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Question:

Discuss About The Valuation Of Shares Companies Market Value.

 
Answer:
Introduction 

Investors are the persons who invest their capital in company with a view to create value on their investment. The main factors which are considered by investors are the return available on the invested capital and risk associated with the same.  In this report, different valuation methods have been used to evaluate the share price of different companies. All the companies have been selected from the information technologies business sector, energy sector and financial market sector. In the end, comparisons between the Warrant buffet valuation theory and dividend discount model and PE ratio has been done.

 
Use of equity valuation method 

In this 10 selected companies has been selected and by using the Capital Assets Pricing model the share price of these companies have been computed (Yahoo finance, 2018).

CAPM Method

RF

Risk free rate of return

RM

Market premium

Beta

risk of the Company

Cost of equity

RF+(RM-Rf)B

PARTICULARS

PRICE OF SHARES

GROWTH

COST OF EQUITY Computed by using the CAPM model

RISK FREE RATE OF RETURN

BETA

MARKET RATE

INFORMATION TECHNOLOGY

 

 

 

 

 

 

COMPUTERSHARE LIMITED

17.57

-0.28%

7%

2.77%

1.04

6.5%

WISETECH GLOBAL

13.25

0.15%

12%

2.77%

2.39

6.5%

Altium

22.28

1.67%

6%

2.77%

0.82

6.5%

ENERGY

 

 

 

 

 

 

BHP Billiton

50.3

-0.10%

9%

2.77%

1.2915

7.7%

CALTEX AUSTRALIA LIMITED

30.5

2.11%

7%

2.77%

0.91

7.7%

WORLEYPARSONS LIMITED

17.44

1.99%

11%

2.77%

1.69

7.7%

APAC COAL LIMITED

2.43

0.83%

26%

2.77%

4.82

7.7%

FINANACIALS

 

 

 

 

 

 

COMMON WEALTH BANK OF AUSTRALIA

70.94

-0.06%

8%

2.77%

1.01

8.2%

National Australian Bank

28.4

-0.63%

9%

2.77%

1.18

8.2%

SUNCORP GROUP LIMITED

13.93

-0.29%

8%

2.77%

0.89

8.2%

(Yahoo finance, 2018).

Dividend Discount Model 

This dividend discount model is used to compute the share price of these companies and analysis their growth, dividend paid and retained earning throughout the time.

Dividend Discount Model

Price of the company

D1/ Ke-G

D1

Dividend payment

Ke=

Cost of the equity

G=

Growth rate

Particular

Net income( $ in million

Dividend pay-out ratio

Dividend payment

Retention ratio

Growth rate

KE

D1 (In million)

KE-G

Share price of Company

Information technologies

 

 

 

 

 

 

 

 

 

COMPUTERSHARE LIMITED

2105.8

2%

45.48528

98%

2.1%

7%

46.45

4.5%

1024.0

WISETECH GLOBAL

1537

0%

2.6129

100%

0.2%

12%

2.62

11.5%

22.7

Altium

63.31

2%

1.2662

98%

2.0%

6%

1.29

3.9%

33.4

ENERGY

 

 

 

 

 

 

 

 

 

BHP Billiton

64.29

2%

1.41438

98%

2.2%

9%

1.44

6.9%

20.9

CALTEX AUSTRALIA LIMITED

24.35

2%

0.36525

99%

1.5%

7%

0.37

5.7%

6.5

WORLEYPARSONS LIMITED

520

3%

15.6

97%

2.9%

11%

16.05

8.1%

198.0

APAC COAL LIMITED

-235

0%

 

100%

0.0%

26%

0.00

26.3%

 

FINANACIALS

 

 

 

 

 

 

 

 

 

COMMON WEALTH BANK OF AUSTRALIA

9928

6%

595.68

94%

5.6%

8%

629.28

2.6%

24070.5

National Australian Bank

4975

4%

199

96%

3.8%

9%

206.64

5.3%

3871.6

SUNCORP GROUP LIMITED

1075

5%

56.2225

95%

5.0%

8%

59.01

2.6%

2229.9


Computation of the Price earnings Ratio

Computation of the PE Ratio

 

MPS

EPS

PE ratio (MPS/EPS)

Information technologies

 

 

 

COMPUTERSHARE LIMITED

17.57

0.57

30.82

WISETECH GLOBAL

13.25

0.57

23.25

Altium

22.28

0.35

63.66

ENERGY

 

 

 

BHP Billiton

50.3

 

 

CALTEX AUSTRALIA LIMITED

30.5

1.4

21.79

WORLEYPARSONS LIMITED

17.44

1.3

13.42

APAC COAL LIMITED

2.43

0

#DIV/0!

