Blackmores Ltd

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Table of Contents
1introduction1
22
3Corporation Background3
3.1Organization3
3.2Market Position3
3.3Government Impact4
3.4Description of Competitors4
4Capital Structure6
4.1Blackmores’ Current & Historical Leverage6
4.1.1Debt to Equity Ratio6
4.1.2Degree of Financial Leverage and Operating Leverage8 4.2Capital Expenditure and Financing9
4.3Capital Structure Relative to Competitors10
4.4Bankruptcy Risk Assessment11
4.5Leverage Policy Summary12
4.6Is this the Optimal Leverage Policy?13
5Dividend Policy14
5.1Current and Recent History of Dividend Payment14
5.2Dividend policy comparing to comparable firms14
5.3Relevant Company Characteristics to its Dividend Policy16 5.4Analysis of Company’s Dividend Policy and Lintner’s Analysis16 5.5Optimal Dividend Policy17
6Valuation19
6.1Assumptions19
6.2Valuation Method20
6.2.1Determining the Cost of Equity (rS)20
6.2.2Determining the Cost of Debt (rb)22
6.2.3Weighted Average Cost of Capital (WACC)22
6.2.4Estimating the Future Sales Growth Rate23
6.2.5Estimating Future Cash Flows23
6.2.6Estimating Firm value24
6.3Sensitivity Analysis25
6.3.1Share price sensitivity to changes in the Sales Growth Rate (2011-2020)25 6.3.2Share Price Sensitivity to Change in the Sales Growth Rate (after 2020)26 6.3.3Share Price Sensitivity to Changes in WACC27

6.4Comparison of the Estimated and Actual Share Price28
7Investment Recommendation29
8Appendix30
9Reference34

Executive Summary

Blackmores LTD (BKL) which started in the 1930s is a major player in developing and marketing products and services that deliver a more natural approach to health, based on their expertise in vitamins, minerals, herbs and nutrients.

For the year ended 30 June 2010, Blackmores posted a net profit after tax of $24.3 million, an increase of 17% on last year. Group revenue increased by 7% to $214.9 million; earnings before interest, tax, depreciation and amortization (EBITDA) increased by 25%; and earnings per share increased by 15%.

This report will incorporate an analysis of Blackmores LTD including, the level of leverage and the company’s capital structure; the dividend policy and the amount of dividends paid to the shareholder; and finally, a valuation analysis on Blackmores based on WACC.

Introduction

The purpose of this paper is to analyze the Corporate Finance of Blackmores. The analysis will contain three main components of capital structure, dividend policy and valuation analysis. Blackmores is a multinational organization operating in Australia, New Zealand and Asia and currently employs more than 500 people in the region. The company has a multibillion dollar market capital in the area of developing and marketing branded vitamins and supplements. The analysis Blackmores in this report include:

• Capital structure and leverage policy
o Operational and financial leverage
o Capital expenditure, financing and structure
o Assessment of bankruptcy risk and cost
• Dividend Policy
o Current and past five years dividend policy and franking credits o Company dividend policy and the peer group comparison
o Characteristics and an analysis of the company’s dividend policy • Consistency with Linter’s analysis
o Analysis of whether the SHL dividend policy is optimal o Company valuation and share price
o Blackmores share price estimation using Weighted Average Cost of Capital and Net Present Value o Valuation assumption and related explanations
o Company Beta value estimation
• Share price comparison and difference analysis
• Valuation sensitivity analysis

Corporation Background

1 Organization

Blackmores LTD (BKL) which started in the 1930s is a major player in developing and marketing products and services that deliver a more natural approach to...
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