is a clear tendency for the market return to decrease overtime. If we compute the 2008 forecast we can find an expected return of 5,19%. However, for the sake of the analysis and assuming that in 2007 we could not be able to expect as clearly the consequences of the Financial Crisis, we have chose to assume the plain 5 years average.

Valuation for the Base Scenario Determining the FCFF – Free Cash Flow for the Firm (I)

General Assumptions considered and the outputs that would be computed General Assumptions: ― All the values considered in the following evidences (1, 2, …) are presented in Million of Pounds (£); ― We have decided to compute the whole analysis (not only for the DCF approach but to the entire case resolution) using current

or nominal prices (yearly prices) instead of constant prices (which we could have preferred as we are given the annual inflation rate). As we would assume a steady inflation condition, we can conclude that the impact on the Cash Flows would be only relevant regarding the Depreciation portion of the Free Cash Flow for the Firm (in order to compute the Firm Value with constant prices we would have to compute both the inflation impact on the EBITDA, CAPEX and Net WC, as well as the constant (real) Discount Rates – the total impact on the final Firm Value would be equal to zero except for the Depreciation portion, as these non-monetary expenses wouldn’t be un-inflated). So, to sum up, if we have considered the real prices the Depreciations impact would have been over-considered. 3 different ways to determine the Equity Value using the DCF Method: ― METHOD A: Considering a fixed WACC throughout the entire period of analysis; ― METHOD B: Considering a dynamic (floating) WACC with a fixed Cost of Equity (fixed Beta Levered); ― METHOD C: Considering a dynamic (floating) WACC with a dynamic Cost of Equity (floating Beta Levered).


Determining the FCFF – Free Cash Flow for the Firm (II)

EVIDENCE 1 (A)

Information from the Tottenham Pro Forma Income Statement (millions of pounds) from Exhibit 2, 5 and Case (I)

Year 1

Revenue

2

Attendance Sponsorship Broadcast Merchandise Other Total

3 4 5 6 7

YoY(%)

8

Operating Costs

9

Payroll

10

Stadium Operating Expenses Other Total

YoY(%)

11 12

YoY(%)

0

1

2

3

4

5

6

7

8

2007

2008

2009

2010

2011

2012

2013

2014

2015

17,40 15,70 28,70 5,20 7,10 74,10

18,97 17,11 31,28 5,67 7,74 80,77

20,67 18,65 34,10 6,18 8,44 88,04

22,53 20,33 37,17 6,73 9,19 95,96

-

9,0%

9,0%

9,0%

9,0%

9,0%

9,0%

9,0%

50,92

56,01

61,62

67,78

74,56

82,01

90,21

99,23

10,0%

10,0%

10,0%

9

2016

10

2017

11

2018

12

2019

24,56 26,77 29,18 31,81 34,67 37,79 41,19 44,90 48,94 22,16 24,16 26,33 28,70 31,28 34,10 37,17 40,51 44,16 40,51 44,16 48,13 52,46 57,19 62,33 67,94 74,06 80,72 7,34 8,00 8,72 9,51 10,36 11,29 12,31 13,42 14,63 10,02 10,92 11,91 12,98 14,15 15,42 16,81 18,32 19,97 104,60 114,01 124,27 135,46 147,65 160,94 175,42 191,21 208,42

-

10,0%

10,0%

10,0%

10,0%

16,38 1,80 69,10

17,04 1,87 74,92

17,72 1,95 81,28

18,43 2,02 88,23

19,16 2,11 95,82

-

8,4%

8,5%

8,6%

8,6%

9,0%

9,0%

9,0%

9,0%

9,0%

13

2020

50,90 45,93 83,95 15,21 20,77 216,76 4,0%

109,16 120,07 132,08 145,29 159,82 166,21 10,0%

10,0%

10,0%

10,0%

10,0%

4,0%

19,93 20,73 21,55 22,42 23,31 24,25 25,22 26,22 27,27 2,19 2,28 2,37 2,46 2,56 2,66 2,77 2,88 3,00 104,13 113,22 123,16 134,04 145,95 158,99 173,28 188,92 196,48 8,7%

8,7%

8,8%

These projections figures are given in the Case

8,8%

8,9%

8,9%

9,0%

9,0%

4,0%


Determining the FCFF – Free Cash Flow for the Firm (III)

EVIDENCE 1 (B)

Information from the Tottenham Pro Forma Income Statement (millions of pounds) from Exhibit 2, 5 and Case (II) 0

1

2

3

4

5

6

7

8

Year

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

13 EBITDA

5,00 2,20

5,85 2,29

6,76 2,38

7,73 2,47

8,77 2,57

9,88 2,68

11,06 2,78

12,30 2,90

13,61 3,01

14,99 3,13

16,43 3,26

17,93 3,39

19,49 3,52

20,27 3,66

-

4,09%

3,93%

3,78%

4,05%

4,28%

3,73%

4,32%

3,79%

3,99%

4,15%

3,99%

3,83%

2,80 2,26 0,19 0,35

3,56 2,46 0,38 0,71

4,38 2,69 0,59 1,10

5,26 2,93 0,82 1,52

6,20 3,19 1,05 1,96

7,21 3,48 1,30 2,42

8,27 3,79 1,57 2,91

9,41 4,13 1,85 3,43

10,60 4,50 2,13 3,96

11,86 4,91 2,43 4,52

13,17 5,35 2,74 5,09

14,55 5,83 3,05 5,66

15,97 6,36 3,37 6,25

16,61 6,61 3,50 6,50

2,50% 2,50% 2,50% 2,50% 2,50% 2,50% 2,50% 2,50% 2,50% 2,50% 2,50% 2,50% 2,50%

2,50%

14

Depreciation YoY(%)

15 EBIT 16 17

Interest Taxes

18 Net Income 19 Inflation

35%

20 Company Tax Rate 21 Capital Expenditure (Maintenance) YoY(%)

35%

35%

35%

35%

35%

35%

35%

35%

9

35%

10

35%

11

35%

12

35%

13

3,98%

35%

3,3

3,4

3,6

3,7

3,9

4,0

4,2

4,3

4,5

4,7

4,9

5,1

5,3

5,5

-

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

One should note that the yearly variations for the Total Revenues, Total Costs, Depreciation and Capital Expenditure (Maintenance) were computed and they are all equal to 4% - this piece of information is useful to make sure that we can assume a terminal growth rate of 4%, as stated in the case, as we will demonstrate later


Determining the FCFF – Free Cash Flow for the Firm (IV)

EVIDENCE 2 (A)

Determining the Free Cash Flow for the Firm (I ) 0

1

2

3

4

5

6

Year

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020 +

1

EBIT

2,80

3,56

4,38

5,26

6,20

7,21

8,27

9,41

10,60

11,86

13,17

14,55

15,97

16,61

2

Company Tax Rate

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

3

EBIT (1-t)

1,82

2,31

2,85

3,42

4,03

4,69

5,38

6,12

6,89

7,71

8,56

9,46

10,38

10,80

4

Depreciation

2,20

2,29

2,38

2,47

2,57

2,68

2,78

2,90

3,01

3,13

3,26

3,39

3,52

3,66

5

Operational Cash Flow

4,02

4,60

5,23

5,89

6,60

7,37

8,16

9,02

9,90

10,84

11,82

12,85

13,90

14,46

6

Capital Expenditure

3,30

3,43

3,57

3,71

3,86

4,01

4,18

4,34

4,52

4,70

4,88

5,08

5,28

5,49

-

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

YoY(%)

7

8

9

10

11

12

4,00%

13

4,00%

7

Increases in Non-Cash Net WC

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

8

Free Cash Flow for the Firm

0,72

1,17

1,66

2,18

2,74

3,35

3,98

4,67

5,38

6,14

6,94

7,77

8,62

8,96

-

62,78%

41,44%

31,32%

25,84%

22,34%

18,75%

17,44%

15,19%

14,09%

12,92%

11,99%

YoY(%)

The 2020 FCFF has a YoY(%) increase of 4%

10,94%

4, 00%


Determining the FCFF – Free Cash Flow for the Firm (V) Determining the Free Cash Flow for the Firm (I I) General Assumptions: ― The FCFF figures will be similar for all the methods that will be demonstrated afterwards and also for the Adjusted Present

Value approach; ― As we cannot find any piece of information stating the opposite, we have assume that in the Base Scenario the Increases in Non-

Cash Net WC are always equal to zero. This is a simplifying assumption, as it likely that this value would increase overtime as the total EBITDA also increases. For other scenarios, as we would note later, it is possible to estimate an annual increase for this item; Rationale and Computing Formulas: ― The Free Cash Flow for the Firm is computed as follows: FCFF = EBIT (1-t) + Depreciation – Capital Expenditure – Increases in Non-Cash Net WC ― The Operational Cash Flow is computed as follows: OCF = EBIT (1-t) + Depreciation ― We are given the 2007 value for the CAPEX and we have computed the value for the following years assuming a growth rate of

4%, as stated on the Case;



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 Final wrap-up


From the FCFF and the Discount Rates to the Target Price for Share (I)

EVIDENCE 2 (B)

Using Method A we have considered a fixed WACC throughout the entire period of analysis

0

1

2

3

4

5

6

Year

2007

2008

2009

2010

2011

2012

2013

9

WACC

10,0%

10,0% 10,0% 10,0%

10,0% 10,0%

10,0% 10,0%

10,0% 10,0%

10,0% 10,0%

10,0% 10,0%

10

Actualization Factor @ WACC

1,000

1,100

1,464

1,771

2 ,143

2,594

3 ,138

11

Terminal Value @ WACC with g = 4%

12

FCFF @ 2007 Prices @ WACC

13

EV - Enterprise Value

74,25

14

Excess Cash

26,29

17

Equity Value

55,53

15

FV - Firm Value

100,54

18

# of Shares (M)

9,29

16

Financial Debt (Market Value)

