FNN 7201 Financial Management Assignment
Calculation based on two companies
Discussed Sims plc and Coleman’s company account based on their financial statement. Based on these two companies’ details discussed the P/E ratio, and EPS based on their share value and other values.
P/E ratio of the SIM’s company= market price per share (MPS)/ Earnings per share (EPS)
= “£5/45p”
=”11.11 times”
The P/E ratio has been turned at the value of 11.11 times. By using the above-mentioned formula,the value of this P/E ratio has been computed. Thus, the value of market price per share is £5 and the EPS has been valued at 45p. In this respect by using the formula of market price per share (MPS)/ Earnings per share (EPS) the value of P/E ratio has stood at the value of 11.11 times. This P/E ratio can be used as the market value of the organization as well.
EPS of the Coleman’s= profit of the year/ shares number
=” £67m/£200m”
=”33.5p”
According to the above calculation the value of EPS of this targeted company has turned into 33.5p. According to the formula the value of profit of the year is at £67m and the other factor of this calculation of share number is reread as £200m. Thus, using the above-mentionedformula, the value of EPS of this targeted company has stood at the value of 33.5p.
Calculating the share price of Coleman= “11.11 x 33.5p”
=” £3.72” per share.
The share price of the targeted company Coleman has been computed and according to the above calculation the valuation of this share price has turned at the value of £3.72 per share. The calculation has been done by multiplying the two factors of 1.11 and 33.5p.
Coleman companies market value= “£200m x £3.72”
=” £744,000,000”
For the purpose of analyzing the financial aspects of the targeted company, the value of market demand of value has been calculated. The above calculation is reflecting the market value of this company at a value of £744,000,000.
Companies have to predict future dividend values. Calculating the dividend valuation required the “average annual growth” in dividends.
The formula of the annual average growth= is “1/number of years growth”
“Most recent dividend / first dividend”
“¼
g= (19/15)-1
g=6”
Also discussed was the “rate of return” for shareholders by using the CAPM.
“key=4%= [1.2(13%-4%)]
key= 14.8”
For calculating the share per price, the formula is
“po=do(1+g) /(r-g)”
“Do refers to the dividend per shares
g= indicate the annual growth rate of dividends
r=required rate of target shareholders”
“po= (19 * 1.06) / (0.148-0.06)
po= £2.32 share
Market value= £200m x £2.32
=464,000,000”
In this computation of market value has become at teh value of 464,000,000. It has been calculated by multiplying the value of £200m with £2.32. Thus, by this multiplication the final value of market value has turned at teh value of 464,000,000.
Future cash flows are based on Sim’s cost of capital. Required dividend valuation and earning growing average at 3% per annum
Coleman’s present value= “[(£67m x 1.03) / (0.11-0.03)]
=£69,010,000
=£862,625,000”
Asset sales value=” £30millions / 1.11
=£27,027,027”
Synergy value= “£6m / 0.11
=£54,545,454”
So, the Coleman present value= “£862,625,000+£27,027,027+£54,545,454
=£944,197,481”
Advantages of the technique
Earnings ratio
The advantage of the earnings ratio is that these methods provide the opportunity for the company that makes a comparison between the two companies. That helps to get knowledge about the share price of the firm (Sudhakar, 2021, p.09). That result indicates the share is higher value or lower value than markets. That helps to track the performance of the growth of the company.
Dividend growth model
DGM helps to understand the opportunity of the investors to get an idea regarding the price of the share of the company (Battisti et al. 2020, p.07). The investors can estimate the upcoming growth rate based on the dividend and that also helps analyses the financial condition of the company.
Discounted cash flows
DCF estimate the amount which the investors go through the investment that can adjust the value of the money. Value of the money on time can assume the dollars these can investors saving more value than the dollars (Nugroho and Riyadhi, p.011). In future it can be invested and that is easier for the investment based on the comparison between two company. That can benefit the company.
Disadvantages of this technique
p/e ratio based on the company account history also tells the investors nothing about the company. p/e ratio share can disrupt the accounting statement also valuation of dividends is dependent on a future basis. Difficult to predicts the rate of return because the dividend growth rate is less than the discount rate. The approach toward the cash flows cannot estimate future cash flows and also the discount factors cannot predict the future cost of capital.
Earning per ratio
The biggest disadvantage of the earning per ratio is that these cannot provide any knowledge about the ep’s growth (Ren et al. 2021, p.08). The company is creating efforts and improving for growing their company they can get more investors or less EPR they can face less investment made problems for the company.
Dividend growth model
Disadvantage of the DGM is that making stability in the growth of the company. And create the weakest part of the model (Daniel et al. 2019, p.04). The rate of growth and equity cost same as the formula that is worthless because share price is not stable and creates problems for that.
Discounted cash flows
The disadvantage of these cash flows is that they required guesswork that is not based on any real data. Every data includes guesswork, based on these methods the result is not clear also have the fear that these cannot be true because these are totally based on the guesswork. Data cannot be true based on the guess works. It makes it difficult for the company and also for the strategy makers that they create a strategy for the company based on the wrong information.
Recommendations
For creating an impact on the financial statement of the company. Calculate the P/E ratio, EPS, share price, dividend, and total valuation of the company. Also, create future and discounted cash flows based on the average 3% per annum. As per the calculation, discounted cash flow is better than the other methods based on these methods company can predict the closest financial condition of the company. Others methods are also good but they required many guesswork. Also sometimes based on these other methods results are not the closest.
