Strategic Corporation Finance at Morrison Plc - Case Study Example

Strategic Corporation finance: Case Study Morrison PLC Strategic Corporation finance: CaseStudy Morrison PLC Stock market analysis provides a deeper insight to determine share market valuation. Share valuation indicators have been analysed in the paper to determine share value of Morrison PLC. In addition, the paper critically analyses investment decision and recommendation for share value of Morrison PLC. Moreover, an understanding about the share market movement has been illustrated through various theories related to the share price movement of Braemar Shipping Services. Task 1 a) Net Asset Value Net asset value is the mutually funds price per share or exchange traded fund (Brigham & Ehrhardt, Financial management: theory and Practice, 2011). It is the value of the entity’s asset that are less than or more than the value of its liabilities (Brigham & Houston, Fundamentals of Financial Management, Concise Edition, 2011). The mutual fund is registered at the U.S Securities and Exchange Commission and is redeemed at their net asset value. Net asset value is equivalent to the total equity of the organization that is then divided by the shares outstanding. Net Asset Value (NAV) $ Net Asset 4,692 Less: Overstatement of Intangible Assets (40) Add: Understatement of Property, Plant and Equipment 30 Less: Bad Debt (7) NAV 4,675 Number of shares 2,327 NAV per share 2.01 The Net Asset Value (NAV) of Morison PLC is 2.01. This indicates that value per the share is less than the current price of the company’s shares. The fund value of the company is double of the invested fund of the company. Morison’s shares are bought and sold at the mutual fund value of 2.02 in the market, whereas the current share price of Morison is 2.39 this shows that the share price of the company is overvalued. b) Cost of Capital Cost of Capital means the cost of the funds that is used for financing or carrying out the operation of the business (Ross & Vesterfield, 2013). The cost of capital of the organization is dependent on the mode of financing on the factors such as, operating history, profitability, credit worthiness etc. therefore, the new organization shall have a higher cost of capital as it does not has operating histories. i) Capital asset pricing model Capital asset pricing model (CAPM) describes the relationship between the risks and the expected returns of the organization (Damoddaran, 2012). The cost of equity Ke can be calculated using CAPM as follows. Ke = rf + β x (rm- rf) rf = risk free rate = 3 % β = beta of stock = 0.5 rm = return on market = 5 % By inputting values in the CAPM equation, Ke = 3 + 0.5 x (5-3) = 4 % Cost of Debt The cost of debt, Kd is considered the rate of coupon on bonds, which in this case is the risk free adjusted for tax. Tax rate is assumed to be 0%. Kd = rf x (1 – tax rate) = 3 % x (1 – 0%) = 3 % Weighted Average Cost of Capital (WACC) is given as (D/D+E)*Kd*(1-T)+(E/D+E)*Ke Number of Shares 2,335.05 P 238.60 T 0.0% E 557,143 Value of Redemption of Long term liabilities 102 D 322,728 Ke 4.00% Kd 3.00% D+E 879,871 WACC 3.63% The weighted average cost of capital is representative of the cost a company incurs in obtaining finance through sources including debt and equity. Keeping in view the weightage determined for finance obtained by the company from both debt and equity sources, it can be stated that there is a greater weightage for equity as compared to debt. This implies that Morrison is carrying out its operations by obtaining finances mostly from equity sources and has the opportunity to increase its reliance on debt financing. Moreover, as the determination of WACC is also representative of the risk an investor can take with regard to the investment in the company’s stocks, the value of WACC for Morrison, which is 3.63 %, reflects fewer opportunities for investment in the company. c) Dividend Growth model Dividend Growth model measure dividend per share and the expected growth through valuation by assuming dividend growth at a constant rate in perpetuity (Pinto, Henry, & Robinson, 2010). The model is usually applied to the companies that are mature and stable with a steady dividend growth. The models solve problems related to the present value of the infinite series of future dividend. By analysing the dividend Growth model of Morrison the constant rate of growth of the organization can be calculated, it allows investors to determine the value for a stock through