45,01

19

Target price for Share

5,98

1,210

1,331

1,610

7

2014

1,949

8

2015

9

2016

2,358

10

2017

11

2018

2,853

12

2019

149,39 0,72

1,07

1,37

1,64

1,87

2,08

2,25

2,40

2,51

2,61

Note that both the WACC figure (9) and the FCFF were computed before

2,67

2,72

50,35

13

2020 +

3,452


From the FCFF and the Discount Rates to the Target Price for Share (II) Estimated price for share using Method A is £5,98 General Assumptions: ― Constant WACC: this implies a constant D/E ratio, a constant Cost of Debt and Cost of Equity and a constant tax rate for the

company. Given the projections that were presented, we can assume that is most likely that this ratio and Discount Rates will not remain constant throughout the entire period, as we will understand later; ― As all of the portions that determine the value of the FCFF can hold a yearly increase of 4%, we can assume a growing rate (g) of the same dimension: g = 4% Rationale and Computing Formulas: ― The actualization factor is computed in order to get all the values in 2007 prices. It is computed as follows: For 2007: AF = 1; For 2008+: AF(n) = AF(m-1) * WACC (n) ― The Terminal Value is computed as follows: Terminal Value (n) = FCFF (n+1) / [ WACC ( n+1) – g (perpetual) ] ― The Enterprise Value is computed as follows: EV = ∑ FCFF @ 2007 Prices @ WACC ― The Firm Value is computed as follows: FV = EV + Excess Cash (this can be found on Finantial Statements)

― The Equity Value is computed as follows: Equity Value = FV – Finantial Debt (market value, that we got from Exhibit 2) ― The Target price for share is computed as follows: TPS = Equity Value / Shares Outstanding – The target price for share

represents the fair value for each share of the company, according to the assumptions that were defined;


From the FCFF and the Discount Rates to the Target Price for Share (III)

EVIDENCE 3 (A)

Using Method B we have considered a dynamic (floating) WACC with a fixed Cost of Equity (fixed Beta Levered) (I)

Year

0

1

2

3

4

5

6

2007

2008

2009

2010

2011

2012

2013

7

2014

8

2015

9

2016

10

2017

11

2018

12

2019

13

2020 +

1

Equity

137,28 137,63 138,34 139,44 140,96 142,92 145,34 148,25 151,68 155,64 160,16 165,25 170,91 177,16

2

Debt

45,01

3

Debt + Equity

182,29 186,62 191,91 197,79 204,49 212,23 220,82

4

YoY Variation

5

Capital Expenditure

6

Cost of Debt (rd)

5,02% 5,02%

5,02% 5,02%

7

Debt to Equity Ratio

0,3279

0,3873 0,4185 0,4507 0,4849 0,5193 0,5548 0,5909 0,6283 0,6653 0,7026 0,7411 0,7431

8

Leverage Ratio (L)

0,2469 0,2625 0,2792

9

(1-t)

3,30

65%

48,993 53,574 58,354 63,532 69,307 75,481 82,253 89,622 97,787 106,55 116,11 126,67 131,64 230,5

241,3 253,43 266,71 281,36 297,58

4,3332 5,2907 5,8798 6,6981 7,7356 8,5939 9,6814 10,799 12,126 13,283 3,43

0,356

65%

3,57

65%

3,71

0,295 65%

3,86

4,01

5,02% 5,02%

4,18

4,34

4,52

5,02% 5,02% 5,02%

4,70

4,88

5,02% 5,02%

14,65 5,08

308,8

16,215 11,229 5,28

5,02% 5,02%

5,49 5,02%

0,3107 0,3266 0,3418 0,3568 0,3714 0,3859 0,3995 0,4127 0,4257 0,4263 65%

65%

65%

65%

65%

65%

65%

65%

65%

65%


From the FCFF and the Discount Rates to the Target Price for Share (IV)

EVIDENCE 3 (B)

Using Method B we have considered a dynamic (floating) WACC with a fixed Cost of Equity (fixed Beta Levered) (II) 0

1

2

3

4

5

6

Year

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020 +

10

Beta Debt

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

11

Beta Levered (FIXED)

1,290

1,290

1,290

1,290

1,290

1,290

1,290

1,290

1,290

1,290

1,290

1,290

1,290

1,290

12

Beta Unlevered

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

13

Rf

4,57% 4,57%

14

Rm

10,49% 10,49% 10,49% 10,49% 10,49% 10,49% 10,49% 10,49% 10,49% 10,49% 10,49% 10,49% 10,49% 10,49%

15

Market Premium

5,92% 5,92%

5,92% 5,92%

5,92% 5,92%

5,92% 5,92% 5,92%

5,92% 5,92%

5,92% 5,92%

5,92%

16

Rd (CAPM)

5,02% 5,02%

5,02% 5,02%

5,02% 5,02%

5,02% 5,02% 5,02%

5,02% 5,02%

5,02% 5,02%

5,02%

17

Ru (CAPM)

10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94%

18

Re (CAPM)

12,21% 12,21% 12,21% 12,21% 12,21% 12,21% 12,21% 12,21% 12,21% 12,21% 12,21% 12,21% 12,21% 12,21%

19

Re (MM)

12,21% 12,32% 12,44% 12,56% 12,68% 12,81% 12,94% 13,08% 13,22% 13,36% 13,51% 13,65% 13,80% 13,81%

4,57% 4,57%

4,57% 4,57%

7

8

4,57% 4,57% 4,57%

9

10

4,57% 4,57%

11

12

4,57% 4,57%

13

4,57%


From the FCFF and the Discount Rates to the Target Price for Share (V)

EVIDENCE 3 (C)

Using Method B we have considered a dynamic (floating) WACC with a fixed Cost of Equity (fixed Beta Levered) (III)

0

1

2

3

4

5

6

Year

2007

2008

2009

2010

2011

2012

2013

2014

7

2015

8

2016

9

2017

10

11

20

WACC

10,0%

9,9%

9,7%

9,6%

9,4%

9,3%

9,2%

9,0%

8,9%

8,8%

8,6%

8,5%

8,4%

8,4%

21

Actualization Factor

1,00

1,10

1,21

1,32

1,45

1,58

1,72

1,88

2,05

2,23

2,42

2,62

2,84

3,08

22


23


24


99,58

25

Excess Cash

26,29

28 28

Equity EquityValue Value

80,86 80,86

26

FV - Firm Value

125,87

29 29

##ofofShares Shares(M) (M)

9,29 9,29

27


45,01

30 30

Target Targetprice pricefor forShare Share

2018

12

2019

203,92 0,72

1,07

1,38

1,65

1,90

2,12

2,31

2,49

2,63

2,76

2,87

8,7041 8,70

From the previous computations we got a decreasing WACC as the D/E ratio increases ( rd < re)

2,96

74,74

13

2020 +


From the FCFF and the Discount Rates to the Target Price for Share (VI) Estimated price for share using Method B is £8,70 General Assumptions and Formulas: ― Using this method, we have assume a floating WACC rate, taking into consideration that we have used a constant cost of Equity

(re). The rational for this decision will be explained later; ― The Beta Unlevered (Bu), Beta Debt (Bd), Cost od Debt (rd) and Cost of Opportunity (Return on Assets, ru) are constant,

according with the CAPM model; ― We are given in the case an estimation for the total Interest unti l 2020. As we assume the Cost of Debt as being constant, we can

compute an estimation for the total Debt structure in each year ( Financial Debt) as follows: Debt (n) = Forecasted Interest (n) / Cost of Debt

― In order to estimate the Equity structure in each year, we have assume the following formula: Equity (n) = Equity (n-1) + Net Income (n-1) + Other Explicit Equity Increases ― In order to guarantee that the analysis makes sense, we have checked if the total variation on Equity + Debt was at least as

much as the CAPEX for each year (checked if 4 > 5). This is true for every year;


From the FCFF and the Discount Rates to the Target Price for Share (VII)

EVIDENCE 4 (A)

Using Method C we have considered a dynamic (floating) WACC with a dynamic Cost of Equity (floating Beta Levered) (I)

Year

0

1

2

3

4

5

6

2007

2008

2009

2010

2011

2012

2013

7

2014

8

2015

9

2016

10

2017

11

2018

12

2019

13

2020 +

1

Equity

137,28 137,63 138,34 139,44 140,96 142,92 145,34 148,25 151,68 155,64 160,16 165,25 170,91 177,16

2

Debt

45,01

3

Debt + Equity

182,29 186,62 191,91 197,79 204,49 212,23 220,82

4

YoY Variation

5

Capital Expenditure

6

Cost of Debt (rd)

5,02%

5,02% 5,02%

7


0,3279

0,356

8

Leverage Ratio (L)

0,2469 0,2625 0,2792

9

(1-t)

3,30

65%

48,993 53,574 58,354 63,532 69,307 75,481 82,253 89,622 97,787 106,55 116,11 126,67 131,64 230,5

241,3 253,43 266,71 281,36 297,58

4,3332 5,2907 5,8798 6,6981 7,7356 8,5939 9,6814 10,799 12,126 13,283 3,43

65%

3,57

3,71

3,86

5,02% 5,02%

4,01

4,18

5,02% 5,02%

4,34

4,52

4,70

5,02% 5,02% 5,02%

4,88

14,65 5,08

5,02% 5,02%

308,8

16,215 11,229 5,28

5,49

5,02% 5,02%

0,3873 0,4185 0,4507 0,4849 0,5193 0,5548 0,5909 0,6283 0,6653 0,7026 0,7411 0,7431

65%

0,295 65%

0,3107 0,3266 0,3418 0,3568 0,3714 0,3859 0,3995 0,4127 0,4257 0,4263 65%

65%

65%

65%

65%

65%

65%

65%

65%

65%


From the FCFF and the Discount Rates to the Target Price for Share (VIII)

EVIDENCE 4 (B)

Using Method C we have considered a dynamic (floating) WACC with a dynamic Cost of Equity (floating Beta Levered) (II) 0

1

2

3

4

5

6

Year

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020 +

10

Beta Debt

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

11

Beta Levered (Dynamic)

1,290

1,308

1,329

1,349

1,370

1,392

1,415

1,438

1,461

1,485

1,509

1,534

1,559

1,560

12

Beta Unlevered

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

13

Rf

4,57% 4,57% 4,57%

14

Rm

10,49% 10,49% 10,49% 10,49% 10,49% 10,49% 10,49% 10,49% 10,49% 10,49% 10,49% 10,49% 10,49% 10,49%

