Executive summary for Corporate Finance Valuation - Essay Example

?Corporate Finance Valuation Task Corporate Finance Valuation Executive summary This paper provides comprehensive analysis of corporate finance valuation with focus to shareholders value evaluation. The element is a potential performance or financial indicator in various corporations. This is because it gives clear information on the return on investment and the shareholders value that is payable to investors. The analysis focuses on Balfour Beatty Corporation that is a high rank engineering company with global presence. The company provides a wide range of products and services with an aim of meeting its shareholders and customer needs promptly. This report provides an in-depth analysis of the company’s shareholders value, its key variables, sensitivity evaluation and issues that threatens to compromise its performance. The aim is to identify its performance level and viability that is critical in enabling accurate investment decisions. Introduction Balfour Beatty plc is a renowned corporation that focuses its synergy in providing quality infrastructural and engineering services. The company strives to achieve its key objective that is to be the leading producer of quality engineering services globally. It is also set with an aim to maximize its key resources to enhance shareholders value. The company started its operations in the year 1909 as a small entity with a capital base of 50,000million Pounds. It has recorded a tremendous growth that has seen it expand its network to over 80 countries. The company’s exemplary performance is attributable to its effective shareholders value management and product development. This has enabled it to record high equity value in comparison to equity costs. Apart from its best-known engineering services, the company specializes in offering solutions such as infrastructure investments, construction guidelines and other professional services. These products enable consumers to execute their activities pertaining to construction or infrastructural developments with much ease. They are instrumental in ensuring absolute technological transformation in diverse facets of operation. In 2008, the company was named the worlds most admired and the largest infrastructural corporation by revenue due to its wide range of products that result to high performance. The company is also credited for its strong focus on shareholders value that remains a key driver of performance in most settings. The element that defines the amount of return on investment shareholders are to achieve is vital in ensuring sustainable growth. It has been one of the key drivers of the company’s performance and growth since it attracts more investors who inject colossal sums of funds. These funds help in steering growth and service delivery to customers who hold high expectations. Indeed, any organization that aspires to record exemplary performance or attract more investors especially in the current business environment should develop viable resource maximization techniques. This report aims at giving credible information based on corporate finance valuation with focus to shareholder value analysis. It adopts Balfour Beatty plc as its case study. Definition of SVA and its role Shareholder value analysis (SVA) is a performance indicator that measures the return on investment value that a company remits to shareholders (Ranadiv, 2009, P, 1). It gives a clear indication or information on the amount investors receive per shares held. It also measures a company’s financial capacity and value by comparing the returns that stockholders receive every financial year. This enables managers to make credible decisions pertaining to performance and attraction of new investors. Consequently, it facilitates investments decision-making since it gives investors a prior knowledge on a company’s performance and the expected returns (Ranadiv, 2009, P, 1). This is vital since investor’s interest is to earn returns on their investment and to receive refunds of the capital contribution. Justification of SVA model Trotta (2003, P, 93) noted that shareholder value that can be referred to as shareholder value maximization or shareholder value model, implies to an ultimate measure of a corporation’s success. It gives a clear indication on how a corporation’s equity revenue is shared among shareholders. It also gives credible information on how a corporation is able to maximize on its resources in ensuring high productivity. This is evident from the realizable amount in terms of revenue that is generated. Normally, revenue should surpass the amount of capital or resources that are available. This contributes in attracting more investors and expansion of operations that is vital in any setting. Justifiably, corporations should perform systematic SVA to enhance their market capitalization, attract more investors, increase wealth of shareholders and improve ROI. This requires in-depth understanding of key financial indicators or ratios. The indicators that are categorized under stability, efficiency and profitability ratios include sales equity, equity turnover and cost of equity, profit