FINANACIALS

 

 

 

COMMON WEALTH BANK OF AUSTRALIA

70.94

2.2

32.25

National Australian Bank

28.4

1.5

18.93

SUNCORP GROUP LIMITED

13.93

0.57

24.44

(Yahoo finance, 2018).

Rank the ten investments in order of desirability

Rank the ten investments in order of desirability

Particular

PE ratio

Market Price of the shares

KE

Beta

CO-EFFICIENT OF VARIANCE

RANK (IN TERMS OF BETA/ COST OF EQUITY)

RANK (IN TERMS OF BETA/ COST OF EQUITY)

Information technologies

30.82

1023.99

7%

1.04

15.6

8

3

COMPUTERSHARE LIMITED

23.25

22.73

12%

2.39

20.5

10

1

WISETECH GLOBAL

63.66

33.37

6%

0.82

14.1

5

6

Altium

0.00

 

 

 

 

 

 

ENERGY

 

20.88

9%

1.2915

14.2

6

5

BHP Billiton

21.79

6.46

7%

0.91

12.6

3

8

CALTEX AUSTRALIA LIMITED

13.42

198.02

11%

1.69

15.3

7

4

WORLEYPARSONS LIMITED

 

 

26%

4.82

18.3

9

2

APAC COAL LIMITED

 

 

 

 

 

 

 

FINANACIALS

 

 

 

 

 

 

 

COMMON WEALTH BANK OF AUSTRALIA

32.25

24070.55

8%

1.01

12.2

2

9

National Australian Bank

18.93

3871.58

9%

1.18

12.9

4

7

SUNCORP GROUP LIMITED

24.44

2229.93

8%

0.89

11.7

1

10

Which investment of the ten would you select

The best investment option in this case would be Sun Crop Group Limited due to its high return and less risk associated with it.

 
Why the investment option selected 

After evaluating the PE ratio, it could be inferred that the PE ratio of Sun Crop is higher as compared to other companies. If investors want to create value on investment by having less risk then Sun Corporation is the best company for the investment purpose.  Sun Crop has been ranked as 1 ranking company on the basis of its risk per unit of return is 0.1357. It is least risk as compared to other business management organizations.

Research and summarise some interesting facts about Warren Buffet

It is evaluated that Warren Buffet has been following market based theory in which he analyses the company and its performance. He analyses the share price, beta of Company, Market premium and sustainability of company. The Warren Buffet has been appointed as CEO of the Berkshire Hathway. He uses several investment  valuation methods to identify the corporate financial performance of company.

It is analyzed that Warren Buffet uses the profitability, earning per share and estimation of the risk associated with the invested amount.  He reveals that only changes in the share price are not the only indicator to determine the future growth of the company. Investors should evaluate profitability, earning per share and estimation of the risk associated company before investing their capital in their business.  The intrinsic value estimates the precise figure which could be used to evaluate the share price of company and its future growth in the near future.

There are several details which Warren Buffet Would makes on the performance of these companies.

In case of information technologies company.

Information technologies

COMPUTERSHARE LIMITED

WISETECH GLOBAL

Altium

The share price of Computer Share limited $ 17.57 which reflects that share price of company is overvalued. The profitability of company is also lower which reveals the negative market condition. In case of Wisetech Global Company, profitability of company is higher and showing the less amount of financial leverage. The share price of company is lower as compared to its intrinsic value. In context with the Altium Company, Warren Buffet has shown that company has high loss which might result to destruction of its business in very short time.  

In case of Energy Sector companies, following companies have been selected.

ENERGY

BHP Billiton

CALTEX AUSTRALIA LIMITED

WORLEYPARSONS LIMITED

APAC COAL LIMITED

It is evaluated that share price of BHP is $ 50.7 which is higher and will be grown with the very less rate. The high profitability and increased business turnover increase the potentially of the return on capital employed. . AS per the Warren Buffet, Company has been performing well and would create value on the investment (Jordan, 2014). 

In case of CALTEX AUSTRALIA LIMITED, the net profit of company has increased by 22% since last five year. The financial leverage and capital structure is also optimum which shows positive outcomes toe the investors. Warren Buffet reveals that company will grow in the future with good amount of return (Yahoo finance, 2018). In case of WORLEYPARSONS LIMITED, Warren Buffet has divulged that company has maintained stable business practice and will grow with the average rate. Investor who wants to have higher return should not invest more capital in this company. APAC COAL LIMITED has also been facing high loss in its business which will provide good return to investors only in long run. In short run it will destruct the value of the investment of the investor (White, Sondh, and Fried, 2015).