15

Market Premium

5,92% 5,92% 5,92%

5,92% 5,92%

5,92% 5,92%

5,92% 5,92%

5,92% 5,92%

5,92% 5,92% 5,92%

16

Rd (CAPM)

5,02% 5,02% 5,02%

5,02% 5,02%

5,02% 5,02%

5,02% 5,02%

5,02% 5,02%

5,02% 5,02% 5,02%

17

Ru (CAPM)

10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94%

18

Re (CAPM)

12,21% 12,32% 12,44% 12,56% 12,68% 12,81% 12,94% 13,08% 13,22% 13,36% 13,51% 13,65% 13,80% 13,81%

19

Re (MM)

12,21% 12,32% 12,44% 12,56% 12,68% 12,81% 12,94% 13,08% 13,22% 13,36% 13,51% 13,65% 13,80% 13,81%

4,57% 4,57%

4,57% 4,57%

7

8

4,57% 4,57%

9

10

4,57% 4,57%

11

12

13

4,57% 4,57% 4,57%


From the FCFF and the Discount Rates to the Target Price for Share (IX)

EVIDENCE 4 (C)

Using Method C we have considered a dynamic (floating) WACC with a dynamic Cost of Equity (floating Beta Levered) (III)

0

1

2

3

4

5

6

Year

2007

2008

2009

2010

2011

2012

2013

2014

7

2015

8

2016

9

2017

10

11

20

WACC

10,0%

9,9%

9,9%

9,8%

9,8%

9,7%

9,6%

9,6%

9,5%

9,5%

9,4%

9,4%

9,3%

9,3%

21

Actualization Factor

1,00

1,10

1,21

1,33

1,46

1,60

1,75

1,92

2,10

2,30

2,52

2,75

3,01

3,29

22


23


24


83,23

25

Excess Cash

26,29

28

Equity Value

64,51

26

FV - Firm Value

109,52

29

# of Shares (M)

9,29

27


45,01

30


6,94

2018

12

2019

168,71 0,72

1,07

1,37

1,64

1,88

2,10

2,27

2,44

2,56

2,67

The WACC is also decreasing, even though it is decreasing less than in Method B

2,76

2,82

58,93

13

2020 +


From the FCFF and the Discount Rates to the Target Price for Share (X) Estimated price for share using Method C is £6,94 General Assumptions: ― In this particular case we have assumed a floating Beta Levered, which means that as the capital structure changes the Beta

Levered will also tend to adjust (the risk profile of the company changes), so we have a double impact on the WACC (the Betas change and the D/E ratio also changes); ― The Beta Levered was computed according to the CAPM model, as follows: Bl (CAPM) = Bu + (Bu – Bd) * (1 – t) * (D / E) ― Even though the D/E Ratio is increasing (which leads to a lower WACC) the Beta Levered is also increasing (which tends to

increase the Cost of Equity (re) and has a increasing impact on the WACC). The overall outcome is that the WACC is decreasing, but not as much as the one we can find on Method 2; ― As the WACC for 2020 will be higher using this method when comparing to Method 2, then the terminal value will be lower; ― Once again, we are able to consider a terminal growth rate of 4% (g = 4%), and we have assumed a constant Cost of

Opportunity for the Capital (ru) and a constant Cost of Debt as the Beta Unlevered and the Beta Debt remain steady; ― All the other assumptions and computing formulas were explained previously.


Conclusions regarding Tottenham base scenario valuation using the DCF approach Final conclusions on the 3 different values for the company’s equity that were computed Final Results using the DCF approach: ― According to Method A, the Target price for share is £5,98; ― According to Method B, the Target price for share is £8,70;

― According to Method C, the Target price for share is £6,94;

Rational: ― The FCFF is the same regardless of the method that we choose. S o, it all comes down to the Discount rates that are used;

― The same WACC computed with the company’s risk profile of 2007 for the entire period will have the most negative impact on

the Equity Value as, according to our methodology and the company projections, the Debt level is expected to grow in the future (and the Cost of Debt is lower than the Cost of Equity); ― Furthermore, if we assume that the Beta Levered will remain constant and only the capital structure will change, we can find a

situation where the Target price in least affected.

Agenda  Case Study Introduction  Methodology: our approach  Valuation for the Base Scenario 
















 Final wrap-up


Determining the Equity Value using the APV Approach (I)

EVIDENCE 5 (A)

When using the APV approach the FCFF figures keep the same

0

1

2

3

4

5

Year

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020 +

1

EBIT

2,80

3,56

4,38

5,26

6,20

7,21

8,27

9,41

10,60

11,86

13,17

14,55

15,97

16,61

2

Company Tax Rate

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

3

EBIT (1-t)

1,82

2,31

2,85

3,42

4,03

4,69

5,38

6,12

6,89

7,71

8,56

9,46

10,38

10,80

4

Depreciation

2,20

2,29

2,38

2,47

2,57

2,68

2,78

2,90

3,01

3,13

3,26

3,39

3,52

3,66

5


4,02

4,60

5,23

5,89

6,60

7,37

8,16

9,02

9,90

10,84

11,82

12,85

13,90

14,46

6

Capital Expenditure YoY(%)

7


8

Free Cash Flow for the Firm YoY(%)

6

7

8

9

10

11

3,30

3,43

3,57

3,71

3,86

4,01

4,18

4,34

4,52

4,70

4,88

5,08

-

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,72

1,17

1,66

2,18

2,74

3,35

3,98

4,67

5,38

6,14

6,94

7,77

-

62,78%

41,44%

31,32%

25,84%

22,34%

18,75%

17,44%

15,19%

14,09%

12,92%

11,99%

12

5,28 4,00%

0,00 8,62 10,94%

13

5,49 4,00%

0,00 8,96 4, 00%


Determining the Equity Value using the APV Approach (II)

EVIDENCE 5 (B)

The required discount rates (Cost of Opportunity and Cost of Debt) for the APV approach were also computed before (I)

Year

0

1

2

3

4

5

6

2007

2008

2009

2010

2011

2012

2013

1

Opportunity Cost of Capital (ru)

2

Actualization Factor for FCFF @ ru

3

Terminal Value @ ru with g = 4%

4

FCFF @ 2007 Prices @ ru

0,72

5 ∑ FCFF @ 2007 Prices @ ru

62,19

7

2014

8

2015

9

2016

10

2017

11

2018

12

2019

13

2020 +

10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 10,94% 1,00

1,11

1,23

1,37

1,52

1,68

1,86

2,07

2,30

2,55

2,83

3,13

3,48 129,04

1,06

1,35

1,59

1,81

1,99

2,13

2,26

2,35

2,41

2,45

2,48

39,58

When considering the APV approach we can divide the Enterprise Value in two portions: the present value of the FCFF and the present value of the Tax shields:

- The first portion that comprises the Enterprise Value when using the APV approach is computed considering the FCFF that are discounted with the Opportunity Cost of Capital (ru). The discount rate w as previously computed; - The second portion of that comprises the Enterprise Value when using the APV approach is computed considering the Tax Shields that are discounted with the Cost of Debt (rd), as w e assume that the Tax Shields are as risky as the Debt itself.

3,86


Determining the Equity Value using the APV Approach (III)

EVIDENCE 5 (C)

The required discount rates (Cost of Opportunity and Cost of Debt) for the APV approach were also computed before (II)

0

1

2

3

4

5

6

Year

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020 +

6

Interest (forecast)

2,26

2,46

2,69

2,93

3,19

3,48

3,79

4,13

4,50

4,91

5,35

5,83

6,36

6,61

7

Tax Shield @ Current Year prices

0,79

0,86

0,94

1,03

1,12

1,22

1,33

1,45

1,58

1,72

1,87

2,04

2,23

2,31

8

Cost of Debt (rd)

9

Actualization Factor for TS @ rd

10

Perpetual Value of Tax Shield @ rd

11

Tax Shield @ 2007 Prices @ rd

12 ∑ Tax Shield @ 2007 Prices @

5,02%

rd

1,00

5,02% 5,02% 5,02% 1,05

1,10

1,16

5,02% 5,02% 1,22

1,28

7

5,02% 5,02% 1,34

1,41

8

9

5,02% 5,02% 1,48

1,55

10

11

5,02% 5,02% 1,63

1,71

12

5,02% 5,02% 1,80 46,08

0,79 38,57

0,82

0,85

0,89

0,92

0,95

0,99

1,03

1,06

1,11

1,15

1,19

13

26,83

1,89


Determining the Equity Value using the APV Approach (IV)

EVIDENCE 5 (D)

Using the APV approach we get a target price for share that is similar to the one computed for the DCF approach, method B

Year

0

1

2

3

4

5

6

2007

2008

2009

2010

2011

2012

2013

13

FCFF + Tax Shield @ 2007 Prices

100,76

14

Enterprise Value

100,76

15

Excess Cash

26,29

16

FV - Firm Value

127,05

17


45,01

18

Equity Value

82,04

19

# of Shares (M)

9,29

20


8,83

7

2014

8

2015

9

2016

10

2017

11

2018

12

2019

13

2020 +


Determining the Equity Value using the APV Approach (VI) Estimated price for share using the APV approach is £8,83 (I) Main Conclusions and Formulas: ― Once again, when computing the Enterprise Value considering the APV approach we are assuming that the Beta Unlevered and

the Beta Debt are constant, which means that we can also find a constant Cost of Opportunity (ru) and Cost of Debt (rd); ― As it can be implied from the previous slides, we have computed the EV as follows: ― EV (@ APV) = ( ∑ FCFF @ 2007 Prices @ ru) + ( ∑ Tax Shield @ 2007 Prices @ rd), and: ― ( ∑ FCFF @ 2007 Prices @ ru) = ∑ [ FCFF (n) / ((1+ru) ^ n) ] ― ( ∑ Tax Shield @ 2007 Prices @ rd) = ∑ [ Tax Shield (n) / ((1+rd) ^ n) ] ― The Tax Shield is computed as follows: Tax Shield = Forecasted Interest * Tax Rate (35%)


Determining the Equity Value using the APV Approach (VII) Estimated price for share using the APV approach is £8,83 (II) Why have we computed Method B on the DCF analysis? ― There is a theoretical background to assume that under certain conditions the DCF approach would yield a similar Enterprise

Value as the APV approach (we do not think that it is appropriated to demonstrate it here); ― In it’s simpler formulation, we understand that this theoretical condition is related with the assumption that we can compute a

WACC for the terminal value considering a constant D/E ratio and a constant value for the Cost of Debt, the Tax Rate and the Cost of Equity (on the DCF approach); ― In this particular situation the APV was calculated under no assumption of a constant D/E and neglecting the Cost of Equity (re)

as it only considers the Cost of Debt (rd) and the Cost of Opportunity of Capital (ru); ― So, in order to get both the analysis to yield similar outcomes we have simulated a DCF analysis with similar assumptions as the

previous APV approach: a floating D/E ratio and constant Cost of Equity (re), this is, our Method B; ― Indeed, we can conclude that under this conditions both the analysis have similar Target Prices for Share: ― DCF (Method B): £8,70 ― APV: £8,83

― As the remaining methods on the DCF analysis have different underlying assumptions, it is understandable that the outcomes

must be also different one another.

















