The issue:
Grand Metropolitan PLC is the world’s largest wine and spirits seller. It mainly operated in London, USA. In 1991, it beats market expectation with a 4.8% increase in pretax profits, and the company Chairman stated that company’s goal “to constantly improve on”. Despite the great performance in the world recession in 1991, the price of GrandMet shares was 10% below the average price/earnings ratio of the companies in the Standard & Poor’s 500 index. And more important, rumors had that GrandMet, valued at more than $14 billion in the stock market, maybe a takeover target. The management dilemma is to understand why the company’s stock is traded below of what considered being the right price and whether the company is truly being undervalued by the market or there are consistent issues with negative NPV projects and lines of businesses.
WACC calculation
I. Cost of debt
The purchasing power parity implies the following relationship between the home (GB £) and local (US $) costs of debt:
Local rd$ = (1 + Home rd£) {(1 + local inflation i$)/(1 + Home inflation i£)} -1
=> rd£ = (1 + rd$)*(1 + i£)/(1 + i$) -1 = (1+ rd$)*1.043/1.027 -1 (from case Exhibit 9)
= (1+ rd$)*1.015579 - 1
Similarly to convert the small amount of debt issued in Germany, we use the relative inflation rates of the two countries to get:
rd£ = (1+ rdDM)*1.043/1.04 = (1+ rdDM)*1.00288 - 1
Total debt outstanding by country are given in Exhibit 6 of the case, we use the market value of the unspecified (long term) debt in our WACC calculations:
US outstandings: Vd$ = 3,137+152+110 (Market values) = $3,399M
Vps$ = 11.0 (Market value of preferred stock outstandings)
British outstandings: Vd£ = 1,794.8+87+63 (Market values) = £1...
... middle of paper ...
...stment in company’s stock even more risky.
Exhibit 1.
Exhibit 2.
Cost of Debt 8.63% 62% 3.48%
Cost of Equity 15.59% 38% 5.92%
WACC 9.40%
Assumed Growth 4.80%
Pre Tax on 1991 963.00
Post Tax on 1991 625.95
Terminal Value after 1991 14,252.91
Value of Equity 14,878.86
Shares outstanding 1,005,896,041
Calculated price per share $ 14.792
Actual price per share $ 9.480
Price undervalue 35.91%
Exhibit 3
Stock Over value /
Growth Rate Value of Equity Value Undervalue
4.80% 14,878.86 $ 14.79 36%
4.00% 12,675.62 12.60 25%
3.00% 10,695.84 10.63 11%
2.00% 9,250.95 9.20 -3%
1.00% 8,149.98 8.10 -17%
A way to calculate the cost of debt when the outstanding debt has not been traded is to use a synthetic rating based upon the company’s financial ratios (ie the interest coverage ratio). By getting a default spread based on the ratio and adding the risk-free rate, an updated pre-tax cost of debt estimate is going to surface.
The first observation from the financial data in appendix one is that General Motors has a low profit margin and is generally less than the industry average each year. The firm is able to keep a low profit margin because they have such high sales volumes throughout the world. This strategy can be both an asset and liability in business planning. The plus side of the strategy is that GM is able to sell a large number of vehicles in the marketplace due to the lower selling price as compared to the competitor. However, the down side of the strategy is that there is a possibility that if sales volumes decrease, the firm can incur a significant decline in the EPS because the profit margin on each item sold is very low. If the global economy sours, GM can have a very difficult time meeting shareholder expectations.
One look at the common-size income statements for these companies can tell a story. While Jones Apparel Group was lagging at year ended 1998, even with a restructuring charge on Liz Claiborne’s income statement, 1999 was a different story. Huge growth at Jones lead to revenues double of that one year ago while Liz, while increasing, was quickly falling behind. The growth for both of these companies continued into the year ended 2000, but Jones Apparel Grou...
C) because it is the inflation-adjusted value of a country 's production of goods and
“The National Debt (sidebar).” Issues and Controversies. Facts on File News Services, 23 Jan. 2009. Web. 25 May 2011. .
After very lightly skimming across the basics of equity valuation, the strategy of the company comes is next.
Sturzenegger, Federico, and Jeromin Zettelmeyer. Debt defaults and lessons from a decade of crises. MIT press, 2006.
Public debt, which comes from securities and bonds issued by the United States Treasury, is responsible for over 60 percent of the debt (“Debt Position and Activity Report” 1). These debts are being held by the public inside and outside the US. Over 25 percent of the debts are held by foreign governments, in which China and Japan accounts for almost half of the sum (“Treasury Bulletin: September 2009” 60).
a) What was the “balance of payments” of Pecunia that year? What happened to the country’s net foreign assets?
Cox, He, Mclean, Russel, Tse, Waananen. (2011) . Charting the American Debt Crisis, New York Times- Politics
provided by the government. This meant that the new bank debt would be the most senior piece in and would
The CAPM is the best method of determining the cost of equity for General Mills, inc. (NYSE: GIS). Using CAPM calculations, GIS target for December 2013 is $50.60 (Reuters, 2013). If this security becomes untenable in one year’s time, then the option of increasing dividends to boost investor confidence can be explored. The APT is less accurate compared to the CAPM and the dividend growth models. However, CAPM seems to be the easiest to use. The isolation of the Beta assumptions into a single variable fits the current state of the company best when using the CAPM.
Hall, Ed. “U.S. Department of the Treasury.” Bureau of the Census, 26 July 2010. http://www.brillig.com/debt_clock/
The Body Shop International case is an interesting case study into the miscommunication of owners and stockholder interests with regard to financial conditions. Anita Roddick, the founder of The Body Shop had no financial experience and thought that all she needed to do was expand her business and the financing would take shape as she developed her business. While Anita’s product concept of a natural skin-care line was good; her lack of experience in financial matters took its toll on her business.
“If you owe your bank a hundred pounds, you have a problem; but if you owe it a million, it has.(1)”