Assignment Description-
Task 1 Share price tracking and the EMH:
Critically analyse the movement of your allocated share during the period it was being tracked (Jan 2016 - April 2016). You may choose any length of time within that 4 month period from 1 day and up.
Refer to relevant theories and academic literature to explain why and to what extent the share moved in response to new information.
Please see Moodle for your allocated share name.
Task 2 - Company Valuation:
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 Royal Mail PLC (RMG), https://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary/GB00BDVZYZ77GBGBXSET1.html?lang=en.
As an investment advisor you wish to value the company so have collected the following information:
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Balance sheet as at:
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30-Mar-14
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29-Mar-15
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Non-current assets
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£m
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£m
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Tangible assets
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3757
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5153
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Intangible assets
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392
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482
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Investments
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7
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7
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Current assets
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Inventories
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22
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20
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Trade and other receivables
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926
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949
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Other current assets
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3
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32
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Cash
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367
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343
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Investments
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2
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5
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Current liabilities
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Short term loans and overdrafts
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87
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93
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Other current liabilities
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1851
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1875
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Net current assets
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3538
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5023
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Non-current liabilities
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Long term debt
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1137
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1177
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Net assets
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2401
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3846
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30-Mar-14
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29-Mar-15
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Equity
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£m
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£m
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Share capital
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17
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19
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Other reserves
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52
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-16
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Retained Earnings
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2332
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3843
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Total equity
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2401
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3846
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No. of Shares
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1,000
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1,000
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Other information:
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Share price
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Div/share
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EPS
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30-Mar-14
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564p
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0
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30.6
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29-Mar-15
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442p
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20p
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42.8
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Notes on the above information Asset valuations
• The tangible assets have recently been revalued and it is thought that they are overstated by £500m in the above accounts.
• 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 3% and the expected return on the market is 6% per cent.
Royal Mail estimated its Beta would be 1.3 in 2005, source available here on page 53, https://www.royalmailgroup.com/sites/default/files/Initial_Proposals_response-Chapters_6-13_2006.pdf
However using data downloaded from Yahoo Finance your client has calculated that the Betaof Royal Mail is 0.001. The client's sources are listed below.
https://uk.finance.yahoo.com/q/hp?s=RMG.L&b=1&a=00&c=2016&e=8&d=03&f=2016&g=d[accessed 8 April 2016]
https://uk.finance.yahoo.com/q/hp?s=%5EFTSE[accessed 8 April 2016]
Non Current liabilities
Assume the non-current liabilities pay a coupon of 2.375%. They are currently being traded at £90 per £100. You should consider these ‘irredeemable' They are shown in the balance sheet at their par value.
The share price over the last 12 months is shown overleaf:
https://markets.ft.com/research/Markets/Tearsheets/Summary?s=RMG:LSE
Required:
Part AValuation of Royal Mail plc. (Use onlythe information contained in the assignment for Task 1)
a) Net asset value
Calculate the Net asset value per share forRoyal Mail Plc.
b) Cost of capital
i. Calculate the cost of equity capital forRoyal Mailusing the Capital Asset Pricing Model.
ii. Calculate the cost of debt capital (assume a taxation rate of 20%).
iii. Calculate the weighted average cost of capital (WACC).
(use the share price as at 29th of March 2015 for the value of equity)
c) Dividend growth model
Use the dividend growth model to calculate the theoretical price of a share under the following assumptions:
(i) g = 0%
(ii) g = 2%
d) Value per share using the price earnings (p/e) ratio
Calculate the price earnings ratio using the share prices as at 30th of March 2014 (30.6p) and29th of March 2015 (42.8p)and the EPS figure for 2013.
Comment on your answers if the energy sector containing ROYAL MAIL PLC hasan average p/e ratio of 32.8(https://biz.yahoo.com/ic/773.html, accessed8 April 2016).
Part B
Comment on the value of a Royal Mail share and advise your client
a) Use the information from your calculations above and any information other you deem appropriate to arrive at the valuation of aRoyal Mailshare.
In doing so critically evaluate the Price-Earnings and Dividend Growth models used in your calculations and relate your calculations to the current and historic share price information as appropriate.
b) Discuss whether you would advise your client to purchase shares in Royal Mail on the 5th May 2015.