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Using the WACC methodology to improve the assessment of projects in the french farming industry. Empirical evidences from farm's results of Isère

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par Anaël BIBARD
Grenoble Graduate School of Business - MBA 2012
  

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3.4 WACC Estimation

Regarding the WACC estimation, 2 types of data will be used: primary and secondary data. For primary data, we will use:

- Results of the farms from Isère extracted from the database of the CERFRANCE Isère to calculate the weighted average leverage by specialization. The time frame of the dataset is 2006-2010, with 620 farms. The characteristics of this dataset are presented in detail in part 3.2.

- Sample collection of 46 recent loan's rate for all specialization in the database of the

CERFRANCE Isère, to determine the market value of the cost of debt.

Regarding secondary data, we will use:

- The market capitalization and the beta calculated by Bloomberg for all the companies listed

in North America and Western Europe for the following activities: Oilseed farming, grain farming, cattle ranching and farming, poultry, fruits & vegetables. Those activities have been chosen because they are really close to the specialization of the farms of Isère.

- Risk-free rate of return: the 10 year government bonds yield calculated by the French central bank will be used. The 12 month average of this rate will be used. This choice of long term maturity was determined by the timeframe of the investments of French farms. Even in grain production, investments are made for 7 years on average, and the rotation timeframe for the crops is 3 to 4 years. For dairy farms, constructions are amortized over 20 years on average.

- Risk premium for small companies, as determined in part 2.1.2.

The extraction from Bloomberg helped to identify 41 companies specialized in agriculture in Western Europe and US (see Table 11). The grain market is globalized today, and the meat market is really influenced by world prices either. These statements are not so true for the dairy market, because the cost of refrigerated transportation is quite high regarding the price of milk. The European market is a more representative market for dairy production therefore.

The beta of each firm will be weighted averaged with the market capitalization, in order to obtain a beta for each specialization and each region. However, for grain farming we will retain the beta of oilseed and grain farming for Western Europe and the US together. The grain market is so interconnected between Europe and US that the market-risk is really close. For the grain farming in Isère, we will retain the beta of oilseed farming and grain farming, because oilseed production is considered as grain production in the French classification. For dairy and cattle farming, we will retain the beta of cattle ranching and farming of Western Europe. For diversified production and the average farm of Isère, we will retain the average beta of the 41 companies extracted from the Bloomberg database.

Specialization

Total market cap

(M $)

# of companies in western Europe

# of companies in

the US

Total # of companies

Oilseed farming

5 810

11

0

11

Grain

14 421

9

4

13

Cattle ranching

8 196

4

3

7

poultry

2 321

1

2

3

Fruits & vegetables

2 224

3

4

7

Total

32 971

28

13

41

Table 11: Number of companies studied for the Beta estimation. Source: Bloomberg

The last element of the WACC formula is the corporate tax rate. This element is really hard to determine in agriculture, because farmers have the choice between the corporate tax rate at 15% (up to 38 120 € of net income and 33.33% after) and the personal income tax with its progressive tax rate from 0% to 41%, depending on the total income per capita of the household. Moreover, the net income is also subject to social tax, at an average rate of 32.1%. Therefore, to simplify our calculation we will assume a corporate tax rate at 33.33%, which is the usual corporate tax rate in France (only companies held at 75% by persons have the benefit of the 15% tax rate up to 38 120 €). This rate is chosen in most studies about profitability for other industries in France. Therefore, it will simplify comparisons. As the French farms are small companies, it is not obvious that this tax rate could increase in the coming years. The actual government considers that SEM's are too much taxed compare to the blue chips.

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