evaluating its pay out ratios. Morrison has a sustainable payout ratio and average dividend yield ratio this indicates a health growth of the company. The price of the company’s share can be determined using the dividend growth model as. P = d1 / (Ke – g) Where d1 = Dividend at t1 Ke = Cost of Equity g = growth rate Share price when g = 0 0.12 x 2335.06 / (4% – 0) = £70.05 Share price when g = 2% 0.12 x 2335.06 / (4% – 2) = £140.10 The above-presented calculations provide two scenarios. First of all, when growth in dividends is assumed to be zero, the forecasted price of company’s stock has declined to £ 70.05. On the other hand, when the forecasted rate is assumed to be 2 percent, there is a significant increase in the stock price noted, which is £ 140.10. d) Value per share earnings ratio Value per share earning ratio compares company’s current share price with per share earnings to its competitors and similar firms in the industry (Brigham & Houston, 2009). The retail industry has a P/E ratio of about 15, whereas, the P/E of the Morrison was 9.57 in Feb 2014 and 8.29 in March 2014. This shows that the competitors in the market have a better P/E that has led to a higher P/E of the industry making shares of other companies more attractive than those of Morrison. Price Earnings Ratio = Price per share / Earnings per Share On 2nd February 2014, the share price was 240p EPS = 10p P/E = 240/10 = 2.4 On 20th March 2014, the share price was 208p EPS = 10p P/E = 208/10 = 2.08 The industry average for P/E ratio has been 15, whereas the P/E for Morrison has been around £ 2. This in turn shows that the profitability of Morrison is comparatively lower than the industry averages. These findings indicate that there is a need of improvement in the revenues generated by the company in the near future as the company has placed significant reliance on raising finance from equity sources and therefore it is pertinent to ensure a stable and near industry average price for its stocks. Task 2 By analysing the share value of the Morrison PLC, it shall be noted that the organization’s share-value has declined throughout the period (Morrison PLC 2014). This indicates the organization’s performance among its peers and competitors is relative low. In addition, the decline in the value per price earning ratio of the share prices during Feb 2014 - March 2014 shows that the competitors’ performance in the industry has improved more than Morrison. This is because of the average P/E ratio of the industry being 15 percent (Morrison PLC 2014). However, the Net Asset value of Morrison PLC indicates that the share value of the company is less than the market price of its shares (Morrison PLC 2014). This shows that the share price of the company worth more than the estimated value of the company (Morrison PLC 2014). Therefore, the purchase of the share of the company can create problems for investors if there is further decline in the company’s NAV. This would eventually cause the marketing price of shares to fall. By analysing the cost of capital of the company, it shall be noted that Morrison PLC’s cost of debt remained 3.0 % and as per the CAPM the cost of equity is 4.0 %. The WACC was 3.63 %. This showed that the cost of debt is lower than the calculated cost of capital of the company (Morrison PLC 2014). This shows the company’s estimation for the debt is lower than the calculated capital cost due to which the company has to pay more to acquire loans and borrowing (Morrison PLC 2014). The costing for future debts of the company is low due to which it may influence the budgeting of the company, the estimate of the company for the debt is lower than the actual debts it has to pay off for acquiring loans in the future (Morrison PLC 2014). Therefore, the expenditure for the further expansion and growth of the business operation requires more money than it has estimated due to which the share value of the company may decrease if the company plans for further expansion or initiating other business operation (Morrison PLC 2014). Lower cost of debt estimated by the company highlights that the return of return the company has estimated on the investment is insufficient to satisfy the expectation of the contributors of the capital due to which the dividend and the share value of Morrison PLC may decline if the company engage in further expansion of its operations. This indicates that Morrison shall increase its P/E in order to compensate the cost of its capital (Morrison PLC 2014). The