• May 7th, 2015

Numerical interpretive workshop: Company valuation

Paper, Order, or Assignment Requirements

 

 

This order is very important and should be based on lecture ppts. You will be given data about the company and asked to judge its performance and valuation. You will be expected to justify your calculations with reference to relevant theories. This piece of work is equivalent to 2,500 words, 2,000 written – 500 for allowed for numerical work.

 

Learning outcomes

  1. Synthesize and apply both theory and empirical information to the solution of to a range of investment-decision problems.
  2. Reconcile conflict between DCF models for decision-making and using accounting income for evaluating project performance.

 

Introduction

 

You work in the corporate finance department of a major investment bank. One of your clients has expressed an interest in making an investment in British Petroleum (BP), http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary.html?fourWayKey=GB0007980591GBGBXSET0 .

 

As an investment advisor you wish to value the company so have collected the following information:

Balance sheet as at: 31 Dec 2014 31 Dec 2013
Non-current assets £m £m
Tangible assets 89,589 87,157
Intangible assets 21,057 20,752
Investments 15,950 18,744
126,597 126,653
Current assets
Inventories 11,804 17,727
Trade and other receivables 21,608 25,438
Other current assets 0 0
Cash at bank 19,122 13,657
Investments 3,530 1,905
56,064 58,727
Current liabilities
Short term loans and overdrafts -4,418 -4,476
Other current liabilities -36,453 -39,679
-40,872 -44,155
 
Net current assets 15,193 14,571
Non-current liabilities
Long term debt -69,419 -62,141
 
Net assets 72,371 79,083

 

  31-Dec-14 31-Dec-13
Equity £m £m
Share capital 0 0
Other reserves 72371.01 79022.47
Total equity 72371.01 79,022
No. of Shares 18.26Bn 18.51Bn
Other information:
Share price Div/share EPS
31-Dec-13 488.05 23.40p 75.12p
31-Dec-14 409.3p 23.85p 13.20p

 

 

Notes on the above information
Asset valuations
  • The tangible assets have recently been revalued and it is thought that they are overstated by £2,500m in the above accounts.
  • The property, plant and equipment have recently been revalued and it is thought they are understated by £150m.
  • There may be £100m of debtors (trade receivables) that cannot be collected.
 
The Capital Asset Pricing Model

Assume the risk free rate of return is 1% and the average return on the market is 6% per cent.

Beta for has been calculated variously at 1.34* or 1.74**

** http://finance.yahoo.com/q?s=BP.L&ql=0   [accessed 13 April 2015]

** http://markets.ft.com/research/Markets/Tearsheets/Summary?s=BP.:LSE [accessed 13 April 2015]

Non Current liabilities

Assume the non-current liabilities pay a coupon of 4%. They are currently being traded at £110 per £100. You should consider these ‘irredeemable’ They are shown in the balance sheet at their par value.

The share price over the last 12 months is shown overleaf:

http://markets.ft.com/research/Markets/Tearsheets/Summary?s=BP.:LSE

Required:
Task 1 Valuation of BP plc. (20 marks)

(Use only the information contained in the assignment for Task 1)

  1. a) Net asset value

Calculate the Net asset value per share for BP.

  1. b) Cost of capital
  1. Calculate the cost of equity capital for BP using the Capital Asset Pricing Model.
  2. Calculate the cost of debt capital (assume a taxation rate of 20%).
  3. Calculate the weighted average cost of capital (WACC).

(use the share price as at 31 January 2014 for the value of equity)

  1. c) Dividend growth model

Use the dividend growth model to calculate the theoretical price of a share under the following assumptions:

  • g = 0%
  • g = 2%
  1. Value per share using the price earnings (p/e) ratio

Calculate the price earnings ratio using the share prices as at 31 December 2013 (488p) and 31 December 2014 (409p) and the EPS figure for 2013.

Comment on your answers if the retail industry sector containing BP’s has an average p/e ratio of 12.8 (http://biz.yahoo.com/ic/120.html, accessed 13 April 2015).

 

 

 

Task 2 (60 marks, you may use any information for this section)

 

Calculate the value of a BP share and advise your client

  1. Use the information from your calculations above and any information other you deem appropriate to arrive at the valuation of a BP share.

In doing so critically evaluate the Price-Earnings and Dividend Growth models used in your calculations and relate your calculations to the current and historic share price information as appropriate.

  1. Discuss whether you would advise your client to purchase shares in BP on the 5th May 2015.
 

 

Task 3 Share price tracking and the EMH (20 marks)

Critically analyse the movement of your allocated share during the period it was being tracked (Jan 2015 – April 2015). You may choose any length of time within that 4 month period from 1 day and up.

Refer to relevant theories and academic literature to explain why and to what extent the share moved in response to new information.

My allocated share name is ‘MEARS GROUP’.

 

Resources

 

Essential Reading

 

Arnold, G. (2012). Essentials of Corporate Financial Management (2007). Harlow: FT prentice Hall

 

Recommended Reading

 

Other books you may find useful include:

Brealey, R., Myers, S., & Allen, F. (2008). Principles of Corporate Finance (9th ed.). New York: McGraw Hill. (976 pages) (8 Copies of 7th and 8th edition in library)

Pike, R., & Neale, B. ( 2006). Corporate Finance and Investment. Decision and Strategies (5th ed.). Harlow: FT Prentice Hall. (759 pages)

Watson, D., & Head, A. (2007). Corporate Finance. Principles and Practice (4th ed.). Harlow: Pearson Education.

Ross, S., Westerfield, R., & Jordan, B. (2008). Corporate Finance Fundamentals (8th ed.). Boston: McGraw Hill.

McLaney, E., (2006) Business Finance- Theory and Practice (7th Ed.) FT Prentice Hall

 

You should be prepared to consult electronic references including journal articles, newspapers, books, academic papers, and websites.  This module asks you to research widely but effectively.

 

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