 Final wrap-up

Tottenham valuation Is the company fairly valued?

Considering the current stock price of 13,80£ and regardless of the method used – either the Discounted Cash Flow or the Adjusted Present Value – all the results we computed allow us to infer that the price of Tottenham shares are overvalued:

Using the Discounted Cash Flow, the price of each share was £5,98, £8,70 and £6,94, for method A, B and C, respectively. In the Adjusted Present Value, the value estimated was £8,83. These values highlight that, in both cases, the market price is too high and it does no t reflect the true value of the Tottenham shares. Some reasons why Tottenham stock might be overvalued and respective impacts — Tottenham stock overvaluation may result from an emotional buying spurt, which inflates the stock's market price. This is coherent with the

emotional dimension that this sports entails and, therefore, the emotional connection established, most of the times, between people and the respective club. This way, a stock may be overvalued due to a surge in demand driven primarily by investor perceptions; — Another reason for this to happen may come from a recent deterioration in the company's financial strength. As it is stated in the case, some

key competitors were able to leverage their revenues and, this way, gain competitive advantage in some dimensions. Therefore, the stock may become overvalued if its fundamentals (i .e. revenue, earnings, growth projections, balance sheet, ect.) decline while its market price remains constant; — Overvalued companies have better access to both equity and debt capital and they will generate lofty profits for a while but, eventually,

when the company's fundamentals - its true earning potential - surface, investors are likely to experience severe losses.

















 Final wrap-up

Valuation for other Scenarios

Three Scenarios: Construct a new stadium, purchase a new player and both Brief Problem Explanation

Introduction for the potential investments ― The club’s directors are analyzing three possible investment scenarios, namely: scenario a) construction of a new stadium, b)

purchase of a new striker, c) both of them. To analyze the market reaction of each announcement and consequently to evaluate each decision, it is important to observe which factors are affected by such decisions. Brief explanation of the three scenarios:

― Scenario A: Construct a new stadium. The forecasts suggest that this investment would raise revenues in two main items, which

are attendance and sponsorship rights, and in other hand would raise costs with the normal construction cost and with the increasing of maintenance ones; ― Scenario B: Purchase a new player. This decision must be well though, as the investment is quite significant and the return

might not correspond to it. So, the costs that should be analyzed are related to the purchase of the new player and its annual salary. The potential revenues are more subjective and so harder to forecast, nevertheless they might become from factors such as attendance and merchandise, which are th e items more correlated and sensible to the team’s performance. Besides that, this scenario has two particularities that regards to the possible player’s injury and the limitation of the stadium size; ― Scenario C: Construct a new stadium and purchase the new player. This scenario would allow to avoid the second restriction of scenario B, and so earn all potential revenues from the player’s purchase plus the construction of the new stadium.

















 Final wrap-up

Valuation for the Scenario A Main impacts for this scenario

Particularities of Scenario A Potential change in revenues:

― Once the stadium will allow to bear approximately 60 thousand people, it is expected to increase the attendance revenues by 40% of

the forecasted values for the existing stadium; ― As the stadium will bear more people that it actually does, it is normal that there should be more companies interested in sponsoring

the team, and so it is expected to increase the sponsorship revenues by 20% relative the forecasts for the next years; ― The other revenues, such as broadcast, merchandise and others, are not expected to be influenced by the construction of a new

stadium. Potential change in costs:

― The construction of a new stadium will require a place to build it, and so the land’s purchase is expected to be the same value as the

selling of the existing stadium, and so we do not to ok it into account for this analysis, as the net value would be zero; ― It is known that the stadium will require an investment in Capital Expenditure of £250 million, which will be paid in equal

installments at the end of both years of construction, this is, end of years 2008 a nd 2009; ― Regarding stadium maintenance costs, those are expected to be 14% higher than the ones tha t were forecasted to the actual stadium; ― Another important cost, though it does not implies an outflow of money, is the cost that reflects the usage of the stadium, which are

the depreciations. A special tax incentive will allow the team to depreciate the construction value over 10 years following completion.

Valuation for the Scenario A

Determining the FCFF – Free Cash Flow for the Firm (I)

EVIDENCE 6 (A)

Total revenues with the new stadium – Scenario A 0

1

2

3

4

2007

2008

2009

2010

2011

Attendance (base scenario) Attendance (aditional) Total Attendance with new stadium

17,4 0,00 17,4

18,97 20,67 22,53 24,56 26,77 29,18 31,81 34,67 37,79 41,19 44,9 48,94 50,9 0,00 0,00 9,012 9,824 10,71 11,67 12,72 13,87 15,12 16,48 17,96 19,58 20,36 18,97 20,67 31,54 34,38 37,48 40,85 44,53 48,54 52,91 57,67 62,86 68,52 71,26

Sponsorship Sponsorship (aditional) Total Sponsorship with new stadium

15,7 0,00 15,7

17,11 18,65 20,33 22,16 24,16 26,33 28,7 31,28 34,1 0,00 0,00 4,066 4,432 4,832 5,266 5,74 6,256 6,82 17,11 18,65 24,4 26,59 28,99 31,6 34,44 37,54 40,92

Broadcast Merchandise Other

28,7 5,2 7,1

31,28 5,67 7,74

74,1

80,77 88,04

Year

5

2012

6

2013

7

2014

8

2015

9

2016

10

11

12

13

2017

2018

2019

2020

Revenue

Total Revenues with new stadium YoY(%)

-

9,00%

34,1 6,18 8,44

9,00%

37,17 40,51 44,16 45,93 7,434 8,102 8,832 9,186 44,6 48,61 52,99 55,12

37,17 40,51 44,16 48,13 52,46 57,19 62,33 67,94 74,06 80,72 83,95 6,73 7,34 8 8,72 9,51 10,36 11,29 12,31 13,42 14,63 15,21 9,19 10,02 10,92 11,91 12,98 14,15 15,42 16,81 18,32 19,97 20,77 109 23,84%

118,8 129,6 141,2 153,9 167,8 182,9 9,01%

9,01%

9,00%

9,01%

9,00%

9,00%

199,3 217,3 236,8 246,3 9,00%

9,00%

9,00%

4,00%



EVIDENCE 6 (B)

Total operating costs with the new stadium – Scenario A

Year

0

1

2

3

4

2007

2008

2009

2010

2011

5

2012

6

2013

7

2014

8

2015

9

2016

10

11

12

13

2017

2018

2019

2020

Operating Costs

Payroll

50,92 56,01 61,62 67,78 74,56 82,01 90,21 99,23 109,2 120,1 132,1 145,3 159,8 166,2 YoY(%)

-

10,00%

10,02%

10,00%

10,00%

9,99%

10,00%

10,00%

10,01%

9,99%

10,00%

10,00%

10,00%

4,00%

Stadium Op. Expenses (base scenario) 16,38 17,04 17,72 18,43 19,16 19,93 20,73 21,55 22,42 23,31 24,25 25,22 26,22 27,27 Stadium Op. Expenses (aditional) 0,00 0,00 0,00 2,58 2,682 2,79 2,902 3,017 3,139 3,263 3,395 3,531 3,671 3,818 Total Stad. Op. Exp. with new stadium 16,38 17,04 17,72 21,01 21,84 22,72 23,63 24,57 25,56 26,57 27,65 28,75 29,89 31,09 Other

1,8

Total Op. Costs with new stadium YoY(%)

1,87

1,95

2,02

2,11

2,19

2,28

2,37

2,46

2,56

2,66

2,77

2,88

3

69,10 74,92 81,29 90,81 98,51 106,92 116,12 126,17 137,18 149,20 162,39 176,81 192,59 200,30 -

8,42%

8,50%

11,71%

8,48%

8,53%

8,61%

8,65%

8,73%

8,77%

8,83%

8,88%

8,92%

4,00%



EVIDENCE 6 (C)

Total financial items with new stadium – Scenario A 0

1

2

3

4

Year

2007

2008

2009

2010

2011

EBITDA

5,00

5,85

6,75

18,22 20,33 22,63 25,09 27,76 30,60 33,66 36,95 40,46 44,24 46,01

Depreciation (base scenario) Depreciation (aditional) Total depreciation with new stadium

2,2 0 2,2

2,29 0 2,29

2,38 2,47 2,57 2,68 2,78 25 25 25 25 25 27,38 27,47 27,57 27,68 27,78

2,9 25 27,9

-

4,09%

1096%

EBIT

2,80

3,56

Interest

2,26

2,46

EBT

0,54

1,10

Taxes

0,19

0,38

Net Income

0,35

0,71

Company Tax Rate

35%

35%

YoY(%)

5

2012

6

2013

7

2014

8

2015

9

2016

10

11

12

13

2017

2018

2019

2020

3,01 3,13 3,26 3,39 25 25 25 25 28,01 28,13 28,26 28,39

0,36%

0,40%

0,36%

0,43%

0,39%

0,43%

0,46%

-20,63 -9,25

-7,24

-5,05

-2,69

-0,14

2,59

5,53

8,68

12,07 40,72 42,35

3,19

3,48

3,79

4,13

4,5

4,91

5,35

5,83

6,36

-23,32 -12,18 -10,43 -8,53

-6,48

-4,27

-1,91

0,62

3,33

6,24

34,36 35,74

0,00

0,00

0,00

0,00

0,22

1,17

2,18

12,03 12,51

-23,32 -12,18 -10,43 -8,53

-6,48

-4,27

-1,91

0,40

2,17

4,06

22,33 23,23

35%

35%

35%

35%

35%

35%

35%

0,00

35%

2,93

0,00

35%

0,00

35%

35%

-88%

3,66 0 3,66

0,33%

2,69

0,46%

3,52 0 3,52

3,98%

6,61

35%



EVIDENCE 6 (D)

