The valuation of the National Grid company - Assignment Example

The Valuation of the National Grid Company [Type the document sub [Pick the Equity valuation of National Grid Company National Grid Company is one of the leading stocks traded on FTSE 100 index. The equity valuation of National Grid Company using the residual income model is as followYear2012201320142015Retained Earning12,20414,27115,04215117.21Growth Rates 16.9%5.4%0.05%Source: Investor.nationalgrid.comAs retrieved from the half year reports of National Grid company plc, the retained earnings are shown above from 1st October 2012 and onwards for the period ending 30th September of each year in succeeding years.

As can be seen from the table above in 2013, the retained earnings reached at the peak level i.e. increased by 17% afterwards the retained earnings showed an increase of 5.4%. From 2015 and onwards, the stable growth of 0.05% was assumed. The rationale of stable growth is discussed in the next section of the report. Equity ChargeValuesExplanationSourceRf0.45%6-month tbill return of UK(Reuters, 2015)Beta0.331Retrieved from FTSE stock trade(Reuters, 2015)Rm2.00%6-month return of FTSE 100(yahoofinance, 2015)MRP(Market Risk Premium)1.55%(Rm-Rf)r=CAPM=Rf+β(MRP)0.

96%BV0£8,343MioBook Value of Equity(Nationalgrid, 2015)Outstanding Share£8,343MioTotal Value of Equity using the above mentioned equation and the values mentioned in the tables above the 877.361. 2. Choice of Valuation MethodThe method adopted for the purpose of calculating the value of National Grid equity is referred to as the Residual Income Growth Model. The reason behind the selection of the model can be explained with the help of the following advantages2.1 Advantages of Selected Model The advantages and disadvantages are retrived from the book entitled “11th Hour Guide for 2015 CFA Exam” (Wiley, 2015, p. 217)1. The model uses accounting data, which is easily accessible2.

The model can be used even if the company do not pay dividends or have negative free cash flows3. The model can be used even in case of uncertain cash flows4. The major advantage of the model is that it focuses on accounting profitabilityHowever, the model has some shortcomings as well which are as follow2.2 Disadvantages of Selected Model1. The accounting data can be manipulated by the management2. Accounting data needs to be adjusted before using in the model3. It assumes Clean Surplus relation holds3.

Analysis of StockNational Grid Company Plc is a multinational company headquartered in London. The primary business includes the supply of electricity and gas utility. The company is listed both in London Stock Exchange and FTSE 100 index. It is categorized under the diversified utilities industry. The company has 20th largest primary listing on London stock exchange. The company also has the secondary listing on NYSE (Hoover, 2011). The market price on October 1st 2012 was £624.68(closing price of London stock exchange on Oct 1st 2012) (yahoofinance, 2015).

Comparing the market price with the intrinsic value calculated using the residual income model above shows that the Stock of National Grid Plc is undervalued as compared to the intrinsic value. The rationale for the stable long term growth rate of 0.05% was that the National Grid is expected to reach the stable level of supply requirement of gas in UK because in the beginning of 2015, which shows minimum shortfall of 15mcm in London, which can be managed easily afterwards through the flows from Norway and Britain with the lingled pipeline.

National Grid is in the process to further improve the supply side by the end of 2015, which may lead to the stabilized phase of National Grid Plc (Reuters, 2015). Therefore, after 2015 and onwards the growth in retained earnings are expected to be minimal i.e. around 0.05%. On May 1st 2015, National Grid Stock has reached at the level of 886.30 which is slightly overvalued from the intrinsic value calculated as on 1st October 2012. Therefore, it can be implied that the price of National Grid Stock is mean reverting.

Bibliography1) Hoover, 2011. Hoovers Handbook of World Business. s.l.:Reference Press.2) Nationalgrid, 2015. National Grid Investor. [Online] Available at: http://investors.nationalgrid.com/3) Reuters, 2015. Bonds & Rates. [Online] Available at: http://markets.ft.com/research/Markets/Bonds4) Reuters, 2015. Equities. [Online] Available at: http://markets.ft.com/research/Markets/Tearsheets/Summary?s=NG.:LSE5) Reuters, 2015. UK Gas Prompt Prices ease on Increased Supply From Norway, s.l.: Reuters.6) Wiley, 2015.

11th hour Guide for 2015 level 2 CFA exam. s.l.:Jhon Wiley & Sons.7) yahoofinance, 2015. Yahoo Finance UK & Ireland. [Online] Available at: https://uk.finance.yahoo.com/q/hp?s=%5EFTSE