Создан заказ №5904467
12 декабря 2020
British American Tobacco (BAT) Corporate valuation
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Part 1
British American Tobacco (BAT), examined its recent stock price history and discovered what analysts were saying about the stock. It is now time to turn to the financial statements, for it is on those statements that a valuation is anchored. You will have to go into X’s financial
statements in considerable depth as the module proceeds. For now you need to familiarize yourself with the layout of the statements and appreciate their main features.
Go through the firm’s statements and show that each of the accounting relations is obeyed in the most recent year. Be sure to identify comprehensive income and net pay out to shareholders. Can you “tell the story” of what the financial statements as a whole, are depicting?
Having located the price of the stock at the end of the last year, just after its previous annual report was published, make use of this number and others from the statements and calculate the total market value of the equity. For this you will need to identify shares outstanding, remember that shares outstanding are not the same as shares issued. Calculate the premium or discount at which British American Tobacco trades relative to book value. Furthermore, calculate all the appropriate ratios like P/B or P/E and provide some explanation relative to their size. Using the value equation and information in the financial statements, make the best calculation you can for the value of the firm.
Examine X’s financial statements for the fiscal year ending in December (or April) of the most recent fiscal year (e.g. 2020), with a view to testing your understanding of accounting: What do you not understand?
Check the following:
i. Using the numbers in the financial statements, show that the following accounting relations hold in X’s 2016 statements:
a. Shareholder’s equity = Assets-Liabilities
b. Net Income =Revenue-Expenses
c. Cash from operations+ cash from investment+ cash from financing+ effect of exchange rates= change in cash and cash equivalents.
ii. What are the components of other comprehensive income for 20XX? Show that the following accounting relation holds: Comprehensive Income= Net income+ other comprehensive income
iii. Calculate the net pay out to shareholders in 2015 from the statement of stockholders’ equity (if you can find it, otherwise do not bother)
iv. Explain how revenue is recognized
v. Calculate the following for 20XX: gross margin, effective tax rate, ebit, ebitda and the sales growth rate for 20XXand 20XX.
vi. Based on the stock price in March 20XX, calculate the market capitalization of the equity. Calculate the P/E & P/B ratio at this price. How do these ratios compare with their historical ratios?
vii. From the price and dividend information you can get, calculate the stock rate-of-return for each accounting year 20XX-20XX.
Overall, create a report regarding the liquidity status of the company, the credit status (short-term & long-term creditors) and the investment policy.
Part 2
In the previous part, you gained some familiarity with the financial statements and calculated the two basic ratios, the P/E & P/B. After this lecture you can calculate many more ratios based on the last share price of your financial statement. You will now modify your calculation of the trailing P/E in the part 2 case to accommodate the t-1 dividend per share. Calculate the enterprise price-to-book ratio and other unlevered ratios. With analysts’ consensus forecast report for the firm in Part 1, you will also be able to calculate the forward P/E.
Following the method of comparables find three comparable firms. Make sure and argument on why the specific firms are the most appropriate to select as serve well as comparables. Can you get better matches? Use relevant papers, academic journals etc. With the firms’ stock prices and accounting information you can calculate comparison multiples. What do these multiples imply X’s price should be? How confident are you in your conclusion?
Using the multiples as screens, do you think that X’s multiples are typically higher or lower than the comparables? If so, would you recommend taking a buy or sell position on the basis of the difference?
Do you think that Asset-Based Valuation will work for company X?
Looking back to the firm’s financial statements in Part 2, identify the amount of shares repurchased (if any) and critically examine how this had affected the stock price.
Identify the amount of dividends last paid (usually the year before your last financial statement). How these dividends have resulted in an increase in the stock price, or a decrease?
Note: If your company hasn’t distributed its profits then you should only comment on the decision made by the CEO and explain the reasons behind this.
By using CAPM formula and making the appropriate assumptions calculate the required return (please calculate beta coefficient, the risk-free government bond and the market risk premium). In the previous part you calculated the prior 12-month stock return for company X. Would you say that investors covered their cost of capital that year?
Part 4
Go back now to the financial statement and recalculate “cash provided by operations” for the last, if possible, 5 years of your sample with the adjustments of the lecture on Cash accounting, Accrual accounting and DCF Valuation. The firm’s tax rate is 27% (please make sure that you use the correct one and the most recent, so please double check before doing so). Also recalculate cash used for investing appropriately to identify actual investment in operations. Finally calculate free cash flow for each year.
Cash flow and Accruals
Identify the amount of accruals that are reported (if any) in the cash flow statement. Then reconcile your calculations of FCF from the last,if possible, 5 years to net income following the accounting relation 4.11 in your book. Look at the accrual items in the cash flow statement for 20XX and identify these assets or liabilities on the balance sheet. Which items on the balance sheet are affected by the items listed in the investment section of the cash flow statement?
Discounted Cash flow Valuation
Suppose you were valuing X at the end of 20XX and that you received the FCF that you just calculated as forecasts for 20XX-XX. Attempt to value the equity with a DCF valuation. Identify aspects of the valuation about which you are particularly uncertain. For these calculations use the appropriate required return for the firm.
Part 5
In part 1 you have gain access to analysts’ forecasts made in the last year of your chosen period when the stock price stood at a certain price (you should know by now). These forecasts should be in the form of point estimates for e.g. 20xx and 20xx and an estimated five-year growth rate. Check the annual dividend per share at that time. With book value information from the financial statements in part 2, calculate the firm’s traded P/B ratio in March or Decemebr (depending on the chosen accounting calendar) 20XX.
With analysts’ forecast of a 5 year growth rate, you can forecast analysts’ EPS estimates for the years 20XX-20XX. Do this and, from these forecasts, lay out the corresponding return on common equity (ROCE) and residual earnings. For the residual earnings calculations, use the appropriate already calculated required return for equity.
Now go ahead and value X’s shares from this pro forma. Assume a long-term growth rate in residual earnings after 5 year forecast period which will be roughly equal to the GDP growth rate. What is your intrinsic price-to-book ratio? What is your V/P ratio? What reservations did you develop as you went through this task?
Part 6
In the previous part you were asked to convert analysts’ earnings forecasts into a valuation using residual earnings method. You can now do the same using abnormal earnings growth methods. Check analysts’ forecasts made in your last chosen period when the stock price stood at a certain level (use the same as before in part 5). These earnings forecasts are in the form of point estimates for years 20XX-XX and an estimated five-year earnings growth rate. Collect the relative dividend pay-outs and calculate the forward P/E ratio. Also, using information in the financial statements in part 2, calculate the trailing P/E.
With the five year growth rate, you can forecast analysts’ EPS estimates for the years 20XX-XX. Do this and, from these forecasts, pro forma the corresponding abnormal earnings growth. Use again the appropriate required return for equity for the calculations.
Now go ahead and value X’s shares from this pro forma. Assume a long-term growth rate in residual earnings after 5 year forecast period which will be roughly equal to the GDP growth rate. What is your intrinsic forward P/E ratio? What is intrinsic trailing P/E ratio? Did you get the same value as in the residual earnings application in the previous part?
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Автор24
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British American Tobacco (BAT) Corporate valuation.docx
2020-12-18 16:35
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