CAPEX and increase in Equity with new stadium – Scenario A 0

1

2

3

4

10

11

12

13

Year

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Capital Expenditure (Maintenance) Capital Expenditure (New Stadium) Total CAPEX with new stadium

3,30 3,43 3,57 3,71 0,00 125,00 125,00 0,00 3,30 128,43 128,57 3,71

3,86 0,00 3,86

4,01 0,00 4,01

4,18 0,00 4,18

4,34 0,00 4,34

4,52 0,00 4,52

4,70 0,00 4,70

4,88 0,00 4,88

5,08 0,00 5,08

5,28 0,00 5,28

5,49 0,00 5,49

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

0,00

0,00

0,00

0,00

0,00

0,00

0,00

YoY(%)

Aditional increase in Equity

-

3792%

0,11%

-97%

0,00 125,00 125,00 0,00

5

6

7

8

9

4,00%

0,00

4,00%

0,00

4,00%

0,00


Determining the FCFF – Free Cash Flow for the Firm (V)

EVIDENCE 6 (E)

Capital Structure with new stadium – Scenario A

Year

0

1

2

3

4

2007

2008

2009

2010

2011

5

2012

6

2013

7

2014

8

2015

9

2016

10

11

12

13

2017

2018

2019

2020

Capital Structure

Debt

45,01 48,99 53,57 58,35 63,53 69,31 75,48 82,25 89,62 97,79 106,55 116,11 126,67 131,64

Equity

137,3 262,63 388,35 365,03 352,84 342,42 333,89 327,40 323,13 321,22 321,62 323,79 327,84 350,18

Debt + Equity

182,29 311,62 441,92 423,38 416,38 411,72 409,37 409,66 412,75 419,00 428,17 439,90 454,51 481,82

Debt + Equity YoY Variation Accumulated

Capital Expenditure

-

129,33 130,30 -18,54 -7,00 129,33

259,63

241,09

3,30 128,43 128,57 3,71 Accumulated

-

128,43

257,00

260,71

-4,65

-2,36

0,29

3,10

6,25

9,17

11,73 14,61 27,31

234,09

229,43

227,08

227,37

230,46

236,71

245,88

257,61

272,22

3,86

4,01

4,18

4,34

4,52

4,70

4,88

5,08

5,28

264,57

268,59

272,76

277,11

281,62

286,32

291,20

296,29

301,57

299,53

5,49 307,06


Determining the FCFF – Free Cash Flow for the Firm (VI)

EVIDENCE 6 (F)

Betas and Discount Rates with new stadium – Scenario A (I)

Year

0

1

2

3

4

2007

2008

2009

2010

2011

5

2012

6

2013

7

2014

8

2015

9

2016

10

11

12

13

2017

2018

2019

2020

Rates


32,8% 18,7% 13,8% 16,0% 18,0% 20,2% 22,6% 25,1% 27,7% 30,4% 33,1% 35,9% 38,6% 37,6%

Leverage Ratio (L)

24,7% 15,7% 12,1% 13,8% 15,3% 16,8% 18,4% 20,1% 21,7% 23,3% 24,9% 26,4% 27,9% 27,3%

(1-t)

65%

65%

65%

65%

65%

65%

65%

65%

65%

65%

65%

65%

65%

65%

Beta Debt

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08


1,290 1,198 1,166 1,181 1,194 1,208 1,224 1,240 1,257 1,275 1,292 1,310 1,328 1,321

Beta Unlevered

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08


Determining the FCFF – Free Cash Flow for the Firm (VII)

EVIDENCE 6 (G)

Betas and Discount Rates with new stadium – Scenario A (II) 0

1

2

3

4

Year

2007

2008

2009

2010

2011

5

Rf

4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57%

Rm

10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5%

Market Premium

5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92%

Rd

5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02%

Ru

10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9%

Re (CAPM)

12,2% 11,7% 11,5% 11,6% 11,6% 11,7% 11,8% 11,9% 12,0% 12,1% 12,2% 12,3% 12,4% 12,4%

Re (MM)

12,2% 11,7% 11,5% 11,6% 11,6% 11,7% 11,8% 11,9% 12,0% 12,1% 12,2% 12,3% 12,4% 12,4%

WACC

10,0% 10,3% 10,5% 10,4% 10,4% 10,3% 10,2% 10,2% 10,1% 10,1% 10,0% 9,9%

2012

6

2013

7

2014

8

2015

9

2016

10

11

12

13

2017

2018

2019

2020

9,9%

9,9%


Determining the FCFF – Free Cash Flow for the Firm (VIII)

EVIDENCE 6 (H)

FCFF with new stadium – Scenario A 0

1

2

3

4

10

11

12

13

Year

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

EBIT

2,80

3,56

-20,63 -9,25

-7,24

-5,05

-2,69

-0,14

2,59

5,53

8,68

12,07 40,72 42,35

Company Tax Rate

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

EBIT (1-t)

1,82

2,31

-13,41 -6,01

-4,70

-3,28

-1,75

-0,09

1,68

3,60

5,65

7,85

26,47 27,53

Depreciation

2,2

2,29

27,38 27,47 27,57 27,68 27,78

27,9

28,01 28,13 28,26 28,39


4,02

4,60

13,97 21,46 22,87 24,40 26,03 27,81 29,69 31,73 33,91 36,24 29,99 31,19

Capital Expenditure

35%

3,30 128,43 128,57 3,71 YoY(%)

Increases in Non-Cash Net WC Free Cash Flow for the Firm

6

7

8

9

3,86

4,01

4,18

4,34

4,52

4,70

4,88

0,11%

#####

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

0,00

0,00

-8,16

-4,26

-3,65

-2,99

-2,27

-1,50

-0,67

0,00

0,00

0,00

0,00

0,00

22,0

22,7

23,4

24,1

25,0

25,8

27,0

29,0

31,2

24,7

25,7

-121%

2,94%

3,15%

3,23%

3,47%

3,54%

4,59%

7,37%

-123,8 -106,4 #####

-14%

4,00%

7,36%

5,28

3,66

3792%

-

5,08

3,52

35%

-

0,7 YoY(%)

5

4,00%

-21%

5,49 4,00%

4,00%


Determining the FCFF – Free Cash Flow for the Firm (IX)

EVIDENCE 6 (I)

Target price for share with new stadium – Scenario A

Year


0

1

2

3

4

10

11

12

13

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

-123,8 -106,4

22,0

22,7

23,4

24,1

25,0

25,8

27,0

29,0

31,2

24,7

25,7

0,7 YoY(%)


5

6

7

8

9

-

#####

-14%

-121%

2,94%

3,15%

3,23%

3,47%

3,54%

4,59%

7,37%

7,36%

-21%

1

1,10

1,22

1,35

1,49

1,64

1,81

1,99

2,19

2,41

2,65

2,92

3,20

Terminal Value @ WACC with g = 4% FCFF @ 2007 Prices @ WACC

435,58 0,7

-112,2 -87,3

16,3

15,3

14,3

13,4

12,5

11,8


360,86

Excess Cash

26,29

Equity Value

FV - Firm Value

387,15

# of Shares (M)

9,29


45,01


36,83

342,14

11,2

10,9

10,7

443,3

4,00%

3,52

Valuation for the Scenario A Some assumptions and formulas

Target price for share with new stadium is £36,83 General Assumptions and formulas: ― It was assumed that the debt level will remain the same as the one on the Base Scenario (this assumptions is valid for the 3

scenarios that will be analyzed); ― The new stadium investment is considered to be entirely financed by equity. This means that it would probably demand an

increase in the number of the existing shares or that the actual shareholders would invest mote money. Consequently, the capital structure will be affected, as we saw in the previous tables; ― As it is known that the club already paid sufficiently high taxes in previous years, it can capture tax refunds if EBT is negative, reducing the club’s obligations with the government, and so reducing the net working capital, as it can be considered an “account receivable”; ― As for the analysis on the Base Scenario, we can assume a terminal growth rate of 4% as all of the items used to compute the

FCFF are expected to grow at a similar rate on the terminal year (g=4%); ― All of the presented figures were calculated taking into consideration the methodology that was previously explained (for the

DCF approach, particularly for the Method A).

















 Final wrap-up

Valuation for the Scenario B Main impacts for this scenario

Particularities of Scenario B Potential change in revenues: ― Based on the past 10 years of Premiership revenue and point total data, Tottenham might expect to boost its revenues by 1,52% of each 1% increasing in the team’s total point. If we do not consider the first restriction that will be explained below,

the acquisition of a new player may increase the net number of goals by 12. These additional revenues might become from factors such as attendance and merchandise, which are the ones more correlated and sensible to the team’s performance. How might we correlate the increase in the net number of goals with the potential increase in the revenues? Is the question that we will explain in the next slide. Potential change in costs: ― The team will have as first cost the initial fee that has to be paid directly to the player’s current club, which is forecasted to be

roughly £20 million. This fee is considered to be an expense; ― The team has to negotiate a contract with the player which is expected to be 10 years extended, and involves a £50 thousand payment per week as player’s salary, which is scheduled to increase 10% each year. This contract is expected to start in 2008, and we assume that the player will be “contributing” for the same period as the contract (not that realistic). Particular restrictions: ― There is a high average injury rate in the Premiership league -20%, - which might affect the player’s performance; ― The actual stadium capacity allows to earn only 25% of all potential revenues that might become from the player’s purchase.

Valuation for the Scenario B

How much worth an increasing of 12 in the net number of goals? Knowing that the increase in the Net Goals will allow to increase Revenues by an increasing of the Total Points of the Team, we might identify two links that have to be known to compute the potential increase in revenues by an increase of 12 in the net number of goals

Net Goals

?

