Residual Income Method
Describe about the Business Valuation and Analysis for Analysis of Blackmore.
The following study is concerned with the prospective analysis of Blackmore. The study has been undertaken to analyse the several models such as Dividend Discount Models, Free cash Flow and Residual Income Method. The valuation undertaken in the study outlines the estimate the value of firms stock price along with the future forecasting of the results derived. The information is derived from the financial statements including the current price shares with future forecasting of stock values. The cost of capital and forecasting of stock values reflects either pessimistic or opportunistic outcomes.
The residual income is one of the processes concerned with the determination of equity, which formally relates to the cost of equity. Under the given study of Blackmore, the residual income represents the excess of opportunity cost, which is relatively measured in terms of the book value of the shareholders equity (Imam, Chan and Shah 2013). The residual income is the revenue generated by Blackmore after taking into the consideration the cost of capital of the organisation. The conceptual approach adopted by the organisation is concerned with the investors required rate of return from their resources such as equity by compensating them with the opportunity cost (Lazzati and Menichini 2015). Consequently, in order to create a shareholder value the management of Blackmore must generate returns at least as high as the opportunity cost.
The residual value of Blackmore reflects a positive value of 27,377,000.
The dividend discount model is the procedure, which helps in evaluating the stock prices through using the predicted dividends after discounting them back to the present value (Francis, Olsson and Oswald 2012). If the value obtained under the dividend discount model is higher than that of the shares, which are currently being traded, then such stocks are termed as undervalued.
The value of shares for the Blackmore under the Dividend Discount model reflects a negative value of -9.90. On the other hand, if Blackmore follows the average growth rate to calculate the share price under the DDM model then the value of shares will be -11.88. Therefore, it can be concluded that under the DDM model the company will be considered as poor and should be avoided for any such future investment.
From the following discussions, it is understood that the net revenue projected growth rate is 18% for the financial year of 2016, which represents $599,485. The earnings before interest and tax is $145,221 for the year ended 2016. The Ra materials consumed are projected to grow by 23% for the financial year of 2016 and it is projected to grow over the years. The projections also identify the employee’s benefits expenditure, which is scheduled to grow by 20%. It is worth mentioning that the employee benefit is projected to grow by 134,933 for the financial year 2016 where as for the financial year of 2017 the projected growth is $161,515. The selling and marketing expenses consisted of 15% growth rate with $19,177 for the financial year of 2016.
Dividend Discount Model
DDM: The share price derived from the dividend discount model reflects a negative amount of $9.90 with the equity value standing -$170,511
Residual Income Method: Under the residual income method share price represents $344.59 since the equity share value highlights a positive $17,225.
Residual Operating Income Method: From the analysis it can be understood that sum value of share price derived through implementation of this model is -$40.70 with total number of ordinary shares 17,225 representing the equity value of $5,127,461.92
Free cash Flow (FCF): The forecasted share price derived with the implementation of free cash flow is $294.81 with total value of equity obtained $51, 44,778.99
In the computation of EBIT the depreciation and amortisation cost for the financial year of 2016 represents 7,045 with projected growth rate of 7% for the rest of the five-forecasted year. It is noteworthy to denote that the operating lease rental expenses for the forecasted five year is 22% with $4,496 for the financial year 2016. The operating lease rental expenses have a scheduled growth contributing to the growth of the company. The repairs and maintenance cost has a scheduled growth rate of 16% and the freight expenses is forecasted to grow by 21% with $10,906 for the financial year of 2016. It is notable to denote that the bank charges and other expenses are forecasted to grow by 27% and 10% respectively with $2,099 and $17,494 for the financial year of 2016.
The cash flow statement of the Blackmore consists of taxable profit with projected growth rate of 30% with $143,411. The tax rate for the forecasted five years is 31% with $43,391 however after adding up the depreciation amount of $7,045. In order to ascertain the Net present value and Internal rate of return cost of capital has been computed with annual interest rate of 6.40%. The sum value of discounted cash flow for the financial year of 2016 derived represents $188,916 while on the other hand for the year ended 2017 the discounted cash flow increased to $2,48,643. The net present value computation rate is assumed at 6.40% annually, which approximately stood $2,279,600. It is worth mentioning that the Internal rate of return represents 161.50 %. The net present value derived is largely based on the write off value of the assets having a growth rate of 32% while the inventory changes represents the growth rate of 57%. The financial assets are classified under the fair value using profit and loss account. Therefore, the classification of these financial assets is largely dependent on the fact that the nature and objectives of the financial assets are identified and derecognised based on the trade data basis. The effective interest method is used in the computation of the amortised cost of debt instrument along with the allocation of the interest income over the relevant period. Therefore, income is identified based on the effective interest for debt instrument apart from the financial assets classified under the fair value of trading and profit and loss account.
