Estimation of the Value of the Tax Loss–Related Items
The present values of the Tax Loss–Related Items are calculated in the same way as the value from operations. The amount of tax shield, which is to be discounted, is calculated by finding tax saved on the Tax Loss Carry forwards (TLC). It is because the development expenses carry forward and loss carry forward helps the company to reduce its tax payable account in the long run. The discount factor is the interest rate on bond whereas the number of years is the same as were for value of operation to adjust the quarter and month that has already passed. Along with that, the amount taken for discounting is before the tax expense of debt because AEM needs to make sure about the availability of enough profits. So, the risk associated with debt is similar or equal to tax loss carry forward. The present value of Tax Shields on Tax Loss Carry Forwards is $17,399 + $30,893 = $48,292.
The Impact of Other Valuation Items Shown In Case Exhibit 11
Other valuation items consist of excess cash and marketable securities, value of non-operating assets, market value of debt, after tax pension fund deficit and value of excessive stock option. These figures are expressed in the present value already so the impact is taken directly in the calculation of value of company and value of equity.
The value of AEM’s real option
The value of AEM’s real option to mine the un-mined gold is calculated by applying the Black and Scholes model to the valuation of a real option.
It is because the extraction of the gold depends upon the authority of the mining company. So the company does not extract and sell the metal when gold prices are below the extraction cost. Thus, the Black and Scholes model incorporates the inputs that help in the correct valuation of the resource company. Those inputs include monetary value of the gold reserves that is calculated by the quantity and price of the gold.
The growth rate is 0% as mentioned in the case. Other factors, explicit from the case data include
Cost of opening mine is $20 million, quantity of gold (average ounce produced per year) is 530,000, average operating cost per ounce is $260, standard deviation is 0.17, and the remaining life of the reserves is 16 years since this is the lease period for AEM.
The risk free rate is 5.79%, adjusted Levered Beta is 1.05 and the tax rate is 37.80%. Whereas the Market Risk Premium is 6.70%, so the Unlevered Beta of Equity is calculated to be 0.65 and the Ksu is calculated to be 10.13%. The gold prices cannot be forecasted because the current price of gold has been assumed as the present value of the gold prices in future.
The exercise price is thus calculated by adding value of gold and PV of operating cost, which is found to be $1,089,988,758.
In all, the Call Price of value of un-mined gold is found to be $1,762,900,115. The normal practices done in the gold industry states that the value of a firm is based on the options of the un-mined gold reserves present under the ground.
The Value of the Firm:
The total value of the firm is found to be $ 1,895,145 by adding present value of FCF, terminal value, PV tax loss carry forward, PV of tax shields on development expenses, non-operating assets, excess cash and marketable securities and subtracting after-tax pension funds. Along with these, as a final touch to correctly value the company, the PV of un-mined gold is added.
The Value of Equity:
The value of equity is found to be $1,702,151. This value is calculated by subtracting MV of short and long-term debt and value of executive stock option from the value of company. Total value of the equity is divided by the weighted average of outstanding shares, which in this case are 61,333,630, to calculate the value per share amount.
Conclusion and Recommendations
The value of a firm is very sensitive to the value of un-mined gold. So, by using the DCF method and the Black and Scholes model to analyze the sensitivity of the real option valuation, it is found that the company’s value per share amount is $27.75, which is higher than the currently trading amount of $13.89............................................
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