Total Points

1,52 %

Revenues

Linking Net Goals with Total Number of Points

Based on the information provided about the average total points and revenues of 8 Premiership League’s teams between 1998 and 2007, we were able to compute a linear regression between both factors, defining the Average Net Goals as the independent and the average total points as the dependent variable. The correlation between both is very significant (99,56%). – We have achieved that an unit increased in the average net goals will have a positive impact of 0,6752 on the average total points. – As the expected value of a player to be healthy is 80%, the expected increase on net goals should be 12 x 0,8 = 9,6, and so adding to the actual number of net goals (-1,4), we should substitute the x fo r 7,7 in the equation, which give us an approximate Y value of 58,1, which reflects the expected total number of points for Tottenham if they acquire the new player. To sum up, it will allow a increasing in Total Points of 11,42%, taking into account that the actual average total points is 51.

The linear regression

e g a r e v a s t n i o p l a t o T

-020

90 80 70 60 50 40 30 20 10 0

y = 0,6752x + 51,623 R² = 0,9956

000

020 Average net goals

040

060


How much worth an increasing of 12 in the net number of goals? Knowing that the increase in the Net Goals will allow to increase Revenues by an increasing of the Total Points of the Team, we might identify two links that have to be known to compute the potential increase in revenues by an increase of 12 in the net number of goals

Net Goals

?

Total Points

1,52 %

Revenues

Linking Total Number of Points with Revenues

1% variation in Total points leads to 1,52% in Revenues…

Knowing that: – the purchase of a new player will allow an increase by 11,42% in the Total Points – 1% variation in a team’s point total leads to an improvement in revenues by 1,52%

As we are dealing with percentages in both cases, that is, an increasing by x% in total points will lead to an increasing by y% in revenues, we cannot assume that the same linear regression model that we used before applies. So, to achieve this value (1,52%) it had to be used a log-log regression model, similar to the following one:

The club might expect to increase its revenues by 17,35% of the forecasted revenues

Log(y) = 1,52 log(x) + Constant

Due to the stadium capacity’s restriction, if the stadium remains with the same size, the club will only can capture 25% of the potential revenues, what means that they will only can increase them by 4,34%, approximately.

Note: Once we do not have all of the data that is needed, it was not possible to represent the tendency line of the equation, and so we only know the given slope (1,52).



EVIDENCE 7 (A)

Total revenues with the new striker – Scenario B

Year

0

1

2

3

4

2007

2008

2009

2010

2011

5

17,4 15,7 28,7 5,2 7,1

18,97 20,67 22,53 24,56 26,77 17,11 18,65 20,33 22,16 24,16 31,28 34,1 37,17 40,51 44,16 5,67 6,18 6,73 7,34 8 7,74 8,44 9,19 10,02 10,92

2012

6

10

11

12

13

2017

2018

2019

2020

29,18 31,81 34,67 37,79 41,19 44,9 26,33 28,7 31,28 34,1 37,17 40,51 48,13 52,46 57,19 62,33 67,94 74,06 8,72 9,51 10,36 11,29 12,31 13,42 11,91 12,98 14,15 15,42 16,81 18,32

48,94 44,16 80,72 14,63 19,97

50,9 45,93 83,95 15,21 20,77

2013

7

2014

8

2015

9

2016

Revenue

Attendance Sponsorship Broadcast Merchandise Other Total revenue on base scenario Aditional revenue Total revenue with new player

74,1 80,77 88,04 95,95 104,6 114 124,3 135,5 147,7 160,9 175,4 191,2 208,4 216,8 0,00 3,50 3,82 4,16 4,54 4,95 5,39 5,88 6,40 6,98 7,61 0,00 0,00 0,00 74,10 84,27 91,86 100,11 109,13 118,96 129,66 141,34 154,05 167,91 183,03 191,21 208,42 216,76 YoY(%)

-

13,73%

9,00%

8,98%

9,00%

9,01%

9,00%

9,00%

9,00%

8,99%

9,00%

4,47%

9,00%

4,00%



EVIDENCE 7 (B)

Total operating costs with the new striker – Scenario B

Year

0

1

2

3

4

2007

2008

2009

2010

2011

5

2012

6

2013

7

2014

8

2015

9

2016

10

11

12

13

2017

2018

2019

2020

Operating Costs

Payroll (base scenario) Payroll (aditional) Total payroll with new player

50,92 56,01 61,62 67,78 74,56 82,01 90,21 99,23 109,2 120,1 132,1 145,3 159,8 166,2 0,00 2,60 2,86 3,15 3,46 3,81 4,19 4,61 5,07 5,57 6,13 0,00 0,00 0,00 50,92 58,61 64,48 70,93 78,02 85,82 94,40 103,84 114,23 125,64 138,21 145,29 159,82 166,21 YoY(%)

-

15,10%

10,02%

10,00%

10,00%

9,99%

10,00%

10,00%

10,01%

9,99%

10,00%

5,12%

10,00%

4,00%

Stadium Operating Expenses

16,38 17,04 17,72 18,43 19,16 19,93 20,73 21,55 22,42 23,31 24,25 25,22 26,22 27,27

Other (base scenario) Other (transfer fee of new player) Total Other costs with new player

1,8 0,00 1,80

Total Operating Costs with new player 69,10 YoY(%)

-

1,87 20,00 21,87

1,95 0,00 1,95

2,02 0,00 2,02

2,11 0,00 2,11

2,19 0,00 2,19

2,28 0,00 2,28

2,37 0,00 2,37

2,46 0,00 2,46

2,56 0,00 2,56

2,66 0,00 2,66

2,77 0,00 2,77

2,88 0,00 2,88

3 0,00 3,00

97,52 84,15 91,38 99,29 107,94 117,41 127,76 139,11 151,51 165,12 173,28 188,92 196,48 41,13%

-14%

8,59%

8,66%

8,71%

8,77%

8,81%

8,88%

8,92%

8,98%

4,94%

9,03%

4,00%



EVIDENCE 7 (C)

Total financial items with new striker – Scenario B 0

1

2

3

4

Year

2007

2008

2009

2010

2011

2012

EBITDA

5,00

-13,25

7,71

8,74

9,84

11,02 12,25 13,58 14,95 16,40 17,91 17,93 19,50 20,28

2,2

2,29

2,38

2,47

2,57

2,68

2,78

2,9

3,01

3,13

-

4,09%

3,93%

3,78%

4,05%

4,28%

3,73%

4,32%

3,79%

3,99%

EBIT

2,80

-15,54

5,33

6,27

7,27

8,34

9,47

10,68 11,94 13,27 14,65 14,54 15,98 16,62

Interest

2,26

2,46

2,69

2,93

3,19

3,48

3,79

4,13

4,5

4,91

5,35

5,83

6,36

6,61

EBT

0,54

-18,00

2,64

3,34

4,08

4,86

5,68

6,55

7,44

8,36

9,30

8,71

9,62

10,01

Taxes

0,19

0,00

0,92

1,17

1,43

1,70

1,99

2,29

2,60

2,93

3,25

3,05

3,37

3,50

Net Income

0,35

-18,00

1,72

2,17

2,65

3,16

3,69

4,26

4,83

5,43

6,04

5,66

6,25

6,51

3,30

3,43

3,57

3,71

3,86

4,01

4,18

4,34

4,52

4,70

4,88

5,08

5,28

5,49

-

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

Depreciation YoY(%)

Capital Expenditure (Maintenance) YoY(%)

5

6

2013

7

2014

8

2015

4,00%

9

2016

4,00%

10

11

12

13

2017

2018

2019

2020

3,26 4,15%

4,00%

3,39 3,99%

4,00%

3,52 3,83%

4,00%

3,66 3,98%

4,00%



EVIDENCE 7 (D)

Capital Structure, CAPEX and increase in Equity with new striker – Scenario B

Year

0

1

2

3

4

2007

2008

2009

2010

2011

5

2012

6

2013

7

2014

8

2015

9

2016

10

11

12

13

2017

2018

2019

2020

Capital Structure

Debt

45,01 48,99 53,57 58,35 63,53 69,31 75,48 82,25 89,62 97,79 106,6 116,1 126,7 131,6

Equity

137,3 137,63 119,63 121,35 123,52 126,17 129,33 133,02 137,28 142,11 147,54 153,59 159,25 165,50

Debt + Equity

182,3 186,6 173,2 179,7 187,1 195,5 204,8 215,3 226,9 239,9 254,1 269,7 285,9 297,1

Debt + Equity YoY Variation Accumulated

Capital Expenditure Accumulated

Difference Aditional Cash

-

4,33

-13,42

6,50

7,35

8,43

9,33

-

4,33

-9,08

-2,59

4,76

13,19

3,30

3,43

3,57

3,71

3,86

4,01

-

3,43

7,00

10,71

14,57

18,59

22,76

-

0,90

-16,98

2,78

3,49

4,41

5,16

22,52

4,18

10,47 11,63 13,00 14,20 15,60 16,22 11,23 32,98

4,34 27,11

6,12

44,61

4,52 31,62

7,11

57,61

4,70 36,32

8,30

71,81

4,88 41,20

9,31

87,41

5,08 46,29

103,63

114,86

5,28

5,49

51,57

10,52 10,93

57,06

5,74

26,29 27,19 10,21 12,99 16,48 20,89 26,04 32,17 39,28 47,58 56,89 67,41 78,35 84,08



EVIDENCE 7 (E)

Betas and Discount Rates with new striker – Scenario B (I)

Year

0

1

2

3

4

2007

2008

2009

2010

2011

5

2012

6

2013

7

2014

8

2015

9

2016

10

11

12

13

2017

2018

2019

2020

Rates


32,8% 35,6% 44,8% 48,1% 51,4% 54,9% 58,4% 61,8% 65,3% 68,8% 72,2% 75,6% 79,5% 79,5%

Leverage Ratio (L)

24,7% 26,3% 30,9% 32,5% 34,0% 35,5% 36,9% 38,2% 39,5% 40,8% 41,9% 43,1% 44,3% 44,3%

(1-t)

65%

65%

65%

65%

65%

65%

65%

65%

65%

65%

65%

65%

65%

65%

Beta Debt

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08


1,290 1,308 1,368 1,390 1,411 1,434 1,456 1,479 1,501 1,524 1,546 1,568 1,594 1,594

Beta Unlevered

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08



EVIDENCE 7 (F)