decline in the P/E ratio depicts that the company’s rate of return or profitability on per share is declining as compared to its competitors in the market. This reflects that Morrison’s share value is at risk, a great decline in the share value of the company can be determined, as the performance of the company is low than its competitors and the cost of the debt is lower than the cost of capital model’s calculations (Yahoo Finance, 2014). The dividend history of Morrison PLC indicates that on an average 10.17 percent increase in the growth in dividends has been increased whereas decline in the earning per share of the company has been noted in 2014 (Morrison PLC 2014). The company has a positive trend in dividend payment in the retailing industry; however, the decline in the earning per share can negatively impact the dividend payments of the company in times to come (Whitman & Diz, 2013). In addition, the dividend growth of the company has been relatively higher than the above than its peer in the industry; the growth rank of Morrison PLC among its competitors is a noticeable thing for the investors. b) By analysing the stock history and share value of the Morrison PLC it can be concluded that the strong dividend history of the company and the net asset value of the company are a positive indicator, therefore the investing in Morrison PLC share can be beneficial in times to come. However, the external factors or the operation of the company has greatly influenced the earning per share of the company. The cost of capital of the company is higher than the cost of the debt, this indicates the further growth in the company may negatively impact share vale of Morrison PLC. In the past five years, the P/E of Morrison PLC has increased throughout the time, but in 2014 the negative P/E may also influence the dividend payout ratio of the company due to which the returns on the investment in Morrison stock seems to be risky. In addition, the performance of the other competitors in the market remains higher than Morrison PLC (Morrison PLC, 2014). This is because of the reason that Morrison stood below average P/E of the retailing industry due to which the dividend and share value of Morrison is at risk (Reuters 2014). By analysing the information, it can be concluded that the investment in Morrison PLC due to its decline in the P/E and underestimation of the cost of the debts can negatively impact share value of the company due to which the investment in Morrison PLC can be risky. Task 3 By analysing the share movement of Braemar Shipping Services PLC (13/02/14 – 01/05/2014) fluctuation between the share movements has been determined, highest 4.24 percent and lowest -4.81 percent during the period (The Telegraph, 2014). Several theories have been proposed to determine the share movement of the company (Panadian, 2009). Efficiency Market Hypothesis (EMH) can be applied for the technical analysis of the company’s share movement (Chandra, 2008). The efficient market hypothesis suggests that the share price is considered as a unbiased estimate of its intrinsic value. However, it does not mean that the market perfectly forecasts changes in stock prices. That is market movement, market trend, stock market discounts, stock market average, tends by volumes, and market noise. Internal and external factor greatly influenced the stock value of Braemar Shipping Services PLC (The Telegraph, 2014). On March 20, 2014, the company completed the sale of Casbarian. This shows that the company’s sales volume had increased due to decrease in the foreign exchange rate which has eventually increased the value of sales and profitability of the company and due to which the share value of the company has boosted (Interactive Investor 2014). Trend by volume can be applied to the increase in the stock price of the company this is because of the reason that the aggressive sales volume of the company has increased the price movement of the company. The decline in the stock price to -4.81% is noted on Feb 20, 2014. On this date, the stock price was at the lowest of the selected period. The fluctuation in stock rates and sales volume of the company has greatly influenced the share price of the company. The market conditions and trend has eventually impacted the performance of the company. Moreover, the announcement related total-voting rights of the company has influenced the stock price of the company, due to which a decline in the stock price of the company has been observed. Conclusion