The following forecast information is provided for Krishna Resources Ltd, an Australian iron ore miner:[table]
| 2020 (actual) | 2021F | 2022F | 2023F | 2024F | Terminal year | $m | $m | $m | $m | $m | $m Net income (after tax) | 114 | 127 | 92 | 86 | 80 | 70 Change in NOA | 42 | 72 | 32 | 16 | 15 | 8 | | | | | | Other information: | | | | | | Cost of equity | 12% | | | | | Number of outstanding shares (in millions) | 860 | | | | | Growth rate in terminal year | 1% | | | | | F = | Forecast | | | | | Current share price | $1.12 | | | | |
[/table][Fill in the blank]
Calculate the value (share price) of the company using the appropriate valuation model.[Fill in the blank]
Based on your valuation is the company overvalued or undervalued and by how much?[Fill in the blank]

Question

The following forecast information is provided for Krishna Resources Ltd, an Australian iron ore miner:[table]
| 2020 (actual) | 2021F | 2022F | 2023F | 2024F | Terminal year | $m | $m | $m | $m | $m | $m Net income (after tax) | 114 | 127 | 92 | 86 | 80 | 70 Change in NOA | 42 | 72 | 32 | 16 | 15 | 8 |  |  |  |  |  |  Other information: |  |  |  |  |  |  Cost of equity | 12% |  |  |  |  |  Number of outstanding shares (in millions) | 860 |  |  |  |  |  Growth rate in terminal year | 1% |  |  |  |  |  F = | Forecast |  |  |  |  |  Current share price | $1.12 |  |  |  |  | 
[/table][Fill in the blank]
Calculate the value (share price) of the company using the appropriate valuation model.[Fill in the blank]
Based on your valuation is the company overvalued or undervalued and by how much?[Fill in the blank]

BlackTom AI · Accepted Answer

Free cash flow to equity (FCFE) is NI minus the change in net operating assets (NOA), so we value the firm by discounting forecast FCFE at the cost of equity and then adding a Gordon-growth terminal value.

1) Relevant concepts
- FCFE = Net income − Change in NOA (cash available to equity holders).
- Value of equity = PV of forecast FCFE + PV of terminal value = sum_t FCFE_t/(1+r)^t + TV/(1+r)^T.
- Terminal value (at end of the forecast period) = FCFE_terminal/(r − g).
- Per‑share value = Equity value / number of shares.

2) Compute yearly FCFE (A$ million)
- 2021: 127 − 72 = 55
- 2022: 92 − 32 = 60
- 2023: 86 − 16 = 70
- 2024: 80 − 15 = 65
- Terminal year FCFE (steady): 70 − 8 = 62

3) Discount each FCFE at r = 12% to value at end of 2020 (t=0)
Discount factors: (1.12)^1 = 1.12; ^2 = 1.2544; ^3 = 1.404928; ^4 = 1.57351936.
- PV(2021) = 55 / 1.12 = 49.11
- PV(2022) = 60 / 1.2544 = 47.87
- PV(2023) = 70 / 1.404928 = 49.82
- PV(2024) = 65 / 1.57351936 = 41.31
Sum PV (years 1–4) ≈ 188.10 (A$ m).

4) Terminal value and its PV
- TV (end of 2024) = FCFE_2025 / (r − g). FCFE_2025 = terminal FCFE = 62 and g = 1%, so TV = 62 / (0.12 − 0.01) = 62 / 0.11 = 563.64 (A$ m).
- PV(TV) = 563.64 / 1.57351936 = 362.30 (A$ m) (rounded consistently with the discrete PVs).
- Total equity value ≈ 188.10 + 362.30 = 550.40 (A$ m).

5) Per-share value and comparison to market
- Shares outstanding = 860 million.
- Value per share = 550.40 / 860 = A$0.64 per share.
- Current market price = A$1.12, so the stock is trading A$1.12 − A$0.64 = A$0.48 above intrinsic value → overvalued by A$0.48 per share.

6) Why this answer is correct and why other approaches are less appropriate
- Using FCFE correctly accounts for earnings and reinvestment (change in NOA) and values cash available to equity holders; ignoring changes in NOA (for example, valuing by NI alone) would misstate free cash available and overstate value.
- Discounting at the cost of equity is appropriate because FCFE are cash flows to equity.
- The terminal value uses the standard Gordon growth form; alternative terminal assumptions (e.g., zero growth or incorrect timing) would produce different values but are not supported by the provided terminal growth rate.

Conclusion: Intrinsic value = A$0.64 per share; the company is overvalued by A$0.48 per share (matches the provided answers).

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