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A buy-side analyst has been asked by her fund manager for advice as to whether they should add stocks of ABC Plc to their portfolio. The stock is currently trading at 260. The analyst decides to use the Discounted Free Cash Flow to the Firm (FCFF) valuation model, and collects the following data for the year just ended:

EBITDA: 540m Depreciation and amortisation: 60m Net interest expense: 45m Effective tax rate: 25% The working capital has increased from 45m at the beginning of the year to 65m at the year-end Investment in fixed capital: 90m Current market value of the outstanding debt: 1,500m Number of shares outstanding: 10m The companys target capital structure is 30% debt and 70% equity Before-tax cost of debt: 7% Risk free rate: 4% The expected return of the market: 9% The stocks beta: 1.2

The analyst forecasts that the FCFF and EBITDA will grow at 8% per annum over the next three years. Due to uncertainty beyond this three-year forecast horizon, the analyst decides to estimate the terminal value (at the forecast horizon) by using the sectors historic-average EV/EBITDA (Enterprise Value-to-EBITDA) multiple of 6.

Reminder of the FCFF formula: FCFF = After tax earnings + Net Noncash Charges + Interest Expense x (1- tax rate) Fixed Capital Investment Working Capital Investment

REQUIRED: Provide an investment recommendation based on your valuation of ABC Plcs stock. Please show your workings (computations should be rounded off to one decimal place).

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