Synthesize and apply both theory and empirical information to the solution of to a range of investment-decision problems.

Learning outcomes
3. Synthesize and apply both theory and empirical information to the solution of to a range of investment-decision problems.
4. Reconcile conflict between DCF models for decision-making and using accounting income for evaluating project performance.

Introduction

You work in the corporate finance department of a major investment bank. One of your clients has expressed an interest in making an investment in British Petroleum (BP), http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary.html?fourWayKey=GB0007980591GBGBXSET0 .

As an investment advisor you wish to value the company so have collected the following information:

Balance sheet as at: 31 Dec 2014 31 Dec 2013
Non-current assets £m £m
Tangible assets 89,589 87,157
Intangible assets 21,057 20,752
Investments 15,950 18,744
126,597 126,653
Current assets
Inventories 11,804 17,727
Trade and other receivables 21,608 25,438
Other current assets 0 0
Cash at bank 19,122 13,657
Investments 3,530 1,905
56,064 58,727
Current liabilities
Short term loans and overdrafts -4,418 -4,476
Other current liabilities -36,453 -39,679
-40,872 -44,155

Net current assets 15,193 14,571
Non-current liabilities
Long term debt -69,419 -62,141

Net assets 72,371 79,083

31-Dec-14 31-Dec-13
Equity £m £m
Share capital 0 0
Other reserves 72371.01 79022.47
Total equity 72371.01 79,022
No. of Shares 18.26Bn 18.51Bn

Other information:

Share price Div/share EPS
31-Dec-13 488.05 23.40p 75.12p
31-Dec-14 409.3p 23.85p 13.20p

Notes on the above information
Asset valuations
• The tangible assets have recently been revalued and it is thought that they are overstated by £2,500m in the above accounts.
• The property, plant and equipment have recently been revalued and it is thought they are understated by £150m.
• There may be £100m of debtors (trade receivables) that cannot be collected.

The Capital Asset Pricing Model
Assume the risk free rate of return is 1% and the average return on the market is 6% per cent.
Beta for has been calculated variously at 1.34* or 1.74**
** http://finance.yahoo.com/q?s=BP.L&ql=0 [accessed 13 April 2015]
** http://markets.ft.com/research/Markets/Tearsheets/Summary?s=BP.:LSE [accessed 13 April 2015]
Non Current liabilities
Assume the non-current liabilities pay a coupon of 4%. They are currently being traded at £110 per £100. You should consider these ‘irredeemable’ They are shown in the balance sheet at their par value.
The share price over the last 12 months is shown overleaf:

http://markets.ft.com/research/Markets/Tearsheets/Summary?s=BP.:LSE

Required:
Task 1 Valuation of BP plc. (20 marks)
(Use only the information contained in the assignment for Task 1)
a) Net asset value
Calculate the Net asset value per share for BP.
b) Cost of capital
i. Calculate the cost of equity capital for BP using the Capital Asset Pricing Model.
ii. Calculate the cost of debt capital (assume a taxation rate of 20%).
iii. Calculate the weighted average cost of capital (WACC).
(use the share price as at 31 January 2014 for the value of equity)
c) Dividend growth model
Use the dividend growth model to calculate the theoretical price of a share under the following assumptions:
(i) g = 0%
(ii) g = 2%
d) Value per share using the price earnings (p/e) ratio
Calculate the price earnings ratio using the share prices as at 31 December 2013 (488p) and 31 December 2014 (409p) and the EPS figure for 2013.
Comment on your answers if the retail industry sector containing BP’s has an average p/e ratio of 12.8 (http://biz.yahoo.com/ic/120.html, accessed 13 April 2015).

Task 2 (60 marks, you may use any information for this section)

Calculate the value of a BP share and advise your client
a) Use the information from your calculations above and any information other you deem appropriate to arrive at the valuation of a BP share.
In doing so critically evaluate the Price-Earnings and Dividend Growth models used in your calculations and relate your calculations to the current and historic share price information as appropriate.
b) Discuss whether you would advise your client to purchase shares in BP on the 5th May 2015.