In finance sectors, Warren Buffer will be given following consideration on the following companies.
  • Common Wealth Bank of Australia
  • National Australian Bank
  • Sun Crop Company

 As per the perception of the Warren Buffett, the share price of Common wealth will create value after 3 years. The dividend rate of this company is also very low which will restrict investors for yearly return (Yahoo finance, 2018).

The National Australian Banks has increased its turnover by 25% since last five years. The ordinary dividend offered by company is also fully franked and issued to shareholders.  It will give good return on capital employed to shareholders.

In case of Sun Corp Corporation, Warren Buffet has given view that it will have strong growth rate. The shares of the company may be overvalued in market but in near future, it will have increased its overall profitability and turnover. It will give good amount of return to shareholders (Weygandt, Kimmel, and Kieso, 2015).

 
Compare Warren Buffet’s approach to share valuation and the share valuation methodology

It is analyzed that as per the views of the Warren Buffet, the share price of the company should be valued on the basis of intricacies of the demand and supply factors prevailing in the market. The profitability, return on capital employed and share price valuation should be used to value the share of company (Tseng, and Chiang, 2016).

Warren Buffet consider the following points while undertaking stocks in his portfolio

In terms of the Return on equity

Investors should evaluate the EPS and return on equity available on their investment

Financial leverage of company

It shows the financial risk and sustainability of the business. Company having low financial leverage must be selected for the investment purpose (Yahoo finance, 2018).

Profitability of the business

The profitability of company is determined on the basis of net income and profit earned capacity of company (Delen, Kuzey, and Uyar, 2013).

Nature of the organization and legal compliance

Warren Buffet evaluates the nature of the business market compliance and other factors before investing in the particular company.

 
Share valuation Methodology

Warren Buffet uses two-column Valuation Methodology to evaluate the market price and intrinsic value of the company.

This model is used to evaluate the share price of company (Mwangi, and Murigu, 2015).

  • Relative Valuation
    P/E ratio is calculated to give the ranking to stocks or determining the undervalued and overvalued shares.
  • Dividend Discount Model (Mwangi, and Murigu, 2015).

This discount model is used to evaluate the forecasted share price of company based on the price and return on capital employed.  

 Discounted Cash Flow Model

Ideally, this discount cash flow model is used to determine the value of the shares when the irregular dividends or no dividends are given to shareholders (Yahoo finance, 2018).

Therefore, after considering these both valuation models, it could be inferred that Warren Buffet Dividend discount model is the best model to value the share price of the company.

Conclusion 

There are several factors which might impact the share price value of company. IT is observed that if investor wants to create value on his investment then he must use proper methods and valuation method to create value on the investment.  Now in the end, it could be inferred that Warren Buffet should method should be used to invest capital in particular securities.

 
References

ASX. (2018, may 09). ASX. Retrieved from ASX LIMITED: https://www.asx.com.au/prices/company-information.htm

Bloomberg, 2018, Treasury Government bonds rates, retrieved on 12th May, 2018, from https://www.google.co.in/search?q=Bloomberg+govermentn+bond+rate&oq=Bloomberg+govermentn+bond+rate&aqs=chrome..69i57j0l5.5915j0j9&sourceid=chrome&ie=UTF-8

Jordan, Economics., 2014. Fundamentals of investments. McGraw-Hill Higher Education

Mwangi, M. and Murigu, J.W., 2015. The determinants of financial performance in general insurance companies in Kenya. European Scientific Journal, ESJ, 11(1).

Owens, D. (2018). Simply Wall ST. Retrieved from https://simplywall.st/stocks/au/banks/asx-ben/bendigo-and-adelaide-bank-shares/news/what-makes-bendigo-and-adelaide-bank-limited-asxben-a-great-dividend-stock/

Tseng, F.M. and Chiang, L.L.L., 2016. Why does customer co-creation improve new travel product performance?. Journal of Business Research, 69(6), pp.2309-2317.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.

White, G.L., Sondh, A.C. and Fried, D., 2015. Analysis of Financial Statement. Analysis.

Yahoo finance, 2018, Altium, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/

Yahoo finance, 2018, APAC COAL LIMITED, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/

Yahoo finance, 2018, BHP Billiton, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/

Yahoo finance, 2018, CALTEX AUSTRALIA LIMITED, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/

Yahoo finance, 2018, COMMON WEALTH BANK OF AUSTRALIA, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/

Yahoo finance, 2018, COMPUTERSHARE LIMITED, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/

Yahoo finance, 2018, National Australian Bank, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/

Yahoo finance, 2018, SUNCORP GROUP LIMITED, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/

Yahoo finance, 2018, WISETECH GLOBAL, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/

Yahoo finance, 2018, WORLEYPARSONS LIMITED, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/

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