3BM070 Strategic Corporate Finance ASSIGNMENT 2
Type of Assessment: Case Study: 2000 words (2,500 equivalent)
Submission deadline: Tuesday 19th May 2015 17:00 uploaded to Moodle
Weighting: 50% of module mark
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.
