Please give me a useful clue as to the following case study.
The Managing Partner of the corporate advisory firm in which you work was very pleased with your work in preparing a briefing paper for the initial meeting with a new client – Health High Precision Tools Pty Ltd is (HHTP).
Hiro-san, the management team and the Board at HTTP have taken heed of your advice. At the moment the board has decided to stay as a private limited liability company – and to facilitate the expected growth raise the extra capital as a combination of debt and equity (by inviting some new investors to provide the new capital, and replace the existing shareholder who wants to withdraw). The board has also confirmed that it will take on the lease rather than commit to the substantial increase in debt that would come with purchasing a property. The board discussed your advice, and is not prepared to take on the property market risk – as property markets are an area it does not have expertise in.
Hiro-san has asked your managing partner now to provide advice with respect to a number of specific issues.
1. A similar, but somewhat bigger publicly listed company operating in Japan has been identified – and HTTP aspires to match its performance. The following information is available for the company: o It has debt to equity ratio of 1:4.6
o Yahoo finance has quoted a beta for it of 1.5
o It has current share price of ¥141.13, and a price to earnings ratio of 4.1
o It has not been paying any dividends over the last five years as it has invested in forthoming growth, and will continue to do that over the next three years (ie end of 2018 -2020). Then it expects to pay a dividend of ¥13 (end of 2021), and then increase it to ¥23, after which it expects the company to stabilise and dividends to grow with inflation
Based on this information, comment on the consistency of the market valuation of the company and its implications for HTTP (note you will need to look up or makes some assumptions about market information to do this).
Using this information as a base, and an acknowledgement that HTTP recognises it has limitations in using debt and as such will at best have 20% of its balance sheet funded by debt in the long term – provide advice as to the cost of capital to be used as a discount rate in company and project valuations.