MBF301 Financial Investments Assignment Sample
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Comparative valuation:
This spreadsheet was set up to go with the case. This is the third of a four-case arrangement. A noteworthy worry of the family proprietors was whether to endeavour to offer their organization. This case study gives understudies the chance to consider numerous ways to deal with esteeming a firm, near valuation Price to Earning ratio, price to-book value ratio, price to cash flow ratio. Both methodologies introduce extensive logical issues (Brealey et al., 20120. A noteworthy shortcoming of the near approach is to locate a comparable organization. Hong Kong, a generally little securities exchange, has no firm in the toy business to use as a guide. Other publically exchanged firms of comparable size, markets, and product offerings are found in the Japanese and the American securities exchanges. However, given the distinctions among the organizations and furthermore the business sectors, how impact on the value of firm. There is sufficient information for the situation to enable the understudy to make a DCF valuation, despite the fact that projection of the money streams is liable to an extensive variety of conceivable outcomes. A gauge of a sensible markdown rate likewise is required, bringing up issues (expecting utilization of the CAPM, for example, what ought to be the association’s beta, the hazard free rate, and the value advertise premium (Moro & Fink,2013). Understudies will require no less than two hours of readiness in addition to a full class session.
- Brand value of Great Eastern Toys gauges are altogether emphatically identified with costs and returns, incremental to bookkeeping factors. Company’s brand value assesses dependability under lies absence of budgetary explanation acknowledgment for brands. In this analysis, discoveries recommend gauges are significant and adequately solid to be reflected in their share costs. Concurrent conditions estimation uncovers deductions are unaffected by potential predisposition coming about because of concurrence between brand value assessments and value of equity share in the company. Brand value gauges are decidedly connected with promoting cost, working edge, and piece of the pie (Gitman, et al., 2015) However, brand value gauges give noteworthy illustrative energy to costs incremental to these factors, and to perceived brand resources and investigators profit estimates.
| Ratio | Formula | 1998 |
| Price earnings ratio | Market value of per share / Earning per share | 32.22 |
| Market value of per share | 244.9 | |
| Earnings per share | 7.6 | |
| Price to book ratio | Market Price per Share / Book Value per Share | 5.83 |
| Market price per share | 244.9 | |
| Book value per share | 42 | |
| P/Cash Earnings multiple | Operating cahs flow / diluted shares outstanding | 244.9 |
| Operating cash flow | 244900 | |
| Diluted shares outstanding | 1000 |
The above table depict that price earnings ratios for year 1998 is 32.22 HK$. At the same time, price to book value is found by 5.83 HK$. In the same way, P\ cash earning multiple is found 244.9 HK$.
DCF valuation:
The numerous methods subsist while it comes to turning over values the discount rate in a DCF and cash flows analysis. The objective of DCF analysis is just to estimation of the cash, an investor must obtain from an investment as well as used to the time value of finance. In Great Eastern toys, measuring the annual interest is 6.2%, when it comes to assessing the potential worth of investments. In addition to it is ordinary to utilize the weighted average cost of capital as the discount rate. For Great Eastern Toys, the management would apply DCF analysis by primary estimating the future cash flow growth of an organization. The researcher will be begin by formative the company’s irregular free cash flow of 12 months, equivalent to among the periodical operating cash flow and capital expenditures. Cash flow of Great eastern toys would be growing by 3% in the following three accounting year (Brigham & Houston, 2012). In addition to, Great eastern toys must apply a long-term cash flow growth rate as well as on behalf of an assumption of annual growth from the view if researcher. The researcher shows that average cost of debt of Great Eastern Toys is 12%. However, this value ought to perhaps exceed the long-term growth scenario of the overall economy.
- There are a lot of methods to estimation the value of an organization, but the most frequently and fundamental used is Discounted Cash Flow (DCF) analysis. The company value is the total of future cash flows, which the company would be generated the discounted back. The value of the company is $1000 million in one year as of currently discounted at 10% is $909.09. Discounted at 15% the value is $869.57. Paying $869.57 today for $1000 one year from now gives you a 15% return on investment. The discount rate is basically the investor required annual return on investment of an organization (Higgins, 2012).
Valuation of the Firm and Equity of Great Eastern Toys:
At beginning, authentic valuation of company defines the base of superior investment along with more creditability. There are several approaches and methods, help to conclude the value of firm and equity share in Great Eastern Toys. Usually, the valuation of companies is clear as analyzed with another company as the earlier quoted equity share price. The value of equity share and firm can be impended by three different principles:
- Market value: it reveals to Great Eastern toys, this is the cost at the point of an organization is trading at a standard stock exchange. The major potion to realize under this loom is that the value of security trading on stock exchange that could not provide the full image of their fundamental capital structure and its prospective. The value of share and firm usually performs neither most of the market division nor authentic situation of the company.
