Assignment
You have been recently appointed as a financial analyst of a British bank. You have to analyse British Petroleum, Louis Vuitton and Tesco.
Part 1. (40%, 300 words): British Petroleum(BP)
A. Use Bloomberg database or BP database to retrieve data and run a regression that has 30 recent annual data and where dependent variable is ‘annual petroleum price growth of year X’ and independent variable is ‘global petroleum consumption growth of year X-1’, where X is the year examined. The beta coefficient you found will be used to estimate future petroleum prices , by retrieving global GDP Growth estimates (or US GDP estimates) from Bloomberg and by assuming that future ‘Global petroleum growth’ will be equal to ‘Global GDP growth’, unless otherwise stated. Assume that the petroleum price in 2010 was 100 per barrel. Also assume that USD to GBP parity will be stable during the forecasted period and make the assumption that the ‘BP production growth’ in the forecasting period is equal to ‘BP volume Sales growth’ and is equal to ‘global petroleum demand increase’. Now form your projections (Compute company sales), based on the following scenarios:
BP production will increase by 3%, 5% and 2% in FY 2011, FY2012 and FY2013 respectively. (Scenario 4)
BP production will increase by 1% p.a. during FY 2011, FY2012 and FY2013, but average petroleum price (in USD) will increase by 2% per annum during the FY2010-FY2013 period (Scenario 1) (3 marks)
BP production will decrease by 10% in FY 2012, while in FY 2011, FY2013 it will
change based on global GDP growth projections (Scenario 2)(3 marks)
BP production will increase by 5% in FY 2011 while in FY 2012, FY2013 it will
change based on global GDP growth projections (Scenario 3)(3 marks)
B. For each of the Scenarios examined previously (Scenarios 1,2,3,4) compute BP’s major B/S and P/L accounts including Total Assets, Fixed assets, Current Assets,
Sales, Operating profit, depreciation, Net profit, Dividends and Equity (12 marks)
assuming that our base year is 2010 and
• Operating expenses excluding depreciation will increase by 2% p.a. during
the examined period,
• To compute annual Depreciation charges, assume that the ratio ‘Annual Depreciation/ Fixed Assets before annual Depreciation’ is constant over time. Fixed Assets are frequently denoted as Non-Current Assets.
• Interest and interest-related expenses as a proportion of debt remain stable, assuming no changes in capital structure. Debt/Sales will be stable in the forecasting period, unless otherwise stated.
• Fixed assets will increase proportionally to volume sales. Annual new fixed asset investments will take place on the 1st January of each year.
• Annual new working capital investments (=increase of working capital) are 5% of nominal Sales increase
• Tax rate will be 25% from 2011 onwards.
C. Find three comparable, to BP, companies and compute from them the unlevered
beta. Now use the unlevered beta and based on the BP capital structure and tax
rate, re-lever the beta so as to compute the ‘levered beta’ of BP (1 mark).
D. Based on Scenario 4, use the levered beta you found previously and compute the value of BP by using the following valuation methodologies
• DCF, using a 3-yr period, and assuming 1% FCF growth after the examined period.(6 marks)
• Comparative valuation (30% P/E method, 30% P/BV method, 40% P/S
method) using seven (7) comparable to BP firms (6 marks)
• DCF using Sensitivity analysis, under the assumptions of increased WACC(compared
to the basic scenario) by 1% and decreased WACC(compared to the basic scenario) by 1% and FCF growth 2% and 0%. (6 marks)
Make sure you explained adequately all the steps you have taken to compute the above mentioned figures and you interpreted sufficiently your findings.
Part 2. (40%, 500 words): Louis Vuitton(LV)
Base year for the following computations is FY2011. By assuming that the 70% of company
sales in 2011 took place in USA (USA branch network) and the remaining 30% in China
(Chinese branch network) and based on the assumptions that the company Sales growth is ceteris paribus equal to ‘country GDP growth plus two percent’ proceed to the following computations :
A. Using Dupont analysis, try to analyse the main factors that had affected company
profitability, and describe how these factors had evolved over time. (100 words, 5 marks).
B. Find six competing companies, and compare the development of Dupont ratios that of competing companies. After reading info about company acquisitions mergers, and activities and based on the findings of your analysis, explain why the company overperforms or underperforms. (100 words, 5 marks).
