Valuation Study of British American Tobacco using Financial Tools

Running Head: Corporate Finance
1
Project Report: Corporate Finance

Corporate Finance
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Executive summary
A valuation study has been performed on the British American Tobacco in the report.
It focuses on the economic valuation model, net asset valuation model, total share holder
return, comparable ratio, discounted cash flows etc methods to identify the position of the
business in terms of the investment. The EVA analysis express that the current EVA of the
company is $ 4743796.77. the total shareholder return of last 5 years are 28.39%. the position
of TSR is highest in the current market.
Further, the DCF valuation method expresses that the intrinsic value of the company
is lower than the market value which means the stock is overvalued. On the basis of the
study, the stock price of the company is undervalued and thus the company is not a good
choice for the purpose of investment.

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Contents
Introduction...........................................................................................................................................4
Company overview................................................................................................................................4
EVA analysis.........................................................................................................................................4
Total shareholder return.........................................................................................................................5
Net asset value.......................................................................................................................................7
Comparable ratios..................................................................................................................................7
Discounted cash flow............................................................................................................................9
Conclusion...........................................................................................................................................10
References...........................................................................................................................................11
Appendix.............................................................................................................................................13

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Introduction:
The report has been prepared to identify the various tools to identify the value of a
business in the marketplace. A business and the investors are required to identify various
tools and techniques on the basis of which the correct worth of the business could be
recognized. In this report, BRITISH AMERICAN TOBACCO PLC has been taken into the
concern and various financial tools such as EVA analysis, total shareholder return, net asset
value, ratios, discounted cash flows etc have been calculated on the company to reach over a
conclusion about the overall performance of the company in the market and the investment
position of the company (Lumby and Jones, 2007).
Company overview:
BRITISH AMERICAN TOBACCO PLC is a British multinational company which
operates its activities under tobacco industry in the US market. Headquarter of the company
is in London. The company services its products and revises at worldwide. It is one of the
leading companies in around 50 countries in tobacco industry. The company has managed
better strategies and financial planning to improve the overall performance of the business in
the industry (Home, 2018).
EVA analysis:
Economic value added is a measurement tool to identify the residual value of an
organization. It valuates the financial performance of the business on the basis of the
operating profits and the cost of capita of the business. It briefs the exact economic value of
the business (Madura, 2014). The EVA analysis has been done on BRITISH AMERICAN
TOBACCO PLC to identify the economic worth of the business.
For analyzing the EVA figures of the business, the operating profit of the business has
been collected form the annual report of the company. The US corporate tax which is 20%
has been taken into the context further. The WACC of each year has been calculated through
collecting the data from various authentic websites and the US official websites. On the basis
of the overall EVA analysis, it has been found that the EVA position of the company as
enough strong in the year of 2013. But along with the time, a decrement has been seen in the
economic profit position of the company (lord, 2007).

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The current year performance of BRITISH AMERICAN TOBACCO PLC explains
that the economic profit level of the company is highest and thus the company is performing
better in the market. The investment level of the company has also been improved.
Figure 1: Economic Value analysis
(Morningstar, 2018)
Total shareholder return:
Further, the study has been done on the total shareholder return of the company (Lord,
2007). Total shareholder return (TSR) is a measurement tool which evaluates the
performance of the stock of a business, it combines the share price, and dividend paid etc
items of the company to identify the total return to shareholder which is mainly expressed in
the percentage form (Lee and Lee, 2006).
In case of BRITISH AMERICAN TOBACCO PLC, it has been found that the total
shareholder return of the company was 51.58%, 19.65%, -2.58%, 44.22% and 29.11%
respectively in the year of 2017, 2016, 2015, 2014 and 2013. It expresses that the worth of
the shareholders in the business was highest in the year of 2017. The huge changes have
occurred due to the great increment in the stock price of the company in the year of 2017
(Morningstar, 2018). Further, it has been found that the overall position of the company is
improving constantly and because of it, the total shareholder return of the company is also
showing positive result. It briefs a better investment position in the company.

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Figure 2: Total shareholder return
Yearend
dates
28/01/201
7
30/01/
2016
24/01/201
5
25/01/2
014
26/01/201
3
5 year
total
1 Closing
stock price
£
4848.258
79
4313.4
497
3394.646
5
3025.76
2
2681.454
834
3652.71
436
2 Add
dividends
£ 2.19 1.56 1.52 1.45 1.41
1.626
3 Less
opening
stock price
£
3200 3606.5 3486 2099 2078 2893.9
4 TSR - £ 1650.448
79
708.50
971
-
89.83351
6
928.211
96
604.8648
34
760.440
355
5 TSR
(percentag
e of
opening
price)
51.58% 19.65
%
-2.58% 44.22% 29.11% 0.28394
911
(Morningstar, 2018)