- Liquidation value: it represent that the received amount from selling of entire asset and surroundings liabilities. In such methods, a quantity of assets might be measured accurately, intangible assets are brand value, goodwill etc. Liquidation value method helps for setting a benchmark under the company would not be esteemed; similarly the stakeholder will not get any profit (Chandra, 2011).
- Going concern value: the earning latent of the company entity is mainly approximated by using this value. It concludes that Great eastern is the everlasting body that is divides from their advertiser as well as would not be pretentious by different external actions.
Clarifying on the above mentioned approaches, the three diverse methods to evaluate the value of the company are enumerated underneath. The combinations of the subsequent methods are the objective of valuation. For example, merger, acquisition, purchase or sale of the company, funding, IPO, financial reporting.
Earning based valuation: In this approach, business value is depends on the current price of future cash flow of Great Eastern Toys. Future earnings of an organisation are approximate through making modification for amazing products alike seasonal fluctuation (Titman et al., 2017). The entire investors watch over the earning of the business.
In addition to, all investor used to review the earning profit of the company, before investing their money. The key factor of future earning as the scenario of the business operation as well as probable enlargement opportunities are encouragement of their stock price. Costs, sales, liabilities and asset are the major factors for determining earning. The general valuation model in this valuation is Discounted Cash Flow Method.
Equity valuation model could obtain either relative or absolute values. Therefore, absolute valuation models get the intrinsic value of asset in addition to usually acquire the form of discounted cash flow models.
Asset based valuation: the value of the company is measured by the book value of their net asset, in this approach. This is a preferable valuation method for real estate or investment, where the specified the company is needed to be restructure or reinvented by the management. For collecting fair value of share, adjustments for patents, goodwill, inventory undervaluation, bad debt etc, should be made to the book value of equity share (Molina &Preve, 2012).
Following accumulating investments, net fixed assets, current assets, intangible assets as well as deducting long and short term liabilities, along with the available amount to equity shareholders is gathered. This is separated by the numeral of equity shareholders to enter at Net Asset Value or NAV per share.
Market based valuation: Relative equity valuation models approximate the value of stock connected with a different stock and concludes on the multiple uses. Therefore, the multiple is the term of ratio among two different financial variables. The figures of the ratios are either their business value or the market value of the company.
The business value of Great Eastern Toys is naturally determined by the market value of their share capital along with equity share and debt, net cash. The statistic of the compound is an accounting metric, for example, sales, earnings, or book value in the company.
The multiples could be designed from per-share value, such as, earnings per share, market price per share, book value per share or sales per share. There are several common price multiples used beneath this valuation method, such as
- Price to earnings ratio
- Price to book value ratio
- Price to cash earnings ratio
- Profit margin
The value of the company will be depending on the above ratios, to determined he financial position of the company.
| Current Assets | 1997 | 1998 |
| Cash | 7.75 | 2.4 |
| account receivable | 24.8 | 33.325 |
| Inventories | 29.45 | 42.55 |
| prepaid expense | 0.925 | 1.163 |
| Total current Assets | 62.925 | 79.438 |
| Current Liability | 1997 | 1998 |
| Short term debt | 18.58 | 22.774 |
| Account payable | 15.5 | 19.85 |
| accurad exp | 3.705 | 5.108 |
| Total current Liability | 37.785 | 47.732 |
| Working capital | 25.14 | 31.706 |
| Change in WC | 6.566 |
| Net income | 7.631 |
| Depreciation | 5.7 |
| Interest expense | 6.125 |
| (1-tax rate) | 0.835 |
| Capital expenditure | 36.765 |
| Change in net working capital | 6.5 |
| FCFF | Net income+ depreciation+ interest expense*(1-tax rate)- capital expenditure- change in net working capital |
| FCAA | -27.05476 |
From the above calculation, it is found that the value of the free cash flow is $-27.05476 HK$ million. In order to calculate the value of the free cash flow, the use formula is Net income+ depreciation+ interest expense*(1-tax rate)- capital expenditure- change in net working capital.
DDM valuation:
Dividend discount model (DDM) is a strategy for measuring a stock’s cost by reducing anticipated profits to the present esteem. In the event that the esteem acquired from the DDM is higher than the present exchanging cost of offers, at that point the stock is underestimated.
