Company directors often believe that the stock market fails "correctly" to value the firms they manage, while investors are often alarmed by the volatility in share prices. This suggests that stock markets may not always be reliable indicators of company value.
Select a company listed on an internationally recognised and well-established Stock Exchange. (Avoid using Oil Companies and Banks)
- Discuss how successful the company has been at delivering value to its shareholders over the past 5 years
- Total shareholder return per year (Competitor à Industry à Market as a whole).
- Do the basics first and good.
- Cover dividend policy in the total shareholder return
- Do not cover too much of the company.
- Give a brief analysis of the whole comparison
- EVA à Economic Value Added
- Profit (latest reported profit)
- Cost of Equity (Ke = Gordon/CAPM)
- MVA à Market Value Added
- Explain how and why the market value of equity has changed over the past 12 months.
- Find a nice chart of the share price over the past 12 months (ending 31st March 2011). Eg. Bloomberg, FT, etc.
- Look for 3 to 4 major movements in the year or no movements.
- EMH à Efficient Market Hypothesis.
- Undertake a current valuation of the equity in this company, using the following methods:
1. Net Asset Value (NAV) as of 31st March 2011. Illustrate the strength and weaknesses (restrictions) of NAV with respect to your company.
2. Price/Earning Ratio (or some other appropriate multiple). We will not use the PE multiple to get back to Market Value, because that's what it comes from.
3. Discounted Cash flow. Forecast 10 years of DCF and focus on CASH, focus on SALES, TAX, MARGIN, WORKING CAPITAL, INTEREST, ADD BACK DEPRICIATIONS.
4. Cost of Equity à GORDON / CAPM
5. Capital Expenditure (outflow of Cash)
6. Terminal Values on Aswath Damodaran's website.
7. Sensitivity Analysis on one or two of the key variables.
Attempt to reconcile any differences in value that you obtain by using these different methods and state (with reasons) what value you think is correct for the company.
- Why is it so that our valuation is higher or lower that the Market Value.
The weightings (%) given above are indicative rather than absolute, and are given to guide the flow as to where to focus the efforts.
Use the TABLES and CHARTS in Appendices. Tables and charts only count as 1 word.
This is an Executive MBA assignment for the Corporate Finance Module, please go through the instructions very carefully.