Financial Analysis Assignment On General Motors (Essay Sample)

Financial analysis: General Motors
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FINA 495-Week 2 Textbook Exercises-Worksheet
Choose a publicly listed firm and its industry and submit your choice to your professor for his approval.
Name of Firm

General Motors Company (GM)

Ticker Symbol

(GM)

Name of Industry

Auto and truck Industry

Valuation of a Steady State Company
1 From the wacc website provided in the cost of equity is provided as follows.
Weighted average cost of capital (wacc) refers to the cost mix of debt, preferred share capital, retained earnings of common equity that maximizes average cost of capital at the optimal capital structure of the firm.
GM Cost of Equity rE=15.96%
The company’s wacc has been obtained by multiplying the risk premium with the companies beta and adding the result with the prevailing risk free rate as indicated below.
rE = rf+β (rm-rf) which is 3+1.62(11-3)=15.96%

Check your estimation with the beta provided for your firm at the Franklin Library database S&P Net Advantage via Valuation:
Franklin Library database beta =1.7%+1.66*7.5% =14.21%.
The two company betas are differing by 1.75% as observed above. The difference is likely due to the difference between analysts’ projections in comparison with the actual prevailing rates.

Do you recommend any adjustments to the estimate at http://thatswacc.com/index.php?
Yes I do. Based on the two betas its clear there is some miss-match. The two estimates differ due to the difference between the company’s industry actual beta, market risk and risk free rate estimate from the market analyst expectation. The company’s beta is given as 1.66% while the market beta is 1.62. The 0.04 difference will indeed impact the final results. The difference again between their set market risk and risk free rate is a major contributing factor to the difference.
My recommendation is continued revision on the Capital pricing model factors as set by the market experts to reflect on the company real market standing. This will reduce the difference between the estimates from the actual figure obtained. Continued forecasting on the real value of the company with time in respect to its market behavior is as well highly recommended to reduce the difference. Other economic factors affecting the market risk should be equally factored.

Further to Working Insight 2.3 in Corporate Financial Strategy where in the steady state
Dividends = Earnings per share
2 Find your firm’s industry beta
To find your firm’s industry beta:
Go to http://pages.stern.nyu.edu/~adamodar/
Click on Data
Click on Current Data
Click on Levered and Unlevered Betas by Industry and then 1. U..S. and open the Excel file.
(To find what industry your firm is in click on the link in Row 6 in the Excel file: Companies in each industry)
Industry

Auto and truck Industry

Industry Beta

0.96 obtained from levered and Unlevered Industrial betas US

3 Recalculate to determine the steady state cost of equity using the industry beta
From Working Insight 2.4: Kess= 0.04 + 1.1(0.05) = 0.095
Kess=1.76+0.96(7.5)=8.9
Rf=1.76
Market premium=7.5 obtained by getting the difference between market risk and risk free rate
Industry beta=0.96
To obtain the steady state I have used the industry beta 0.96 as given in the levered and unnerved US Auto and Truck industry beta

Next calculate the steady-state P/E where P/ESS = 1/Cost of Equity in the Steady State
P/ESS = 1/Cost of Equity in the Steady State = 1/0.095 = 10.52632x
P/Ess=1/8.9=0.11161x

Next calculate the steady-state value of the company where Steady State Value of the Company = D/ Cost of Equity in the Steady State and D = Dividends = Earnings per share (EPS)
From Working Insight 2.6:
Pss = 10/0.095 = 105.26 or 10 x 10.526 = 105.25
Pss=1.38/8.9=0.1551

Compare the steady-state value of the company to current price to estimate how much growth is currently priced by the market into the share:
What percentage of the current share price is based on its current earnings?
=105.25/250 = 0.421
=0.1551/35.39=0.0043836
NB: Average price per share=35.39

The percentage of the current share price based on present value of growth opportunities PVGO is as follows
=1 - 0.421 = 0.579
=1-0.0044=0.9956