The DDM has numerous varieties that vary in many-sided quality. The Dividend discount model, for instance, considers a time of high growth took after by a lower, consistent growth period. For additional on esteeming a stock utilizing this model; Valuing a Stock with Supernormal Growth Rates. The most widely recognized and direct figuring of a DDM is known as the Gordon growth model (GGM), which expect a steady profit growth rate and was named in the 1960s after American market analyst Myron J. Gordon. To discover the position of Great eastern toys, cost of a profit and the Stable Growth stayed at suitable position (Gundersen &Garasky,2012).
Assume thatGreat Eastern toys paid a dividend of $1.80 per share this year. The Great Eastern toys expect dividends to grow in perpetuity at 5% per year and the company’s cost of equity capital is 60%. The $1.80 divided is the dividend for this year and needs to be adjusted by the growth rate to find D1, the estimated dividend for next year. At this moment, the annual cash dividends paid out by Great Eastern toys between 1996 and 1998 are $4.8, $4.8 and $3.1millionsrespectively. The dividend growth of Great Eastern toys in between 1999 to 2004 are 30%,30%, 25%, 20%, 10% and 3%, which equals average growth of about 2%. Assume an investor has a required rate of return of 5%. Using an estimated dividend of $2.12 at the beginning of 2004, the investor would use the dividend discount model to calculate a per-share value (Kramer,2012).
Value of the company based on the DDM model
While the GGM method of DDM is widely used, it has two well-known shortcomings. The model assumes a constant dividend growth rate in perpetuity. This assumption is generally safe for very mature companies, but newer companies have fluctuating dividend growth rates in their beginning years.The second flaw of this DDM is that the output is very sensitive to the inputs. In Great Eastern toys, if the dividend growth rate is lowered 10% to 3%, as a result, the stock price of the company is diminishing. Therefore, DDM model impact on the Great Eastern Toys, DDM model is effective on the financial aspect of Great eastern toys that are significant and could not value the raising growth company like their corresponding companies. As well as, we shows that fair price of equity share is extremely perceptive for growing rates and requiring rate of return, one percent vary may impact the valuation of the Great Eastern Toys so as of 10% to 20%.In this part, the dividend is the major part of an organization that should be related to the earning of the firm (Dew & Xiao, 2011). In addition to, Great Eastern Toys ought to maintain a constant dividend payout as a replacement for the variable payout based on return. According to analysis, Great eastern toys should borrowed cash to pay dividend. The usual recompense of dividends implies that Great eastern toys have developed and there might not be much instability associated with the growth earnings and rates. This is significant for investors who favor to invest in stocks that disburse regular dividends. Therefore, the dividend of Great Eastern Toys may pay by cash. Great Eastern Toys be inclined to remain their dividend payments in relation with the industry basics. That implies that Great Eastern Toys might not desire to manipulate their dividend payments as the association can openly guide to price of stock instability.
Value of the company based on the DDM model = (Dividend per share)/(Dividend rate – Dividend growth rate)
| Dividend per share | Dividend rate | Dividend growth rate | Value of the company | |
| 1999 | 32.22 | 0.05 | 0.3 | -128.88 |
| 2000 | 32.22 | 0.05 | 0.3 | -128.88 |
| 2001 | 32.22 | 0.05 | 0.25 | -161.1 |
| 2002 | 32.22 | 0.05 | 0.2 | -214.8 |
| 2003 | 32.22 | 0.05 | 0.1 | -644.4 |
| 2004 | 32.22 | 0.05 | 0.03 | 1611 |
References
Brealey, R. A., Myers, S. C., Allen, F., & Mohanty, P. (2012). Principles of corporate finance. USA: Tata McGraw-Hill Education.
Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management. UK: Cengage Learning.
Chandra, P. (2011). Financial management. USA: Tata McGraw-Hill Education.
Dew, J., & Xiao, J. J. (2011). The financial management behavior scale: Development and validation.
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. UK: Pearson Higher Education AU.
Gundersen, C. G., &Garasky, S. B. (2012). Financial Management Skills Are Associated with Food Insecurity in a Sample of Households with Children in the United States, 2. The Journal of nutrition, 142(10), 1865-1870.
Higgins, R. C. (2012). Analysis for financial management. USA: McGraw-Hill/Irwin.
Molina, C. A., &Preve, L. A. (2012). An empirical analysis of the effect of financial distress on trade credit. Financial Management, 41(1), 187-205.
Titman, S., Keown, A. J., & Martin, J. D. (2017). Financial management: Principles and applications. UK: Pearson.
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