Discussed the company’s decision about the cash offers or share exchange-
For progress, the work company has to raise funds. Company raises their fund based on the sometimes assets, share, or take credit from someone. this topic has been discussed about the cash or share which is better for the company.
For cash-based raise funds always required assets. Companies have to lock their assets to them for cash. After taking raise funds based on the cash creates liability for the company (Afiezanet al.2020, p,12). Companies have to repay the loan amount on a monthly basis. After the revenue per month, the company is liable to the creditors they have to pay the interest on the base of the loan amount. That creates risk for the company and reduces the total revenue for the company and they cannot access the assets.
Shares-based raise funds always exchange the company percentage. After purchasing the company’s shares, they are also part of the company. Many investors will come to the board and that helps the company to make the right decisions (Albitar et al.2020,p,12). However, sometimes that create negative effects because the many opinions create problem in making decisions.
Based on the above discussion company decisions are based on the company conditions if the companies have assets that cannot be used in recent times they can sell or mortgage their assets. But if they want more money than the best option for raising money is an exchange of the share.
Task 2:
Share price and the valuation of the company
As per the gathered knowledge, the value of the shares of Sims is £5, after analyzing the earnings ratio of Vodafone and Mannesmann the share price of the company is £11.11. After comparing the two companies’ share values that indicate, that Vodafone and Mannesmann Company’s share price is higher than Sims companies are :
Changes in valuation based on the acquiring company
As per the gathered knowledge, if the company acquire other firms, it can be beneficial for the company. Companies have to look at the share price of the acquisition price of the firm, which has to be the closest to the Vodafone Company (vodafone.com2023). The share price of the firm can help to understand the company conditions in the markets. as per the analysis, sims’ value is less than the Vodafone company. For the sims company, this meagre also helps to them, that they can also improve their financial condition. So, it can be a good merger for both companies.
Discussed the financial methods
The firm has to select the equity for raising funds. However, if the company choose the cash methods that includes many costs the company have to rape the amount monthly basis and also, they have to pay the interest to the creditors. Equity shares funding required only the exchange of the company percentage. (Sondakh, 2019.p,12). The risk factor in this funding is low and also in these methods, companies don’t have to pay any interest amount. Based on the calculation earnings ratio of Sims plc is better, and investors are willing to invest in these companies (Bassberry.com,2023). Investors know that they don’t have to put extra effort into collecting the investment amounts.
Durations on an acquiring company
“Interest coverage ratio”
Interest cover= EBITDA/ expenses
“=EBITDA=82
=EXPENSES=15
The interest cover= 5.47%”
ICR is the profitability ratio that help the company to understand the ability of the company if that they can pay their outstanding or not. The above calculation shows that the company have a total potential interest cover is 5.47% based on these results company has the ability to pay their debt.
“Debt to asset ratio”
“Total debt/ total assets
Total debt= 100
Total assets = 430
So, the debt to the asset is 0.23”
DAR is the type of calculation that helps the company with the obligation debt to the assets of the company. In the above calculation, DAR indicates that the company have to take the loans through the banks because they facing problem for raising funding through their assets.
“Return on capital”
“EBIT/ Capital employed
EBIT= 82
Capital employed= 390
So, the total return on capital= is 0.21”
Based on these calculations helps the company to analyze the net income based on their debt and equity. That shows the firm level is high than the average cost. As per the calculation, return on capital indicates that company income is low compared to the investment. They have it improve their income to satisfy their investors either that creates a bad impact among the investors. Also, they have to create a strategy to make more profits.
Reanalysis of the success of the deal
Based on the above discussion indicates that Vodafone can invest in the sims company project that makes the company more profitable. Investment helps the firm for their investment and improves their performance (Allam et al.2019, p,12). Also, that helps the company to create more profit. After the investment, Vodafone also improves their work and gets more profit from that. Sims company also can stable their company position in the markets. With reference to the accumulated details it is noted that the merging decision of the company depends on their company’s flexibility. Further, it is noted that the advance and informative details regarding the merging and acquisition has been provided.
References
Bassberry.com,2023, overview of Sims plc available at: https://www.bassberry.com/ [Accessed on 27-04-2023]
Battisti, E., Migita, N., Nirino, N. and Villasalero Diaz, M., (2020). Value creation, innovation practice, and competitive advantage: Evidence from the FTSE MIB index. European Journal of Innovation Management, 23(2), pp.273-290.
Daniel, M., Rencic, J., Durning, S.J., Holmboe, E., Santen, S.A., Lang, V., Ratcliffe, T., Gordon, D., Heist, B., Lubarsky, S. and Estrada, C.A., (2019). Clinical reasoning assessment methods: a scoping review and practical guidance. Academic Medicine, 94(6), pp.902-912.
Mudzakar, M.K., (2021). The Effect Of Return On Asset, Return On Equity, Earning Per Share, And Price Earning Ratio Toward Stock Return (Empirical Study Of Transportation). Turkish Journal of Computer and Mathematics Education (TURCOMAT), 12(8), pp.387-392.
Nugraha, N.M. and Riyadhi, M.R., (2019). The effect of cash flows, company size, and profit on stock prices in SOE companies listed on Bei for the 2013-2017 period. International Journal of Innovation Creativity and Change, 6(7), pp.130-141.
Ren, Z., Verma, A.S., Li, Y., Teuwen, J.J. and Jiang, Z., (2021). Offshore wind turbine operations and maintenance: A state-of-the-art review. Renewable and Sustainable Energy Reviews, 144, p.110886.
vodafone.com2023, overview of Vodaphone group available at: https://www.vodafone.com/ [Accessed on 27-04-2023]
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