Corporate Management of the Company Thomas Cook - Term Paper Example

Essentials of Corporate Management Table of Contents Overview 3 Valuation of Tomas Cook 3 Net Asset Value 3 Cost of Capital 4 Cost of Equity: 4 Cost of Debt Capital: 5 Weighted Average Cost of Capital (WACC): 6 Dividend Growth Model 7 Value /share using Price Earnings ratio 8 Advise on the purchase of share of rival firm 9 Share Price Tracking 10 Reference 13 Bibliography 13 Overview Thomas Cook Group plc had merged with My Travel Group plc in 19 June 2007. This company is mainly known for conducting leisure trips all around the world. Thomas cook also owns aircrafts, travel stores, hotels and resorts which are also franchised. This Group operates in 22 countries around the globe and is majorly the prime in the core market. Thomas Cook is one of the largest travel related company providing financial services in many countries both in India and abroad. The study is supported with data in order to get the actual valuation of the company in today’s market. Based on the calculation in terms of net asset value, cost of capital, dividend growth model a proper valuation of the company is to be done so that it can be determined as to whether buying the Thomas Cook Group will be a profitable venture or not. Valuation of Tomas Cook Whenever we value a company it is very important to choose the right financial models. In order to check the comparability of a company it is necessary to find the proper correlation between the revenues and the operating expenses. Net Asset Value Net assts value is the amount the investor receives when selling a share. Net asset value is also known as the NAV. This rise or fall in the NAV reflects the value of the mutual fund in the present market. Rise in the value of the mutual fund leads to a rise in the NAV and vise-versa. Particulars Amt in million pound 30-Sep-10 30-Sep-09 Net Assets 1743 1717 Overvalued assets 50 0 undervalued assets 30 0 Bad debt 7 0 No. of Shares (m) 858 858 NAV 2.00 2.00 Cost of Capital Cost of Equity: Cost of equity capital is generally known as the risk undertaken by the investor in the hope of earning favorable returns. Cost of equity can be found through various models like Capital Asset Pricing Model (CAPM) and Gordon Model. But based on the data provided application of the CAPM is more suitable in the given situation. (Bragg, 2012, p.142) Cost of Debt Capital: A company in its initial period uses a lot of debt in the form of bonds, loans, etc. The calculation of the cost of debt of a company gives an idea to the investor as to the overall rate of interest that the company has to payback for using debt financing. This also shows how risky is a company; thus higher the cost of debt more risky is the company. Particulars Amt. in million pound Interest 7 Face value 100 Redemption value 50 No. of years 1 Cost of debt 19% Cost of Debt = (I + (M-NP)/n) / (M + NP) / 2 (Bragg, 2012, p.142) Where, I = Dollar Return M = Maturity Value NP = Net Proceeds of issue N = years Weighted Average Cost of Capital (WACC): The assets of the company are either financed by debt or equity. Weighted Average Cost of Capita (WACC) show the average cost of financing of a company in a weighted form irrespective of the use of capital. WACC gives the investor a broad idea as to the liability of the company towards the payment of interest per dollar financed. Through the computation of WACC of a company one can determine the opportunities of expansion and scope of merging, etc. It is most appropriate in such like situation as it determines the rate of discount used in cash flow and the amount of risk that is involved to the overall firm. The following WACC gives us the idea that debt of the company being more it has to pay more tax and even the burden of obligation is also on the rise (Pratt, 2003, p.46) Particulars Amt. in million pound Cost of Equity 0.07 Cost of Debt 0.19 Equity 1475.76 Debt 1772 Tax 0.3 WACC 562.09 *Tax assumed to be 30% WACC= E/V*Ke + D/V*Kd (1-Tc) (Pratt, 2003, p.46) Where: Ke = cost of equity Kd = cost of debt E = market value of the firms equity D = market value of the firms debt V = E + D E/V = percentage of financing that is equity D/V = percentage of financing that is debt Tc=Corporate tax rate (Pratt, 2003, p.46) Dividend Growth Model Dividend Growth Model is also known as the Gordon Model. This is the simplest of all dividend models as it is based on a constant growth rate. This model is generally used for companies which have growth rate ranging from low to moderate rate, usually the case with matured companies. If a comparison is made between the share prices as of 8th March 2012 where the share price is 0.23p with that of 30th September, 2010 where the share price is 0.18p we can understand that the price of 2010 is more appealing as the investor in the buy side would always prefer low share price but for a sell side investor the price of 2012 is more appealing. Since we are more concentrated in buying the shares of Thomas cook hence we can easily interpret that we are in a favorable position (Pinto, et al., 2010, p.97). Particulars Amt. in million pence Dividend 10.75 Ke 0.07 g 0.05 Po 153.52 Price/share 0.18 Po=D / (Ke-g) (Pinto, et al., 2010, p.97) Where: Po= Value of the share D=Dividend of the share g =Growth factor Ke=Required Return Value /share using Price Earnings ratio Generally the price earnings ratio of the firm indicates the earning that an investor gets from the share thus invested in. Investors get attracted to companies with a high P/E ratio than with a company with a low P/E ratio (Jaffe, et al., 2004, p.125). However, we do not get a proper picture from the P/E ratio thus calculated but it turns out to be useful when compared to the company’s historical cost. The P/E ratio of the given calculation we can understand that there has been a sudden rise in the price earnings ratio of the company which puts the investor of Thomas Cook in a favorable stand (Rajasekaran, n.d., p.519) P/E= Market value per share/Earning per share Advise on the purchase of share of rival firm The main motive behind any investment of an investor is to earn highest possible return by undertaking minimum possible risk. The study thus conducted gives us more or less a proper picture whether the buying the property of Thomas Cook plc will be a profitable one or not. Net