margin, working capital and return on equity. These financial ratios are critical in establishing whether the company is in the right path of performance or may go under liquidation. They are the central accounting pillars that inform investment decisions in most jurisdictions (Trotta, 2003, P, 130). Therefore, Balfour Beatty plc managers should apply them in performing their shareholder value analysis. Valuation of Balfour Betty Company using the shareholder value analysis (SVA) method and in numerical terms Balfour Beatty Company that started its operations in 1909 with a capital base of 50,000Million Pounds is currently generating a net income of 11 billion as its income value. Its capital strength has continuously grown including its asset base. It has been recording an upward profit margin over the years. In 2011, its profit margin was at 0.01686% while its operating profit was at 168million pounds from 148million pounds in the years 2011 and 2010 respectively. From the figures, it is clear that the company’s net equity was in the increase. This in turn led to high shareholder return value that is dependent immensely on the income that is available (Johnson, 2001, P, 300). The company’s working capital value also recorded an increase from 2255million pounds in 2010 to 2272million pounds in 2011. Its asset base stood at 140billion and 89billion in the years 2011 and 2010 respectively. The company’s cost of equity was at 0.09415% while its cost of debt was at 5.10%. The values were minimal in comparison to equity and debt values that stood at 996, 00% and 335, 00% respectively. This depicts effective balance between cost and revenues. The statistics shows the company’s overall performance level that has been recording a systematic increase. Its equity value remains high with sound working capital and asset base that gives it a promising future. Indeed, its exemplary share return value will continue increasing due to the evident effective financial management. Justification or explanation of the variables and How they are used in the valuation model in numerical terms Financial indicators or variables are key elements that give the financial state of affairs in an institution. The variables play a central role in influencing investment decisions between stakeholders and management. They are able to give affair picture of performance on whether the company is making profits or losses (Johnson, 2001, P, 300). Indeed, financial analysts, accountants and investors rely on the value of corporations financial variables in identifying their performance level. The key financial variables that they use include shareholder value analysis where they analyze the strength of equity value, earnings per share, divided per share and earning yield. Equity cost, return on equity and working capital also form key variables that define the performance level in an institution. In particular, earnings per share EPS measures the value of earnings or payments made to shareholders in proportion to shares held (Lescuyer & Lucidarme, 2008, P, 1). The variable measures the return value per share held and performance. It enables investors to get prior knowledge on the return value that they are to get in a period. This value is dependent on the income capacity of accompany. That is if the company performs dismally the value would be minimal while high performance results to high EPS (Lescuyer & Lucidarme, 2008, P, 3). In review of Balfour Beatty plc EPS value, the company has been recording a systematic growth since its inception. Its EPS value was 26.70% in 2011 compared to 23% in 2010. This shows a remarkable growth over the period in terms of EPS value. The growth was attributable to the company’s excellent financial management and optimization of resources. It was also due to low cost obligation that exposes various institutions to poor performance. In 2012, it is EPS value also increased by over 2.5%. The growth in the EPS value has enabled the company to attract more investors and high working capital. The increase in capital base has enabled it to expand its service centers, asset base, quality value of its products and support systems. The aim is to increase the financial performance, meet consumer needs and increase shareholder value. Divided paid value is also a key indicator that depicts whether shareholder value is met or not. It is a critical element since shareholders earnings are in most cases in terms of the divided that is declared. Divided also takes into consideration the profitability level; therefore, it is often declared in proportion to the income value. Companies that seek to record high growth should strive to have positive or more than 1% divided value (Lescuyer and Lucidarme, 2008, P, 23). That is the return amount payable to shareholders should not be below 1% per share to attract investors. Balfour Beatty plc has a high and positive divided value. The company recorded 13.80% up from 12.70% divided value in 2011 and 2010 respectively. This shows that for every shares held, 13.80% ROI was paid to investors in 2011. The increase in divided value gives an excellent performance indicator that explains the company’s promising