Betas and Discount Rates with new striker – Scenario B (II)

Year

0

1

2

3

4

2007

2008

2009

2010

2011

5

2012

6

2013

7

2014

8

2015

9

2016

10

11

12

13

2017

2018

2019

2020

Rf

4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57%

Rm

10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5%

Market Premium

5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92%

Rd

5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02%

Ru

10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9%

Re (CAPM)

12,2% 12,3% 12,7% 12,8% 12,9% 13,1% 13,2% 13,3% 13,5% 13,6% 13,7% 13,9% 14,0% 14,0%

Re (MM)

12,2% 12,3% 12,7% 12,8% 12,9% 13,1% 13,2% 13,3% 13,5% 13,6% 13,7% 13,9% 14,0% 14,0%

WACC

10,0% 9,9%

9,8%

9,7%

9,6%

9,6%

9,5%

9,5%

9,4%

9,4%

9,3%

9,3%

9,2%

9,2%



EVIDENCE 7 (G)

FCFF with new striker – Scenario B 0

1

2

3

4

Year

2007

2008

2009

2010

2011

2012

2013

2014

EBIT

2,80

-15,54

5,33

6,27

7,27

8,34

9,47

10,68 11,94 13,27 14,65 14,54 15,98 16,62

Company Tax Rate

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

35%

EBIT (1-t)

1,82

-10,10

3,46

4,07

4,72

5,42

6,16

6,94

7,76

8,62

9,52

9,45

10,39 10,80

Depreciation

2,2

2,29

2,38

2,47

2,57

2,68

2,78

2,9

3,01

3,13

3,26

3,39

3,52

4,02

-7,81

5,84

6,54

7,29

8,10

8,94

9,84

10,77 11,75 12,78 12,84 13,91 14,46

3,30

3,43

3,57

3,71

3,86

4,01

4,18

4,34

4,52

4,70

-

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

0,00

-6,30

0,00

0,00

0,00

0,00

0,00

0,00

0,72

-4,94

2,27

2,83

3,43

4,09

4,76

5,50

-

-786%

-146%

24,46%

21,25%

19,02%

16,57%

15,48%

Operational Cash Flow Capital Expenditure YoY(%)

Increases in Non-Cash Net WC Free Cash Flow for the Firm YoY(%)

5

6

7

8

2015

0,00

9

2016

10

11

12

13

2017

2018

2019

2020

4,88 4,00%

5,08 4,00%

5,28 4,00%

35%

3,66

5,49 4,00%

0,00

0,00

0,00

0,00

0,00

6,25

7,06

7,90

7,76

8,62

8,97

13,71%

12,85%

11,90%

-1,72%

11,12%

4,00%



EVIDENCE 7 (H)

Target price for share with new striker – Scenario B

Year

Free Cash Flow for the Firm YoY(%)


0

1

2

3

4

2007

2008

2009

2010

2011

5

0,72

-4,94

2,27

2,83

3,43

4,09

4,76

5,50

-

-786%

-146%

24,46%

21,25%

19,02%

16,57%

15,48%

1

1,10

1,21

1,32

1,45

1,59

1,74

1,91

2,09

2012

6

2013

7

2014

8

10

11

12

13

2016

2017

2018

2019

2020

6,25

7,06

7,90

7,76

8,62

8,97

13,71%

12,85%

11,90%

-1,72%

11,12%

2,28

2,50

2,73

2,98

2015

9


170,89 0,72

-4,50

1,88

2,14

2,36

2,57

2,73

2,88

3,00


196,68

Excess Cash

26,29

Equity Value

FV - Firm Value

222,97

# of Shares (M)

9,29


45,01


19,16

177,96

3,09

3,16

2,84 173,79

4,00%

3,26

Valuation for the Scenario B Some assumptions and formulas

Target price for share with new stadium is £19,16 General Assumptions and Formulas: ― The revenues in scenario B includes the restrictions that were mentioned before, the possibility of the player’s injury and also

the size of the stadium that only allows to capture 25% of the total potential revenues that might become from the acquisition of the new player; ― Regarding costs, it was assumed 52 weeks in each year to compute the total payroll costs. The salary paid to the new player will

increase 10% in the 10 years of the contract; ― Furthermore, we assumed that the contract will not be renewed at the end of the 10 years, and so the additional revenues and

costs are only to be considered until 2018; ― All of the presented figures were calculated taking into consideration the methodology that was previously explained (for the


















 Final wrap-up

Valuation for the Scenario C Main impacts for this scenario

Particularities of Scenario C Potential change in revenues: ― Relatively to revenues, besides the ones that we already mentioned in both cases we can consider a leverage factor, as a greater

stadium will allow to obtain the total potential revenues that become from the acquisition of the new player; ― Therefore, the additional revenues if the club decides to invest in both hypothesis, respect to an increasing in attendance of

40% and in sponsorship of 20%, once the stadium will be greater. The increasing in revenues that become from the acquisition of the new player are approximately 4,34% until the conclusion of the stadium’s construction. This value would be boosted to 17,35%, as soon as the stadium is operational. Potential change in costs and CAPEX:

― The potential costs and CAPEX in scenario C is only the sum of the costs that we have mentioned in both of the previous

scenarios, namely a Capital Expenditure of £250 million with the construction of the new stadium, and the respective increase of a greater stadium operating expenses of 14%. Besides that, the club will have a fee of £20 million in the acquisition of the new player, and an additional payroll cost of £50,000 per week, which means £2,6 million per year, in order to pay for the new player’s salary.

Valuation for the Scenario C


EVIDENCE 8 (A)

Total revenues with the new stadium and the new striker – Scenario C 0

1

2

3

4

2007

2008

2009

2010

2011

Attendance (base scenario) Attendance (aditional) Total Attendance with new stadium

17,4 0,00 17,4

18,97 20,67 22,53 24,56 26,77 29,18 31,81 34,67 37,79 41,19 44,9 48,94 50,9 0,00 0,00 9,012 9,824 10,71 11,67 12,72 13,87 15,12 16,48 17,96 19,58 20,36 18,97 20,67 31,54 34,38 37,48 40,85 44,53 48,54 52,91 57,67 62,86 68,52 71,26

Sponsorship Sponsorship (aditional) Total Sponsorship with new stadium

15,7 0,00 15,7

17,11 18,65 20,33 22,16 24,16 26,33 28,7 31,28 34,1 0,00 0,00 4,066 4,432 4,832 5,266 5,74 6,256 6,82 17,11 18,65 24,4 26,59 28,99 31,6 34,44 37,54 40,92

Broadcast Merchandise Other

28,7 5,2 7,1

31,28 5,67 7,74

Total Revenues with new stadium Aditional Revenue with new player Total Revenues with both

74,1 80,77 88,04 109 118,8 129,6 141,2 153,9 167,8 182,9 199,3 217,3 236,8 246,3 0,00 14,01 15,28 18,92 20,62 22,48 24,50 26,71 29,11 31,73 34,59 0,00 0,00 0,00 74,10 94,78 103,32 127,95 139,47 152,03 165,71 180,63 196,88 214,60 233,92 217,27 236,83 246,31

Year

5

2012

6

2013

7

2014

8

2015

9

2016

10

11

12

13

2017

2018

2019

2020

Revenues

YoY(%)

-

27,91%

34,1 6,18 8,44

9,00%

37,17 40,51 44,16 45,93 7,434 8,102 8,832 9,186 44,6 48,61 52,99 55,12

37,17 40,51 44,16 48,13 52,46 57,19 62,33 67,94 74,06 80,72 83,95 6,73 7,34 8 8,72 9,51 10,36 11,29 12,31 13,42 14,63 15,21 9,19 10,02 10,92 11,91 12,98 14,15 15,42 16,81 18,32 19,97 20,77

23,84%

9,01%

9,01%

9,00%

9,01%

9,00%

9,00%

9,00%

-7,12%

9,00%

4,00%



EVIDENCE 8 (B)

Total operating costs with the new stadium and the new striker – Scenario C

Year

0

1

2

3

4

2007

2008

2009

2010

2011

5

2012

6

2013

7

2014

8

2015

9

2016

10

11

12

13

2017

2018

2019

2020

Operating Costs

Payroll (base scenario) Payroll (aditional) Total payroll with new player

50,92 56,01 61,62 67,78 74,56 82,01 90,21 99,23 109,2 120,1 132,1 145,3 159,8 166,2 0,00 2,60 2,86 3,15 3,46 3,81 4,19 4,61 5,07 5,57 6,13 0,00 0,00 0,00 50,92 58,61 64,48 70,93 78,02 85,82 94,40 103,84 114,23 125,64 138,21 145,29 159,82 166,21 YoY(%)

-

15,10%

10,02%

10,00%

10,00%

9,99%

10,00%

10,00%

10,01%

9,99%

10,00%

5,12%

10,00%

4,00%

Stadium Op. Expenses (base scenario) 16,38 17,04 17,72 18,43 19,16 19,93 20,73 21,55 22,42 23,31 24,25 25,22 26,22 27,27 Stadium Op. Expenses (aditional) 0,00 0,00 0,00 2,58 2,682 2,79 2,902 3,017 3,139 3,263 3,395 3,531 3,671 3,818 Total Stad. Op. Exp. with new stadium 16,38 17,04 17,72 21,01 21,84 22,72 23,63 24,57 25,56 26,57 27,65 28,75 29,89 31,09 Other (base scenario) Other (transfer fee of new player) Total Other costs with new player

1,8 0,00 1,8

Total Operating Costs with both

69,10 97,52 84,15 93,96 101,97 110,73 120,31 130,77 142,25 154,78 168,52 176,81 192,59 200,30 YoY(%)

-

1,87 20,00 21,87

41,13%

1,95 0,00 1,95

-14%

2,02 0,00 2,02

11,65%

2,11 0,00 2,11

8,53%

2,19 0,00 2,19

8,58%

2,28 0,00 2,28

8,65%

2,37 0,00 2,37

8,70%

2,46 0,00 2,46

8,77%

2,56 0,00 2,56

8,81%

2,66 0,00 2,66

8,88%

2,77 0,00 2,77

4,92%

2,88 0,00 2,88

8,92%

3 0,00 3

4,00%



EVIDENCE 8 (C)

