Question

Your job as an analyst is to produce valuation report for your investment firm. Your current focus is on Consun Energy Inc., a company which operates in the renewable energy industry. Last year, the company earned $30 million before interest and taxes on revenues of $80 million. Capital expenditure were $20 million, and depreciation was $15 million. The addition to work capital were $6 million. The firm’s weighted average cost of capital is 12.45%, the marginal tax rate is 40% and the expected growth rate of cash flow is 5%. The market value of the debt is $25 million.

(In no more than a paragraph)

1. Conduct a brief Porter’s five competitive forces analysis on this industry and summarize the implication of your analysis in terms the ease of profitability.
2. What stage in the industry life cycle do you think the renewable energy industry is? Corroborate your choice with a brief discussion of industry evidence.
3. Present in a brief discussion, the important macroeconomic variables to consider when analyzing the renewable energy industry and why you think those variables are important to your analysis.
4. What is your estimate of the intrinsic value of the Consun's equity using the financial information provided above?

Answer 1

A.
Porter's five forces model:
This model holds that the state of competition in an industry is a composite of
competitive pressures operating in five areas of the overall market:

1. Competitive pressures that goes on among rival sellers in the industry for buyers/customers.
2. Competitive pressures associated with the threat of new entrants into the market.
3. Competitive pressures coming from substitute products by the companies in other industries.
4.Competitive pressures
stemming from supplier bargaining power.
5.Competitive pressures stemming from buyer bargaining power.

B. I feel that currently Renewable energy is in growth stage. It has just entered the growth stage.
With electric vehicles(EV) coming from companies like Tesla, giving more importance to Solar energy from companies like solar City.

More and more companies are entering into this space. Huge Investment is happening. Presently EV are costlier than petrol/diesel vehicles.
With time they will come to par and eventual in mature stage become cheap.
As and as Renewable energy space goes infrom of Solar energy, Nuclear Energy the electricity cost gets reduced. The present focus in this growth stage is to attract huge Investment into this space.

C. According to me 2 macroeconomic factors will play very important roles.

They are:
Political-Legal Environment:
With governments giving subsidy and reducing taxes this industry will grow at a very strong pace.
Recently Indian government brought many strong decisions to give support to this industry.

Technological Environment:
Technology can act as both opportunity and threat to a business. It can act as opportunity as business can take advantage of adopting technological innovations to their strategic advantage. Many players currently in the market are trying to convert this technology change into their strategic advantage. Many new startups are coming with great innovations.

D.
NOPAT = $18 M
Net investment=$11 M
FCFF=$7M
Value of the firm =$ 93.9597M
Value of t equity=$68.9597 M