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Corporate Finance: Paper 1 - Essay Example

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The equity research report on Jordan Telecom prepared by AJIB highlights the company as a growing concern that has adopted an effective financial strategy. The company’s performance has been indicated as strong in terms of its ability to generate improved returns on its assets…
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Corporate Finance: Paper 1
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"Corporate Finance: Paper 1"

Download file to see previous pages The report applies the discounted cash flow (DCF) method using a 9.5% risk free rate to arrive at an estimated fair value of JD 618.8-679.9 million for JT. However 9.5% risk free rate will have a high return which in turn demands high end risks which is completely missing from the report. The UK had a risk free interest rate of 2.24% in October 2014 which has dipped to 2.21% in November 2014. The USA had a risk free rate of 2.33% in October 2014 and currently has 2.31% in November (Trading Economics, 2014) Overlooking the impact of regulatory environment on a firm’s operations and business performance is not only unrealistic but also can result in poor strategic planning and ineffective business decisions (Fernandez 2007). Jordan has a risk free interest rate of 3% (Rasmala Investment Bank, 2011).
Overlooking the impact of regulatory environment on a firm’s operations and business performance is not only unrealistic but also can result in poor strategic planning and ineffective business decisions (Fernandez 2007).
Since Beta value is close to 1.0 it is favourable as it indicates that the stock has moved a little less than the market. The beta indicates that JT has a favourable incline as the future cash flows are expected to be higher.
While the facts and figures represented in the report present a lucrative business environment that supports capital investment in developing the existing operations, it overlooks the financial and operational risks posed by increasing competition and regulatory changes in future. The CAPM of the company used to derive the Beta value in the AJIB report has been indicated as a favourable indicator of the company’s performance.
The report does not provide a true picture of the WACC as the cost of debt and equity are not correct. The cost of debt for Jordan banks are 3% (Jordan Kuwait Bank, 2014) instead of the 6% assumed. The risk free rate is also incorrect as the actual rate stands at 3%. This means that the cost ...Download file to see next pagesRead More
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