In the 1990’s, there was around 100,000 state owned enterprises (SOE) in China and over half of them were losing money. Since 1992, most of the SOEs were given freedom to reform and extensive new investment was required for the action. IPO is one of the effective channels to raise capital in the market. Beside the Shanghai Stock Exchange and the Shenzhen Stock Exchange, SOE also sought listing out of the PRC and Hong Kong became their first destination.
In 1993, 5 “H”…show more content… 4. The Change in NWCt (‘△NWCt’) is calculated by subtracting the NWCt of a particular year by its value in the previous year. Thus, we are able to obtain 3 years’ △NWCt value, from Year 1995 to Year 1997.
5. Based on the given formula below, we can find out the After-tax Cash Flows (‘CFt’) of SHXS from Year 1994 to Year 1997.
CFt = PATt + Dept – CapExpt - △NWCt
6. By assuming SHXS would experience a constant growth rate in CFt from 1997 onwards, we can use the constant growth model to estimate the terminal cash flows for Year 1997. Upon the requirement in our Case Questions, we have to assume 3 scenarios of growth rate (‘g’), they include 5%, 10% and 15%. We can calculate the terminal value for each of the 3 scenarios based on this formula:
Terminal Value at constant growth rate (g) = CFt * (1 + g) / (E(r) - g), where E(r) is 38.7%.
7. The After-tax Cash Flows at different constant growth rate can be obtained by adding the Cash Flow at Year 1997 (‘CF1997’) and the terminal value of each constant growth rate together.
8. The discounted After-tax Cash Flows at different constant growth rate from Year 1995 to Year 1997 are calculated by using the formula below:
Discounted After-tax Cash Flows at constant growth rate (g) in Year 1997
