Posted: 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
- Synthesize and apply both theory and empirical information to the solution of to a range of investment-decision problems.
- 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 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) |
Calculate the Net asset value per share for BP. |
(use the share price as at 31 January 2014 for the value of equity) |
Use the dividend growth model to calculate the theoretical price of a share under the following assumptions:
|
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
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.
|
|
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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