Task 3 Share price tracking and the EMH (20 marks)
Critically analyse the movement of your allocated share during the period it was being tracked (Jan 2015 – April 2015). You may choose any length of time within that 4 month period from 1 day and up.
Refer to relevant theories and academic literature to explain why and to what extent the share moved in response to new information.
Please see Moodle for your allocated share name.

3BM070 Strategic Corporate Finance: Assignment 2
Criteria 80-89 70-79 60-69 50-59 40-49 30-39 20-29
Task 1 Calculations related to Morrison’s Excellent calculations clearly laid out Excellent calculations and presentation Very good calculations and presentation Mostly correct calculations and well presented Some errors in calculations and some confusion in presentation Inadequate calculations with poor presentation Very few calculations and very poor presentation
Task 2 Advise client on value of Morrison’s Excellent analysis integrated with relevant theories and a wide range of academic literature Excellent analysis integrated with relevant theories and a wide range of academic literature Very good analysis using a range of theories, and a good range of academic literature Good analysis using a range of theories, with reference to relevant theories and academic literature Some analysis, partly descriptive, some reference to theories and academic literature Inadequate analysis, largely descriptive, some reference to theories and academic literature No analysis, descriptive only, little or no reference to theories or academic literature
Task 3 Analysis of share movements Excellent analysis integrated with relevant theories and a wide range of academic literature Excellent analysis integrated with relevant theories and a wide range of academic literature Very good analysis using a range of theories, and a good range of academic literature Good analysis using a range of theories, with reference to relevant theories and academic literature Some analysis, partly descriptive, some reference to theories and academic literature Inadequate analysis, largely descriptive, some reference to theories and academic literature No analysis, descriptive only, little or no reference to theories or academic literature

Are you looking for a similar paper or any other quality academic essay? Then look no further. Our research paper writing service is what you require. Our team of experienced writers is on standby to deliver to you an original paper as per your specified instructions with zero plagiarism guaranteed. This is the perfect way you can prepare your own unique academic paper and score the grades you deserve.

Use the order calculator below and get ordering with idealtermpapers.com now! Contact our live support team for any assistance or inquiry.

Type of paper Academic level Subject area
Number of pages Paper urgency Cost per page:
 Total:

Purchase Guarantee

Why ORDER at IdealTermPapers.com?

  • Educated and experienced writers.
  • Quality, Professionalism and experience.
  • Original Content writing.
  • Best customer support.
  • Affordable Pricing on orders.
  • Thorough research.
  • Ontime delivery of finished work.
  • 100% plagiarism free papers.

Reasonable Prices

  • To get the best quality papers isn’t cheap so don’t trust extremely low prices.
  • We can’t claim that we have unreasonably low prices because low prices equal to low quality.
  • Our prices are good and they balance with the quality of our work.
  • We have a Moneyback guarantee.

Original and Quality work

  • Our writers are professionals and they write your paper from scratch and we don’t encourage copy pasting.
  • All writers are assessed and they have to pass our standards for them to work with us.
  • Plagiarism is an offence and it’s never tolerated in our company.

Native Writers plus Researchers

  • Our writers are qualified and excellent and will guarantee the best performance in your order.
  • Our team has writers who have master's and PhD qualifications who can handle any assignment
  • We have the best standards in essay writing.

We have been in business for over 7 syears

  • We have always served our customers from all over the world and they have continued to order with us.
  • We value our customers since they have trusted us to do their assignments.
  • We are competent in our writing gained from experience over the years
  • Our company has 24/7 Live Support.

You will get

  •  Custom Admission Essay written by competent professional English writers.
  •  Free revisions according to our revision policy if required
  •  Paper format:  275 words per page, Times New Roman font and size 12, doublespaced text and1 inch margin
  •  On time delivery and direct order download
  •  Privacy guaranteed

We can help you:

  •  acquire a comprehensive professional presentation.
  •  get a unique and remarkable content as per your instructions.
  •  Get an additional portion that can be included to your existing presentation;
  •  turn your work in to an eyecatching presentation with well communicated ideas.
  •  improve your presentation to acquire the best professional standards.