Information is considered as central focus for every business organisation. It is worth mentioning that when an organisation has an access to a large number of data to access it can fulfil its business development in order to improve the customer services relationship by enabling enhanced business operations (Dolvin, Jordan and Miller 2012). For Blackmore it can get the benefit of quick access of data, which helps, in securing the requirement the investor’s information. Blackmore can maximize the Return on Information management by investing its resources in large management best practices.
Managing the information with sustained returns:
Blackmore’s organisational success depends upon maximisation of the organising records concerning the information management (Bielecki and Rutkowski 2013). Such organisational information management is concerned with potential business value regarding each kind of assets. Below listed are the best features of ROIM towards records information management.
Consolidation of paper records:
Blackmore consolidates its paper by bringing in various records and regarding multiple storage of vendor (Penman and Yehuda 2015). This helps in bringing the records under single vendor by helping in cutting down the storage and ensuring the records are managed under same set of rules and policies.
Keeping the retention schedule updated:
The records retention schedule helps the business to keep all their information under one roof unless or otherwise when needed. Well that being said, Blackmore keeps the necessary records and eliminates those, which unnecessarily occupies space (Agosto et al. 2016). Such practices help in reducing the cost of storage for Blackmore with the help of retention schedule.
Classification of scheme:
Blackmore classifies all its records through data generated authorization. Such classification enables the Blackmore accurately retain its data through retention schedule in the lead up to new business opportunities. This enables the company to remain competitive and operate more efficiently. The company also ensures that all the information provides a tangible return by ensuring that the documents are securely managed.
Perspective analysis is one of the most common ways of computation of risk assessment for potential future years. Such procedure is helpful in forecasting the projected outcomes of the organisation in analysing from the figures undertaken based on the current market situations and historical cost of Blackmore’s. The current portion of this report justifies the figures obtained, which is applicable on the current market situations along with the past financial history of Blackmore through prediction of financial data.
The projected sales growth provides in depth in to the working and functional operations of Blackmore. By analysing the previous results of the Blackmore, it is evident that the firm is putting more emphasis on the industries to increase along with the decrease in the offset of revenues of other industries. Blackmore are considered as one of the oldest industries in the Australian market from the decades however, with the advent of globalisation new potential competitors operating in the same industries has emerged as competitors in the consumer market and the company may in future face problems in retaining their customers from going in the hands of competitors. From the analysis, such impact has already been noticed in the revenue of the company in the financial year of 2015 when the sales revenue represents 34.24% with total value of 717,211. From the analysis it can be understood that the sales forecasted value has fallen 27.60% in the financial year 2016. However, it can be concluded that the reason behind the downfall of such revenue is to the lack of innovating ideas and high amount of competition. Such indication of lost consumer compelled the firm to undertake the establishment of new stores so that they can cover up the lost grounds by capturing the market share
The assets turnover ratio of Blackmore is computed based on the reformatted financial statements from the financial data along with the existing scenario of the particular industry. While looking at the financial statement of 2015 it is observed that the asset turnover ratio is was 2.86 times and it is worth mentioning that in the next financial year the assets turnover for the financial year of 2016 is 3.33 times. With the computation of forecasted Asset Turnover Ratios, Net Operating Assets (NOA) can be obtained by (NOA= Sales/ATO).
Profit margin representing the (NOPAT/Sales) can be defined as the parameters, which requires the stakeholders to understand the estimated amount of profit a firm has the ability to generate. From the analysis it is understood that the profit margin of Blackmore 9.03% for the year ended 2015 whereas 13.14% for the financial year of 2016.
As per the analysis the dividend discount model of the firm is -9.90 with abnormal earning model reflects negative amount of -14.02. The current investment situation concerning the shareholders is that Blackmore should re-invest their money towards profit maximisation with the objective of increasing the sales revenue and profit for the organisation as whole.
To conclude with the study evaluates all the four models in the determination of the future stock prices with the help of the data from the financial statement of Blackmore. The value of shares for the Blackmore under the Dividend Discount model reflects a negative value of -55.27. Whereas, if Blackmore follows the average growth rate to calculate the share price under the DDM model then the value of shares will be -11.88. Therefore, it can be concluded that under the DDM model the company will be considered as poor and should be avoided for any such future investment.
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