By analysing the information it shall be noted that the share value indicator has of Morrison PLC illustrates that the share price of the company have been greatly influenced due to which the investment in the company can be risky. However, strong historical performances of the company have been satisfactory in the retail industry. Long-term investment in the Morrison PLC can be of significant risk. Furthermore, internal and external factors greatly influence the share prices of the company due to which Braemer Shipping Company has been stimulated throughout the period. List of References Brigham, E. & Ehrhardt, M., 2011. Financial management: theory and Practice. Mason: cengage Learning. Brigham, E.F. & Houston, J.F., 2009. Fundamentals of Financial Management. Mason: Cengage Learning. Brigham, E. & Houston, J., 2011. Fundamentals of Financial Management, Concise Edition. New Jersey: Cengage Learning. Chandra, P., 2008. Investment Analysis and Portfolio Management. New Delhi: Tata McGraw-Hill Education. Damoddaran, A., 2012. Investment Valuation: Tools and Techniques for Determining the Value of Any. New Jersey: John Wiley & Sons. Interactive Investor, 2014. Interactive Investor. [Online] Available at: http://www.iii.co.uk/research/LSE:BMS/news/item/1008576/total-voting-rights [Accessed 4 May 2014]. Morrison PLC, 2014. WmMorrison Supermarketts PLC. Finance. Pureprint. Panadian, P., 2009. Security Analysis and Portfolio Management. New Delhi: VIKAS Publishing House. Pinto, J.E., Henry, E. & Robinson, T., 2010. Equity Asset Valuation. New Jersey: John Wiley & Sons. Pratt, S. & Grabowski, R., 2010. Cost of Capital: Application and Examples. New Jersey: John Wiley & Sons. Reuters, 2014. Reuters. [Online] Available at: http://www.reuters.com/finance/stocks/overview?symbol=MRW.L [Accessed 5 May 2014]. Ross, S. & Vesterfield, R., 2013. Fundamentals of Corporate Finance. New York: McGraw Hill. The Telegraph, 2014. Braemar Shipping Services - Latest Share Price. [Online] Available at: http://shares.telegraph.co.uk/quote/?epic=BMS . The Telegraph, 2014. Braemar Shipping Services - News. [Online] Available athttp://shares.telegraph.co.uk/news/?epic=BMS [Accessed 6 May 2014]. Whitman, M.J. & Diz, F., 2013. Modern Security Analysis. New York: John Wiley and Sons. YahooFinance, 2014. Wm Morrison Supermarkets PLC. [Online] Available at: https://uk.finance.yahoo.com/q?s=MRW.L [Accessed 5 May 2014]. Appendix Date Close Volume Adj Close* % Change 1-May-14 522.50 8,600 522.50 -0.05% 30-Apr-14 522.75 11,500 522.75 1.50% 29-Apr-14 515.00 1,300 515.00 -1.90% 28-Apr-14 525.00 8,000 525.00 0.96% 25-Apr-14 520.00 20,200 520.00 -0.95% 24-Apr-14 525.00 16,800 525.00 1.94% 23-Apr-14 515.00 13,900 515.00 1.98% 22-Apr-14 505.00 10,200 505.00 -1.99% 21-Apr-14 515.25 - 515.25 0.00% 18-Apr-14 515.25 - 515.25 0.00% 17-Apr-14 515.25 17,100 515.25 -0.43% 16-Apr-14 517.50 3,000 517.50 1.27% 15-Apr-14 511.00 3,800 511.00 -0.97% 14-Apr-14 516.00 22,200 516.00 1.18% 11-Apr-14 510.00 21,600 510.00 0.00% 10-Apr-14 510.00 21,200 510.00 -0.58% 9-Apr-14 513.00 20,400 513.00 -0.87% 8-Apr-14 517.50 3,700 517.50 -0.48% 7-Apr-14 520.00 19,300 520.00 1.56% 4-Apr-14 512.00 7,000 512.00 -1.82% 3-Apr-14 521.50 4,100 521.50 -0.14% 2-Apr-14 522.25 3,400 522.25 0.53% 1-Apr-14 519.50 24,400 519.50 -1.80% 31-Mar-14 529.00 12,700 529.00 2.12% 28-Mar-14 518.00 11,200 518.00 1.12% 27-Mar-14 512.25 3,000 512.25 1.44% 26-Mar-14 505.00 7,100 505.00 -3.81% 25-Mar-14 525.00 4,200 525.00 0.19% 24-Mar-14 524.00 8,800 524.00 -0.85% 21-Mar-14 528.50 12,100 528.50 -0.09% 20-Mar-14 529.00 17,100 529.00 4.24% 19-Mar-14 507.50 17,800 507.50 0.50% 18-Mar-14 505.00 15,000 505.00 0.00% 17-Mar-14 505.00 9,500 505.00 -1.37% 14-Mar-14 512.00 9,400 512.00 0.84% 13-Mar-14 507.75 2,800 507.75 0.00% 12-Mar-14 507.75 10,000 507.75 0.05% 11-Mar-14 507.50 17,500 507.50 0.69% 10-Mar-14 504.00 19,400 504.00 -2.89% 7-Mar-14 519.00 5,500 519.00 -0.19% 6-Mar-14 520.00 21,000 520.00 0.10% 5-Mar-14 519.50 12,600 519.50 -0.10% 4-Mar-14 520.00 12,900 520.00 1.07% 3-Mar-14 514.50 10,000 514.50 1.33% 28-Feb-14 507.75 5,700 507.75 0.54% 27-Feb-14 505.00 3,900 505.00 -1.85% 26-Feb-14 514.50 35,100 514.50 -0.10% 25-Feb-14 515.00 28,400 515.00 1.98% 24-Feb-14 505.00 8,700 505.00 1.30% 21-Feb-14 498.50 14,500 498.50 2.78% 20-Feb-14 485.00 28,400 485.00 -4.81% 19-Feb-14 509.50 10,100 509.50 0.00% 18-Feb-14 509.50 9,500 509.50 3.82% 17-Feb-14 490.75 9,600 490.75 -2.53% 14-Feb-14 503.50 7,700 503.50 0.70% 13-Feb-14 500.00 34,200 500.00 Read More