future. The increase also shows how effective the company strives to meet its shareholders expectations. Consequently, divided yield is a vital financial indicator that measures shareholder value. It aids the analysis of a corporation’s financial stability and the amount that it generates as divided yield value. Balfour Company has appositive divided yield value that stood at 5.20% in 2011. This represented 0.9% increase in value in comparison to the previous figure that was 4.10%. Therefore, the company has a strong divided yield value that is attractive to investors. This will steer its growth and expansion plans. Belfour Company has also been reporting a strong profit margin over the years (Friedlob & Plewa, 1996, P, 121). It reported a profit margin of 0.01686% in the year 2011. This represented an increase in its profit margin from 0.01452% to 0.01686% in the year 2010 and 2011 respectively. This shows that the company’s cost of sales has been weigh below the sales value. It also shows effective management of cost implications or operating expenditure. As indicated in the company’s financial statements, Balfour Beatty’s operating profit was valued at 168% in 2011 up from 148% in 2010. The figures show positive performance due to low expenditure and effective management of cost of sales. Evidently, the net income value is what defines the shareholders return capacity. If the income value is, low shareholders will receive minimal returns while high-income value means high returns to investors. Therefore, the company is in the right track to achieving its set performance levels. Akalu (2003, P, 83) noted that return on equity ROE is a financial ratio that measures a corporation’s ability and strength in meeting shareholders expectations. It gives a critical measure on how accompany uses its shareholders resources or money and the return value. Balfour Beatty Company has appositive return on equity value that is depicted by how well it utilizes its resources. This is evident on the income levels that the company’s business units are able to generate with the limited resources. Its current resource base stands at 140 billion that generate 11billion income per year. The performance trend is bound to improve further in the future especially with the attraction of new investors who are set to inject more funds to drive its operations. The company has also been recording high equity and debt values since its initiation. Its equity value stands at 996, 00% that gives a high EPS to share holders while its debt value stands at 335, 00%. The big difference between the two figures shows how well the company is managing its resources and debt obligation. In comparison to the cost element, the company’s equity earnings were beyond equity cost that stood at 0.09415% in 2011. Its debt value was also higher that the cost of debt that stood at 5.10% in 2011. The figures provide a clear indication that the company will have a promising future in terms of expansion, performance and improvement on shareholders value. Sensitivity analysis of the company Apart from shareholder analysis, other key variables influence Balfour’s financial valuation. The variables include financial profitability, efficiency and stability indicators. These variables indicate a company’s profitability levels, efficiency and growth stability. They ensure proper understanding of a company’s performance level that is vital in steering strategic decisions by stakeholders (Martin, 2006, P, 12). Particularly, profitability variables that have been influencing investment decisions in Balfour Company include net profit margin that shows income capacity, return on equity and return on assets. The company records high values on these financial valuation elements. This has been facilitating positive investment response from potential investors. The company’s stability ratios that include current ratio, quick ratio, debt asset and equity ratios also influences its valuation. Their values depict the stability nature of accompany and if the company is a viable candidate for investment initiatives. It records a low debt equity ratio that stands at 0.25769%, high current ratio and quick ratio. Consequently, the company is efficient in terms of inventory, debtor and creditors management. It has less inventory turnover period that boost its sales capacity and income levels (Martin, 2006, P, 12). Its debt collection period is also reduced to 5days. This ensures elimination of possible debt write offs that leads to high cost of operation. These elements are central in identifying a company’s productivity and shareholders return value since they give credible data that is generated from the figures contained in the financial statements. Comparison of the actual value of the company with the SVA estimates Comparatively, the company’s financial statements reports appositive growth in its actual values. The actual values show a sequential or systematic increase in performance. They are the figures that aid shareholder analysis since they are the data used in computing key financial indicators. They can also enable an individual to predict the results of the shareholder value analysis (Hawkins, Turner & Hailstone, 2008, P, 3). As noted, actual figures gives the realizable performance values while estimated figures gives the projected values. However, they both give performance indications that can influence investor’s decisions. The estimates are derived from the latest actual performance level with an aim of setting an attainable performance benchmark. Balfour’s company’s actual and estimate values are proportional and have been giving reliable results. The issues the company is facing Management complications and financial mobilization strategies have been the key challenges that Balfour Company has been facing in the recent past. This has threatened to slow down performance in the institution whose construction services are crucial in various economies. The current leadership of the company affirms that there have been some management challenges especially in the business units and franchises (Hebb, 2008, P, 64). The challenges have also been faced in managing business mergers and ensuring that its strategic partners provide quality support services to customers. In particular, effective management has been lacking in the company due to poor communication and planning of activities. This has been compromising coordination of activities, allocation of resources and the development of viable work plan. This has been a key issue since the company has several control centers and business units including strategic mergers. Indeed, its large business network has made it difficult for effective administration. This has prompted the current leadership to advocate for the adoption of conventional or non-bureaucratic practices. This is to ensure that the favorable operating policies are formulated promptly (Hebb, 2008, P, 64). It is also to ensure that the execution of business processes are within quality limits to improve performance. Consequently, lack of effective and conventional resource mobilization techniques has been hindering the company’s rapid growth. Its current resource mobilization technique limits its financial capacity since it is dependent on investors’ choices. It is important to note that, the company has been relying on investors’ funds as its main source of capital. The strategy has been fruitful for along period however, it cannot facilitate rapid growth especially in the current business environment (Carnevale & Schulz, 1990, P, 89). This is a hindering factor since it cannot enable the organization to mobilize huge sums of money as other new techniques would. This may expose the company to a downward performance trend since it may not be able to compete effectively. Therefore, the company should find it necessary to adopt modern resource mobilization techniques such as issue of bonds to guarantee its sustainability. Conclusion As noted, SVA measures corporation’s success in terms of performance, expansion and the strength of shareholders equity value or returns. It enables managers and investors to establish the strength or weakness of a corporation that guides them in decision-making. Any organization with strong performance orientation should adopt this practice to ensure sustainability in growth. Indeed, Balfour Beatty Corporation that operates in the construction industry should adopt conventional management practices and financial administration techniques. It should also adopt lean construction technique that provides requisite incentives for exemplary performance. The technique ensures optimization of resources, enhancement of quality and effective distribution of equity revenues. Consequently, the company should focus on enhancing shareholders value as indicated in its financial blueprint. This will enable the company to satisfy is shareholder needs and attract more investors. It will also build trust among stakeholders and propel the company’s image as the best corporation with quality financial administration systems. References Akalu, M. M. 2003, Projects for shareholder value: a capital budgeting perspective = Projecten voor aandeelhouderswaarde: een kapitaalbudgetteringsperspectief. [Amsterdam], Thela Thesis. Carnevale, A. P., & Schulz, E. R. 1990, Return on investment: accounting for training. [Alexandria, Va.], American Society for Training and Development. Friedlob, G. T., & Plewa, F. J. 1996, Understanding return on investment. New York, Wiley. Hawkins, A., Turner, C., & Hailstone, P. 2008, The improving profitability pocketbook. Alresford, Management Pocketbooks. Hebb, T. 2008, No small change: pension funds and corporate engagement. Ithaca, ILR Press/Cornell University Press. Johnson, R. E. 2001, Shareholder value a business experience. Oxford, Butterworth-Heinemann. Lescuyer, P., & Lucidarme, T. 2008, Evolved packet system (EPS) the LTE and SAE evolution of 3G UMTS. Chichester, West Sussex, England, J. Wiley & Sons. Martin, D. 2006, Corporate governance: Practical guidance on accountability requirements : A specially commissioned report. London, Thorogood. Ranadiv, S, 2009, Shareholder Value Analysis Viewed on 2nd Jan 2013 Trotta, R. J. 2003, Translating strategy into shareholder value: a company-wide approach to value creation. New York, NY [u.a.], AMACOM. Read More