Tabcorp Cost of Equity

CASE STUDY 3: TABCORP

Part 1

In the process of creating a pro forma conducive to free cash flow analysis a number of assumptions must be made with regard to the Tabcorp’s financials. In broad terms and as a guide, the demerger is split in the region of two thirds towards the new Tabcorp and one third to the casino business. However, there are certain exceptions to this general trend.

Firstly, revenue is assumed to grow at 2.9% annually in line with disposable income, which is considered an accurate reflection of industry growth. The established loss of the Victorian license for EGM’s in Victoria from 2012 is also taken into account, as it is expected to be a considerable drain on revenues. The considerable excess cash levels forecasted from 2013 roughly equate to a value similar to that of the license. Government taxes and levies are expected to continue at the historical average of 27% of revenues and are firm wide and unlikely to be effected by the demerger, as are professional and contract services at 0.6% of revenues. Other areas that are expected to remain at the historical average are property costs, as the company continues to improve its facilities, and other expenses which are an undefined cost and difficult to discern. Depreciation and amortization were subject to a slight increase to 5% of revenues above the historical average to account for the maintenance of Tabcorp’s wagering facilities.

There has been an increase in commissions and fees as a proportion of revenue to 30%, which factors in the additional services and product dimensions to be be serviced under the new arrangement. As a result of the structural change associated with the demerger, employment costs have also been increased to accommodate the transition. On average they were at 14%, and with Tabcorp retaining 21% of staff, 3% of revenue would be standard however transitional issues are likely and hence 4% has been applied. Advertising and promotions has been split evenly, however...