In need to be exchanged for U.S dollar when

In this case,
study our group select Sky City as our research company. Sky City is one of a
leading gaming and entertainment business in New Zealand and Australia which
also has a remarkable icon with a great brand value. It mainly operates casino, hotels, convention centers, restaurants
and bars at various place across urban area in New Zealand and Australia.

This assessment will give out an investing advice for
investors after discussing these subjects
in terms of the calculation of Weighted Average Cost of Capital (WACC), the average dividend
growth rate and dividend discount model the
price of SKYCITY Entertainment Group Limited and comparing the current market
price with our valuations. Data and information were extracted from NZX company
research and AUT Blackboard.

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WACC is described as the cost of financing firm assets
which is an appropriate way to determine whether undertaking that project will
increase the value of the firm (McMahon et al., 1993). The weights in the
calculation of WACC should be based on the firm’s target capital structure. Due
to there are two costs of capital for Sky City which are the cost of equity and cost of debt. The
calculation of the cost of equity should
be based on the CAPM approach Er=rf+beta(rm-rf) (Abraham et al., 2008). In our
case, the Sky City has a beta value of
1.28, risk free rate is 1.94% and the market premium of 7%, which are the most
recent value. Then, our calculated the cost of equity is 10.87% (Appendix 1).

In the financial
statements, the company has separately calculated two debt costs which are
weighted average interest rate (6.7%) and weighted average debt cost (6.98%)
respectively. The difference is that because of the exchange rate, SKYCITY has
issued the United States Private Placement (USPP) Notes over the past few
years. However, the exchange rate of the New Zealand dollar has fallen by
nearly 10% from last year to this year. As a result, more New Zealand dollars
need to be exchanged for U.S dollar when the interest is paid. The formula to
calculate the cost of debt is interest
paid divided by total borrowings. Interest
paid is 30,713,000 and the total borrowings is 395,002,000 (Skycity,2017), thus the actual cost of debt is 7.78% (Appendix 1), which are much higher than the
data in the financial statements. This will result in higher financing costs
which WACC is 9.45% (Appendix 1). In this
case, we will use the earnings data (6.98%) as a measure of WACC’s debt cost
for final discussion.

The profit before income
tax is 95,763,000 (Skycity,2017) and the
income tax expense is 50,901,000 (Skycity,2017)
then we calculate the tax rate is 53.15%, but the prima facie income tax is
28%. So we use tax rate of 28% to calculate WACC. The total value is equity
plus Interest-bearing liabilities which equal to 1,465,939,000 (Appendix 1). To calculate the WACC we use
formula WACC= Cost of Debt * D/V* (1-Tax Rate) + Cost of Equity. As a result,
WACC is 9.29%. Therefore, Sky City should invest the project has a higher return than 9.29% to make profits. Based
on the theory of capital budgeting, capital projects can be classified as
replacement projects and expansion projects (Bakry, 2016). In the financial
statements, the company Mentioned it will continue
to maintain the operations in Skycity Auckland and SkyCity Hamilton. They will spend $700 million
to build the New Zealand International Convention Center (NZICC) and Hobson
street hotel to expand the business. The NZICC is are expected to generate $90
million in economic benefits for New Zealand annually (Skycity,2017).

We calculate the average dividend growth rate is 5.66%
(appendix 2) and the free cash flow to the firm (FCFF) in 2014, 2015, 2016, 2017
was in terms of 239,174,300, -26,429,100, 149,977,400 and 152,594,100 (appendix
2) respectively. These two values represent the average dividend growth annually
and the cash available for discretionary purposes (Walters & Halliday,
2004). FCFF is cash available to all investors, both equity owners and debt
holders. The value of a company depends on the level of FCFF and WACC, the
lower the financing costs will have a higher corporate value. Skycity’s FCFF is
good, Interest paid is 30,713,000 (Skycity,2017)
in 2017 and FCFF value is 152,594,100 (Skycity,2017)
which means the company has the cash to pay a dividend
to equity owners and the dividend growth rate of 5.66% Proof of this.

Dividend discount model is an approach divide the
dividend expected to be distributed in the future into the present value at an
appropriate discount rate in order to assess the value of the stock (Garrow
& Valentine, 2010). In this case, we
use average dividend growth rate of 5.66% and the cost of equity of 10.87%
calculate the value of Skycity is 4.26 (appendix 2). The average dividend
growth rate represents average dividend
growth annually from 2013 to 2017 and this value represents the dividend growth
the company may pay in the next five years, therefore we choose this value as growth rate (g). we use CPAM approach to
calculate the cost of equity is the recent value of financing cost of equity
for SkyCity, therefore, we choose this
value as the discount rate. Compare the
value we calculated with the market price we find that our valuation value is a
little larger than the market price (market price 3.94), therefore, the stock
price is undervalued now. To invest a company, we should consider other factors
affect stock prices such as Macroeconomic
factors, Industrial and regional factors and company factors.  In the financial statements, the company
Mentioned it will continue to maintain
the operations in Skycity Auckland and SkyCity
Hamilton. They will spend $700 million to build the New Zealand International
Convention Center (NZICC) and Hobson street hotel to expand the business. The
NZICC is are expected to generate $90 million in economic benefits for New
Zealand annually (Skycity,2017).
Investors should be cautious about the following data, WACC represents the
company’s financing costs, the company’s dividend growth rate represents the
company’s dividend capability, the increase in dividend growth rate will
increase the company’s value and the reduction in the cost of equity will also increase the company’s value. According
to the current value and the company’s future project planning, it is
recommended to buy this stock, then sold it around 4.26.