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General motors

General motors. Module 6 : Estimating the Cost of Capital. Enterprise operations. General Motors. Client Strategy Template: GM . Strategies.

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General motors

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  1. General motors Module 6: Estimating the Cost of Capital

  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. Reformulation General Motors

  6. Net financial liabilities

  7. Parsimonious Forecasting General Motors

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

  9. Parsimonious assumptions

  10. Valuation using cash flows • FCF = EPAT - ∆NEA • Discount rate  10% • Enterprise Value = 133,895

  11. Cost of capital & valuation General Motors

  12. Regression Data • 60 months of S&P historical data • 39 months of GM historical data • Bankruptcy • MTLQQ • Used to find Cost of Equity Capital (CAPM)

  13. “Government motors” • June 2009: filed Chapter 11 bankruptcy • July 2009: emerged from bankruptcy with ownership split between: • US Federal Government • United Auto Workers Association • Canadian Government • GM bondholders • November 2010: GM shares returned to the NYSE at $33 per share

  14. Estimating Beta

  15. Regression Results • Coefficient: 1.73 • 95% confidence interval: 1.04-2.41

  16. Beta estimates • Bloomberg Adjusted Beta  1.303 • Other Beta Estimates • Yahoo Finance 1.76 • Nasdaq 1.2 • Google Finance 1.73 • MSN Money 1.76 • Morningstar 1.76 • Firstrade 1.76 • ADVFN 1.70 • Calculated Beta  1.73 • Selected Beta  1.73

  17. Cost of equity • Capital Asset Pricing Model: • Assumptions: • Beta = 1.73 • rMkT = 8% • 5 return +3% premium • Intercept and standard error found in regression • rEqt = 19.72% • Using equation from slide 13: rEq = rrf + [β*(rMkt – rrf)] • Assumptions: • Beta = 1.73 • rMkT = 8% • rrf = 3.68% (from Bloomberg) • rEqt = 11.15% Cost of Equity from Bloomberg = 12.6%

  18. Cost of debt capital • Pretax borrowing rate proxied by: • Interest Expense Average amount of interest bearing debt • rD = 489/16,050*(1-.37) = 1.9% • Alternative calculation: • FEAT NFL • rD = 1,622/(5,419) = (29.9%) Cost of Debt from Bloomberg = 1.9%

  19. Cost of enterprise capital • rEnt = (rD * VD/VEnt) + (rEq * VEq/VEnt) • For GM: • VD = (5,419)  NFL • VEq = 52,482  Market cap • Implied VEnt = 47,063 • Calculated WACC = 13.83%

  20. WACC: Bloomberg

  21. Valuing GM • Estimate of Enterprise Cost of Capital = 10.1%

  22. Questions?

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