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General motors

General motors. Module 9 : Valuation of Equity. Enterprise operations. General Motors. Client Strategy Template: GM . Strategies.

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General motors

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  1. General motors Module 9: Valuation of Equity

  2. Enterprise operations General Motors

  3. Client Strategy Template: GM Strategies Growth Strategy:Focus on “alternative propulsion strategies” (hybrid, electric, FlexFuel, hydrogen fuel cell) in an attempt to create environmental diversity and fuel efficiency throughout product line Financial Goals & Operating Priorities:Aim to be the industry leader in fuel efficiency, pursue top market share in both domestic and global market Characteristics of the Business Major Business Units: GMNA, GME, GMIO, GMSA, GM Financial Markets: Automotive assembly and manufacturing, financial services (leases, contracts), automotive safety technology Products: Chevrolet, GMC, Buick, Cadillac, OnStar technology, GM Financial services Customers: Auto wholesalers, Rental car agencies, Authorized dealerships Competitors:Toyota, Ford, Nissan Strategic Alliances/Joint Ventures: Mostly concentrated in China Potential Adverse Influences: Constant technology innovation, oil prices, raw material prices, government regulation, dependence on suppliers, product recalls (safety issues)

  4. Markets & products • Auto brands • Chevrolet • GMC • Buick • Cadillac • OnStar (wholly owned sub) • GM Financial • Formerly AmeriCredit Corp • Strategic Alliances • Concentrated in China • JV with SAIC Motor

  5. Parsimonious Forecasting General Motors

  6. Break down RNEA Enterprise Profit Margin (EPM) -Measure of profitability -How much operating profit does the firm earn from each sales dollar? -Used EPM from sales Enterprise Asset Turnover (EAT) -Measure of efficiency -What level of sales does the firm realize from each dollar invested in enterprise assets?

  7. Parsimonious assumptions

  8. Valuation using cash flows • FCF = EPAT - ∆NEA • Discount rate  10% • Enterprise Value = 109,146

  9. Cost of capital & valuation General Motors

  10. Cost of enterprise capital • rEnt = (rD * VD/VEnt) + (rEq * VEq/VEnt) • Cost of equity = 12.6% • Cost of debt = 1.92% • Calculated WACC = 11.89%

  11. Valuing GM • Estimate of Enterprise Cost of Capital = 11.89% • Enterprise Value = 89,184

  12. Residual enterprise income General Motors

  13. REI Model • Assumptions remain the same: • 2.82% sales growth • 4.73% EPM • 5.7 EATO • 11.89% WACC • Enterprise value matches

  14. Abnormal Enterprise Income Growth General Motors

  15. AGR Model • Assumptions remain the same: • 2.82% sales growth • 4.73% EPM • 5.7 EATO • 11.89% WACC • Enterprise value = 89,184

  16. Checking our figures • Enterprise value remains $89,184 throughout all models

  17. Valuation of Equity General Motors

  18. Task #1: Estimate value of equity share • Estimate of market value of debt: 3,805 • Estimate of value of enterprise: 89,184 • Estimate of value of equity: 85,380

  19. Task #2: Sensitivity Matrix • Analysis continues to predict that GM is undervalued • Market multiples • Equity value calculation • Is my valuation far too optimistic? What is happening with GM stock?

  20. GM Stock troubles • Since January 1, 2014: • Drop from $41 to $35 price per share • March 10- March 14 down 10% • Ignition switch recall • Linked to at least a dozen deaths in the last decade • Global recall of 1.6 million vehicles • “biggest crisis since going bankrupt” • Class action lawsuit • CEO Barra to testify before US House of Representatives on April 1

  21. Task #3: Analyst reports

  22. Value Line forecast • Beginning book value per share + earnings per share – dividends per share = Ending book value per share • g(Earnings) = 7.94% • g(Dividends) = 4.77%

  23. Dividend discount model Value of equity share = 36.68

  24. Residual income model Value of equity share = 36.96

  25. Growth in Earnings/Sales g = growth in residual income: -13.4% Long-term growth in earnings/sales: 9% My assumption: 2.82%

  26. Questions?

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