Strategic Corporate Finance

3BM070 Strategic Corporate Finance

Weighting: 50% of module mark
Learning outcomes
3.    Synthesize and apply both theory and empirical information to the solution of to a range of investment-decision problems.
4.    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)
a) Net asset value
Calculate the Net asset value per share for BP.
b) Cost of capital
i.    Calculate the cost of equity capital for BP using the Capital Asset Pricing Model.
ii.    Calculate the cost of debt capital (assume a taxation rate of 20%).
iii.    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 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
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.
Please see Moodle for your allocated share name.

3BM070 Strategic Corporate Finance: Assignment 2
Criteria    80-89    70-79    60-69    50-59    40-49    30-39    20-29
Task 1 Calculations related to Morrison’s    Excellent calculations clearly laid out    Excellent calculations and presentation    Very good calculations  and presentation     Mostly correct calculations and well presented    Some errors in calculations and some confusion in presentation    Inadequate calculations with poor presentation    Very few calculations and very poor presentation
Task 2 Advise client on value of Morrison’s    Excellent analysis integrated with relevant theories and a wide range of academic literature    Excellent analysis integrated with relevant theories and a wide range of academic literature    Very good analysis using a range of theories, and a good range of academic literature    Good analysis using a range of theories, with reference to relevant theories and academic literature    Some  analysis, partly descriptive,  some reference to theories and academic literature    Inadequate analysis, largely descriptive, some reference to theories and academic literature    No analysis, descriptive only, little or no reference to theories or academic literature
Task 3 Analysis of share movements     Excellent analysis integrated with relevant theories and a wide range of academic literature    Excellent analysis integrated with relevant theories and a wide range of academic literature    Very good analysis using a range of theories, and a good range of academic literature    Good analysis using a range of theories, with reference to relevant theories and academic literature    Some  analysis, partly descriptive,  some reference to theories and academic literature    Inadequate analysis, largely descriptive, some reference to theories and academic literature    No analysis, descriptive only, little or no reference to theories or academic literature
This one chose the ST.IVES Company  to analyse.