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General motors

General motors. Module 8 : Valuation Using Abnormal Enterprise Income Growth. Enterprise operations. General Motors. Client Strategy Template: GM . Strategies.

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General motors

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  1. General motors Module 8: Valuation Using Abnormal Enterprise Income Growth

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

  11. WACC: Bloomberg

  12. Valuing GM • Estimate of Enterprise Cost of Capital = 11.89% • Enterprise Value = 89,194

  13. Residual enterprise income General Motors

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

  15. Abnormal Enterprise Income Growth General Motors

  16. AGR Model • Assumptions remain the same: • 2.82% sales growth • 4.73% EPM • 5.7 EATO • 11.89% WACC • Enterprise value = 89,194

  17. Key Points • Steady State in 2017 • Total to be capitalized is anchored on EPAT • Add PV of AGR • Add PV of continuing value • Enterprise value = total to be capitalized x (1/WACC) • Explains the premium of market value over capitalized EPAT

  18. Checking our figures • Enterprise value remains $89,194 throughout all models

  19. Questions?

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