Asset Value is also known as the Balance sheet method generally used in the valuation of the underlying assets. It establishes the value for the seller. As we can observe that NAV value of Thomas Cook has not shown any probable change in the value so from this valuation it becomes very difficult to assess whether the companies NAV is going to increase or decrease in near future. Thus to take a probable decision on the same more than one year should be considered to understand the rise or fall in the NAV value in the years to come(Garman, et al.,2011, p.459). The result that we found for Thomas Cook’s CAPM is 7% which means that the required rate of return has beaten the expected return of 5% proving that the investment is a fruitful one which may give positive return in the future (Dash, 2009, p.92) The cost of debt of the company is slightly on the rise due to the fact that the redemption value is half of that of the face value. This can be a matter of great concern for the investors which should be taken care of before delving into the venture of Thomas Cook (Bragg, 2012, p.142) But as we can notice that the NAV of the company Thomas Cook has remained same through a span of two years. But since the calculation of the NAV of a company does not say much about it, hence it would be better if too much importance is not delivered on this ground. The rise in the cost of debt over the cost of equity may turn out to be a matter of great concern for the investors thinking of acquiring the company. This rise has been due to the fact that the redemption of the share value has gone down by half of its face value may be with the intention of holding on to the retained earnings of the company for the betterment of the company in future. But this may be taken care of in future. As a result of this we can observe a rise in the price per share which is with the intention to increase the retained earnings of the company so much so as to raise the redemption value of the investors in the future. A proof of which can be seen from the price earnings ratio of Thomas Cook which has risen from 7.54 (2010) to 8.58 (2012) indicating that the return may further rise in the years to come. Thus as per a detailed study conducted it becomes clear that buying the Thomas Cook Group would not be that bad an idea. Thus it is advisable to invest in Thomas Cook group for its acquisition. Share Price Tracking In this segment of the paper, we would analyze the price movement of the share a particular company during the period it was tracked. The company chosen for the share price tracking in this study is Premier Foods plc (PFD.L). The following graph illustrates the share price movements of Premier Foods plc over the last one year (May 15, 2011 to May 15, 2012). It can be observed from the above graph that share price of Premier Foods plc (PFD.L) had considerably fluctuated during the past one year. The shares of the company were trading at 34.09 Great Britain Pounds (GBP) on May 17, 2011, whereas on May 1, 2012, the shares of Premier Foods Plc were quoted at 16.25 GBP. Subsequent to that the share price of Premier Foods increased considerably and closed at 126.50 GBP on May 16, 2012. Thus, during the period from May 17, 2011 to May 16, 2012, the share price of Premier foods experienced an increase of approximately around +271.08% (Yahoo Finance, 2012). Figure 1: Share Price movement of Premier Foods plc (PFD.L) against FTSE 100. Furthermore, it can also be noted from the above graph that the share price variations of the stocks under the FTSE 100 index was minimal during the identical period. The share price movement of the FTSE 100 index is represented in the above figure by the green line, which has remained almost steady during the last one year. The following table illustrates the weekly share price movements of Premier Foods PLC, FTSE 100 Index and the 3BM070 Portfolio during the period the stocks were tracked, i.e. from February 2, 2012 to March 3, 2012: These share price movements can be graphically represented as follows: Figure 2: Share Price Movements of PFD, FTSE 100 & 3BM070 In this representation, the price of PFD, FTSE 100 as well as 3BM070 as on February 2, 2012, was assumed to be the base price. It can be observed from the above graph that while the prices of the stocks under FTSE 100 and the 3BM070 remained almost stable, the share price of Premier Foods Plc fluctuated to a large extent. The company’s share price remained below that of the two indexes till March 22, 2012, but post that it rose much above the indexes’ share prices. This indicates that the company is negatively correlated with the market as a whole and hence, when the FTSE 100 moves below the base price, the share price of Premier Foods rises abive the base price and vice –versa. Reference Bragg S. M., 2012. Business Ratios and Formulas: A Comprehensive Guide. Canada: John Wiley & Sons. Dash A. P., 2009. Security Analysis and Portfolio Management (Paperback), Second Edition. New Delhi: I. K. International Pvt Ltd. Garman, K. et al., 2011. Personal Finance. United States: Cengage Learning. Jaffe J., et al., 2004. Corporate Finance. New York: Tata McGraw-Hill Education Pinto J. E., et al., 2010. Equity Asset Valuation. Canada: John Wiley and Sons. Pratt S. P., 2003. Cost of Capital: Estimation and Applications. Canada: John Wiley & Sons. Rajasekaran V, No Date. Corporate Accounting. India: Pearson Education India Yahoo Finance, 2012. Premier Foods plc (PFD.L) –LSE. [Online] Available at: http://sg.finance.yahoo.com/echarts?s=PFD.L#symbol=pfd.l;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined; [Accessed on May 17, 2012]. Bibliography Brigham, E. F., et al. 2010. Financial Management Theory and Practice. United Kingdom: Cengage Learning. Harrison H, 2008. Financial Accounting, India: Pearson Education India. Keynes J. M., 2006. The General Theory of Employment, Interest and Money. India: Atlantic Publishers & Dist. Needles B. E., et al., 2010. Principles of Accounting. United Kingdom: Cengage Learning. Osborne Books, No Date.  Ratio Analysis. [Online] Available at: http://www.osbornebooks.co.uk/files/asa2_18rev.pdf [Accessed on May 17, 2012]. Szczurek T. M., 2004. Pursuit of Passionate Purpose. Canada: John Wiley & Sons. Theodore G., et al., 2009.The Portable MBA in Finance and Accounting. Canada: John Wiley & Sons, Read More