Total financial items with new stadium and the new striker – Scenario C 0

1

2

3

4

Year

2007

2008

2009

2010

2011

EBITDA

5,00

-13,25

7,71

33,99 37,49 41,30 45,40 49,86 54,64 59,82 65,40 40,46 44,24 46,01

Depreciation (base scenario) Depreciation (aditional) Total depreciation with new stadium

2,2 0 2,2

2,29 0 2,29

2,38 2,47 2,57 2,68 2,78 25 25 25 25 25 27,38 27,47 27,57 27,68 27,78

2,9 25 27,9

-

4,09%

1096%

0,33%

0,36%

0,43%

-15,54 -19,67

6,52

9,92

13,62 17,62 21,96 26,63 31,69 37,14 12,07 40,72 42,35

5,26

6,26

7,26

8,26

9,26

YoY(%)

5

2012

0,40%

6

2013

0,36%

7

2014

8

2015

9

2016

10

11

12

13

2017

2018

2019

2020

3,01 3,13 3,26 3,39 25 25 25 25 28,01 28,13 28,26 28,39 0,39%

0,43%

0,46%

0,46%

3,52 0 3,52 -88%

3,66 0 3,66 3,98%

EBIT

2,80

Interest

2,26

EBT

0,54

-18,80 -23,93

1,26

3,66

6,36

9,36

12,70 16,37 20,43 24,88

-1,19

26,46 27,09

Taxes

0,19

-6,58

-8,38

0,44

1,28

2,23

3,28

4,44

5,73

8,71

-0,42

9,26

Net Income

0,35

-12,22 -15,56

0,82

2,38

4,13

6,08

8,25

10,64 13,28 16,17

-0,77

17,20 17,61

3,26

4,26

10,26 11,26 12,26 13,26 14,26 15,26

7,15

9,48



EVIDENCE 8 (D)

CAPEX and increase in Equity with new stadium and the new striker – Scenario C 0

1

2

3

4

10

11

12

13

Year

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Capital Expenditure (Maintenance) Capital Expenditure (New Stadium) Total CAPEX with new stadium

3,30 3,43 3,57 3,71 0,00 125,00 125,00 0,00 3,30 128,43 128,57 3,71

3,86 0,00 3,86

4,01 0,00 4,01

4,18 0,00 4,18

4,34 0,00 4,34

4,52 0,00 4,52

4,70 0,00 4,70

4,88 0,00 4,88

5,08 0,00 5,08

5,28 0,00 5,28

5,49 0,00 5,49

4,00%

4,00%

4,00%

4,00%

0,00

0,00

0,00

0,00

YoY(%)

Aditional increase in Equity

-

4,00%

4,00%

4,00%

0,00 125,00 125,00 0,00

5

6

7

8

4,00%

0,00

9

4,00%

0,00

4,00%

0,00

4,00%

0,00

4,00%

0,00

4,00%

0,00



EVIDENCE 8 (E)

Capital Structure with new stadium and the new striker – Scenario C

Year

0

1

2

3

4

2007

2008

2009

2010

2011

5

2012

6

2013

7

2014

8

2015

9

2016

10

11

12

13

2017

2018

2019

2020

Capital Structure

Debt

45,01 64,93 84,84 104,76 124,67 144,59 164,51 184,42 204,34 224,25 244,17 264,09 284,00 303,92

Equity

137,3 262,63 375,41 359,86 360,68 363,06 367,19 373,28 381,53 392,17 405,45 421,62 420,85 438,05

Debt + Equity

182,29 327,56 460,26 464,62 485,35 507,65 531,70 557,70 585,87 616,42 649,62 685,71 704,85 741,96

YoY Variation

Accumulated

Capital Expenditure

Aditional Cash

145,27

277,97

282,33

3,30 128,43 128,57 3,71 Accumulated

Difference

-

145,27 132,70 4,36

20,73 22,30 24,05 26,00 28,17 30,56 33,19 36,09 19,14 37,11 303,06

325,36

349,41

375,41

403,58

434,13

467,33

503,42

522,56

559,67

3,86

4,01

4,18

4,34

4,52

4,70

4,88

5,08

5,28

-

128,43

257,00

260,71

264,57

268,59

272,76

277,11

281,62

286,32

291,20

296,29

301,57

5,49

-

16,83

4,13

0,65

16,87 18,28 19,88 21,66 23,65 25,86 28,31 31,01 13,86 31,62

307,06

26,29 43,12 47,25 47,90 64,78 83,06 102,93 124,59 148,25 174,10 202,41 233,42 247,28 278,90



EVIDENCE 8 (F)

Betas and Discount Rates with new stadium and the new striker – Scenario C (I)

Year

0

1

2

3

4

2007

2008

2009

2010

2011

5

2012

6

2013

7

2014

8

2015

9

2016

10

11

12

13

2017

2018

2019

2020

Rates


32,8% 24,7% 22,6% 29,1% 34,6% 39,8% 44,8% 49,4% 53,6% 57,2% 60,2% 62,6% 67,5% 69,4%

Leverage Ratio (L)

24,7% 19,8% 18,4% 22,5% 25,7% 28,5% 30,9% 33,1% 34,9% 36,4% 37,6% 38,5% 40,3% 41,0%

(1-t)

65%

65%

65%

65%

65%

65%

65%

65%

65%

65%

65%

65%

65%

65%

Beta Debt

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08

0,08


1,290 1,238 1,224 1,266 1,302 1,336 1,368 1,398 1,425 1,449 1,468 1,484 1,516 1,528

Beta Unlevered

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08

1,08



EVIDENCE 8 (G)

Betas and Discount Rates with new stadium and the new striker – Scenario C (II)

Year

0

1

2

3

4

2007

2008

2009

2010

2011

5

2012

6

2013

7

2014

8

2015

9

2016

10

11

12

13

2017

2018

2019

2020

Rf

4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57% 4,57%

Rm

10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5%

Market Premium

5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92%

Rd (CAPM)

5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02% 5,02%

Ru (CAPM)

10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9% 10,9%

Re (CAPM)

12,2% 11,9% 11,8% 12,1% 12,3% 12,5% 12,7% 12,8% 13,0% 13,1% 13,3% 13,4% 13,5% 13,6%

Re (MM)

12,2% 11,9% 11,8% 12,1% 12,3% 12,5% 12,7% 12,8% 13,0% 13,1% 13,3% 13,4% 13,5% 13,6%

WACC

10,0% 10,2% 10,2% 10,1% 10,0% 9,9%

9,8%

9,7%

9,6%

9,6%

9,5%

9,5%

9,4%

9,4%



EVIDENCE 8 (H)

FCFF with new stadium and the new striker – Scenario C 0

1

2

3

4

Year

2007

2008

2009

2010

2011

2012

EBIT

2,80

-15,54 -19,67

6,52

9,92

13,62 17,62 21,96 26,63 31,69 37,14 12,07 40,72 42,35

Company Tax Rate

35%

35%

35%

35%

35%

35%

35%

35%

EBIT (1-t)

1,82

4,24

6,45

8,85

11,45 14,27 17,31 20,60 24,14

7,85

26,47 27,53

Depreciation

2,2

2,29

27,38 27,47 27,57 27,68 27,78


4,02

-7,81

14,59 31,71 34,02 36,53 39,23 42,17 45,32 48,73 52,40 36,24 29,99 31,19

Capital Expenditure

35%

35%

-10,10 -12,79

3,30 128,43 128,57 3,71

5

6

2013

7

2014

35%

27,9

8

2015

35%

9

2016

35%

10

11

12

13

2017

2018

2019

2020

28,01 28,13 28,26 28,39

3,86

4,01

4,18

4,34

4,52

4,70

4,88

3792%

0,11%

#####

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%

4,00%


0,00

-6,58

-8,38 -8,38

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

-0,42

0,00

0,00


0,7

-129,7 -105,6

28,0

30,2

32,5

35,1

37,8

40,8

44,0

47,5

31,6

24,7

25,7

-127%

7,73%

7,82%

7,81%

7,91%

7,86%

7,91%

7,92%

YoY(%)

-

#####

-19%

4,00%

-34%

5,28

3,66

-

YoY(%)

5,08

3,52

35%

4,00%

-22%

5,49 4,00%

4,00%


Determining the FCFF – Free Cash Flow for the Firm (IX)

EVIDENCE 8 (I)

Target price for share with new stadium and the new striker – Scenario C

Year


0

1

2

3

4

10

11

12

13

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

-129,7 -105,6

28,0

30,2

32,5

35,1

37,8

40,8

44,0

47,5

31,6

24,7

25,7

0,7 YoY(%)


5

6

7

8

9

-

#####

-19%

-127%

7,73%

7,82%

7,81%

7,91%

7,86%

7,91%

7,92%

-34%

1

1,10

1,21

1,34

1,47

1,62

1,77 1,77

1,94

2,13

2,33

2,56

2,80


-22%

3,06 3,06 477,91

0,7

-117,7 - 117,7 -86,9

20,9

20,5

20,1

19,8

19,5

19,1


450,77

Excess Cash

26,29

Equity Value

FV - Firm Value

477,06

# of Shares (M)

9,29


45,01


46,51

432,05

18,9

18,6

11,3

486,0

4,00%

3,35

Valuation for the Scenario C Some assumptions and formulas

Target price for share with new stadium is £46,51 General Assumptions and Formulas: ― The additional revenues with the new player acquisition are higher in year 2010, as the construction of a new stadium will

allow to capture 100% of the potential revenues from the player; ― The costs in Scenario C are only t he sum of the costs in Scenarios A and B, and the same happens in the capital expenditure that reflects only the cost of the new stadium’s construction; ― In this Scenario we also assumed that the contract is not renewed after the 10 years; ― All of the presented figures were calculated taking into consideration the methodology that was previously explained (for the


NOTE: For the Scenario A and C we have mentioned that the stadium would be entirely financed by equity, either from additional shares issuing or through additional lending from the existing shareholders (investors). Both the situations could mean that the new Target price for share would most likely be (negatively) affected, as the new shares issuing would introduce the “Dilution Factor” and shareholders lending could introduce additional dividend payments, reducing the estimated FCFF.



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 Final wrap-up

MscBA 2012 - Advanced Corporate Finance Coursework-2

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