C. Compute the financial (DFL) and operating leverage (DOL) of the company (1 mark).
D. Now assume that company network(sq.m. or productive capacity) will expand by
10% while sector network(sq.m. or productive capacity) will expand by 4% and based on historical data regarding DFL and DOL for the last 2 years, compute next year Sales, Operating Profit and Net Income and comment upon your findings.(100words, 3 marks)
E. The company will increase its Selling area (new shops) in China by 20% per annum in FY2012, FY2012 and FY2013. The Sales per square meter of planned New Shops during the first year of operation are expected to be only 70% of average Sales per square meter of older Louis Vuitton shops. However, the Sales per square meter of new shops from the second year of operation onwards is 100% of average Sales per square meter of older Luis Vuitton shops. You have to account for the above mentioned factors in your computations as well. Compute company sales (1 mark)
F. Compute LV’s major B/S and P/L accounts including Total Assets, Fixed assets,
Current Assets, Sales, Operating profit, Depreciation, Net profit, Dividends and
Equity assuming that Operating expenses excluding depreciation will increase proportionally to sales, Depreciation will be 5% of fixed assets, Interest and related expenses are proportional to Debt, Debt will not increase in the examined period,
Fixed assets will increase proportionally to nominal sales, investments in fixed assets will take place on the 1st January of each year, New working capital investments will be 5% of nominal sales increase (50 words, 5 marks)
G. Compute the value of the firm using Dividend Discount Model(DDM), assuming a 3- yr period, 50% dividend payout (=Dividends/Net Income)and assuming 1% dividend growth after the examined period.(50 words, 5 marks)
H. Compute the value of the firm using Discounted Cash Flow valuation, assuming a 3- yr period, and assuming 1% Free Cash Flow growth after the examined period (40 words, 5 marks). Assume the company will replace 90% of equity with debt. Assume that the annual interest rate(=Interest Expenses/Debt), which is used to compute interest payments will increase, compared to last year’s interest rate, by 6%*(Debt Increase)*Interest Expense/Debt. Now compute the LV’s Cost of Equity, the Cost of Debt, the WACC and the value of the company after the previously mentioned action(30 words, 5 marks)
I. Assume the company becomes all equity financed by proceeding to a capital
increase. What is now the WACC and what is the value of the company?(30 words, 5 marks)
Make sure you explained adequately all the steps you have taken to compute the above mentioned figures and you interpreted sufficiently your findings.
Part 3 (20%, 200 words): Tesco
Tesco has currently 1,000 shops of 100,000 sq. m. and intends to expand in China. The expansion requires approval from the PRC (Chinese) government within the next three years. Possible decision to expand requires that the company has to pay a negligible fixed fee to the Chinese government, and working capital investments will not be of a significant value, so assume that the cost of investment is simply a function of investments to acquire fixed assets. Assume that if Tesco decides to expand, Chinese shops will have 5% profit margin, but Sales/sq.m. will be 50% of that of current global average sales/sq.m. for Tesco. Tax rate is 20%. Based on any market data you can find by using Bloomberg, use Tesco share price volatility and compute the value of this growth option (15 marks). Explain what you suggest to the company management and why (5 marks).
Make sure you explained adequately all the steps you have taken to compute the above mentioned figures and you interpreted sufficiently your findings.
Notes
Βl=Beta levered, Bu=Beta unlevered
Bl = Bu x [1 + (1 – tax rate) x (D / E)],
Bu = Bl / [1 + (1 – tax rate) x (D / E)]
WACC= ke [E / (D+E)] + kd [D / (D+E)]
Ke=Cost of equity, Kd=cost of debt,
Some mistakes to avoid
The aim of the assignment is to demonstrate that you correctly investigate the available
resources, retrieve data, compute the numbers required in the assignment and that you
understand what you are doing. The following mistakes are quite common, and you should
strive to avoid these.
If you write a poorly structured report, with no summary tables and with just a bunch of spreadsheets attached at the end, it is very difficult for the examiner to even know what your results are.
Also, we will not know whether you have carried out the calculations correctly, what your
conclusions are, and in general, whether or not you understand what you are doing.
Your aim in writing your report must be to convince the reader that you have complete
confidence in applying these techniques, that you understand the ideas behind these
applications, and that you can critically discuss the results and form reasonable conclusions.
Requirements
Word length: The report must be less than 1,000 words in length
Other Requirements: You should submit both an electronic and a hard copy of your
assignment and an electronic copy of all related files. Submitted word files without the
submission of related excel files( that may include mnemonics, wherever applicable) will not
be marked.Electronic files will be in a CD/DVD containing all your calculations. You should
attach a representative selection of your printouts of spreadsheets in an appendix.
Text should be in Microsoft Word format for Windows 2007 or previous edition. Font: main
text: Times New Roman 12; Titles: Times New Roman 14; Spacing: 1.5. Excel: Excel format
for Windows 2007 or previous edition. Tables should be transferred from excel to word text,
but related excel files should be enclosed as well (related excel files).
