“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 2500 words 2000 written 500 for allowed for numerical work.
Learning outcomesSynthesize 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 2013Non-current assets
m
mTangible assets
89589
87157Intangible assets
21057
20752Investments
15950
18744
126597
126653Current assets
Inventories
11804
17727Trade and other receivables
21608
25438Other current assets
0
0Cash at bank
19122
13657Investments
3530
1905
56064
58727Current liabilities
Short term loans and overdrafts
-4418
-4476Other current liabilities
-36453
-39679
-40872
-44155
Net current assets
15193
14571Non-current liabilities
Long term debt
-69419
-62141
Net assets
72371
79083
31-Dec-14
31-Dec-13Equity
m
mShare capital
0
0Other reserves
72371.01
79022.47Total equity
72371.01
79022No. of Shares
18.26Bn
18.51Bn
Other information:
Share price
Div/share
EPS31-Dec-13
488.05
23.40p
75.12p31-Dec-14
409.3p
23.85p
13.20p
Notes on the above informationAsset valuationsThe tangible assets have recently been revalued and it is thought that they are overstated by 2500m 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.:LSERequired:Task 1 Valuation of BP plc. (20 marks)
(Use only the information contained in the assignment for Task 1)a) Net asset value
Calculate the Net asset value per share for BP.b) Cost of capitalCalculate the cost of equity capital for BPusing the Capital Asset Pricing Model.
Calculate the cost of debt capital (assume a taxation rate of 20%).
Calculate the weighted average cost of capital (WACC).(use the share price as at 31 January 2014 for the value of equity)c) Dividend growth model
Use the dividend growth model to calculate the theoretical price of a share under the following assumptions:
(i) g = 0%
(ii) g = 2%d) 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 BPs 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
a) 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.
b) 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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