Basic Assumptions
▪ Hyper-growth years are from 2000-2004
o Especially for Internet firms like Tom.com
▪ Assume perpetuity 2010 onwards
▪ Tax rate is 16% based on the Inland Revenue Department of Hong Kong
▪ Deprecation of assets and goodwill will depreciate not more than 3 years
o Example intangible assets like software or programming
o Due to the competitive forces in the Internet sector
WACC Assumptions
▪ Risk-free rate is 6.33% during hyper-growth-years, and 7.5% onwards till perpetuity
o Based on the 1-year yield of HK government debt
o More uncertainties arise in future, hence risks exist
▪ Equity risk premium is 17% for hyper-growth years (2000-2004) and 6% till perpetuity
o 17% is calculated based on the average of total returns of Hang Seng Index from 1995-1999 (23.28%) – risk-free rate (6%), which will be 17% Approximately
o Tom.com is listed on Hong Kong Exchange Board
o Rule of thumb that risk premium is around 6%-7% in general
▪ Beta is 1.05 for Tom.com, as it is assumed that it has high unsystematic risk but low systematic risk, hence secure itself from market downturns
▪ Discount rate for each year is based on the cost of equity
o 25% for hyper-growth-years and 15% periods later, hence within the range of Perkins’ estimation of discount rate for internet firms
▪ No dividend over the life of the firm
o New Internet firms normally reinvest retained earning to sustain hyper-growth
Cash Flow Assumptions
▪ Revenue growth rate for hyper-growth-years is based on Perkins’ CAGR (170%)
▪ EAIT, the operating profit is calculated as a percentage of revenue
o 5% for hyper-growth-years and 10% afterwards
▪ Better expenses control in later years as experience as increased in management
▪ Working capital is calculated based on % of revenue, thus achieving changes in NWC each...