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Strategic Financial Management - Case Study Example

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The stock market value of a listed corporation is determined by many factors, among them changes in inflation, consumption, interest rate, currency exchange rate and oil prices. Stability in these prices and rates is important for investors to determine the correct book value of listed firms and their assets, which serves as basis for making a wise stock transaction…
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Strategic Financial Management Case Study
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Download file to see previous pages As a result, the share prices listed in the stock market do not always reflect the true market value of a company. This perception has gained such currency that people who invest in stocks are driven more by speculation than certainty. The thinking that the stock market is not always a reliable indicator of firm value works against the interests of the company seeking capital for expansion because it may not be able to attract as many investors as it wants. One such firm is the fast-growth airline EasyJet plc, which was ranked No. 72 by Business Week in the list of the World's Most Innovative Companies in 2006. In the view of its officers, the airline's share prices have been distorted by the current volatilities that they fail to represent the true market value of the firm. Since the firm's formal listing in the London Stock Exchange in 2000, exactly five years after its establishment in 1995, EasyJet has worked hard to create value for shareholders but it seems unconvinced by the share prices reflected in the trading floor. For the benefit of investors and its board of directors that needs accurate financial data for decision-making purposes, EasyJet would naturally want to establish the correct market value of the firm.
This paper affects a strategic financial analysis for and in behalf of EasyJet to find the true stock market value o...
Then we chronicle how EasyJet plc has delivered such value to shareholders for the past five years and the trajectory of change in its equity value over the last 12 months, with the market value picking up in 3-4 months and then dropping without warning. To determine the firm's true market value, this paper evaluates EasyJet's equity at current prices using the firm's net asset value, price-earnings ratio and discounted cash flow for 10 years. Finally, we attempt to reconcile any differences in value obtained from these financial analysis methods. Based on the results, we set the correct stock market value for the firm.

Strategic Financial Management

Through strategic financial management, the company may find its true stock market value by isolating the sum of all expected future cash flows discounted to the present and then dividing the sum of these discounted cash flows with the number of available shares. Equity valuation can also be done by comparing the firm's current share price with its net asset value, price-earnings ratio and its discounted cash flows for the next 10 years.

Strategic financial management is defined as the identification of strategies that can maximize an organization's present net value in order to increase shareholder value (Leading Concepts, 2006). Its key objective is precisely to create shareholder value. According to Grundy & Scholes (1998), strategic financial management seeks control of the company's bottom line through proactive, involved and customized means in a manner that is dynamic, forward-looking and outward-oriented. In effect, the firm looks at the links between corporate strategy and strategic financial management to see how the process can play a positive and proactive role in ...Download file to see next pagesRead More
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