Valuation of BHP Group: Corporate Finance

Running Head: Corporate Finance
Corporate Finance

Corporate Finance
Contents
Executive Summary.................................................................................................. 2
Company’s Profile: BHP Group................................................................................... 2
Market Risk (Beta) of BHP Group................................................................................ 4
Discount rate Calculation of BHP Group using Capital Asset Pricing Model.......................6
Current Price of BHP Group Stock Using Dividend Growth Model....................................7
Limitations of Constant Dividend Growth Model/Gordon Growth Model.............................9
References............................................................................................................ 10
Appendix............................................................................................................... 11
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Corporate Finance
Executive Summary
The report has carried out the detailed valuation of BHP Group. First of all,
regression has been run on the monthly returns of market and monthly returns
of the stock of BHP Group to calculate beta of the Group which is also known as
market risk. The beta calculated by financial website and beta calculated by us
through regression model is differing and the reasons are described in the
report. The beta calculated by Yahoo finance is taken in this case. Then, Capital
Asset Pricing model has been explained in detail and also being employed to
calculate the discount rate of BHP Group. Also, a constant dividend discount
model has been implemented for computing current price of BHP Group’s stock.
This model has also been discussed in quite detail along with its limitations.
Company’s Profile: BHP Group
BHP is one of the leading companies operating in resources extraction and
processing. It deals in extracting and processing oil, minerals and gas. It has a
total employee base of 62000 workers and contractors who are mainly from
America and Australia. The sales and marketing activity are carried out from
Singapore and Houston, United States and the products are being sold
worldwide. BHP Group is headquartered in Melbourne, Australia.
BHP is carrying out its operations under Dual Listed Company structure and has
2 parent companies which include BHP Group PLC. and BHP Group Limited.
These are jointly stated as BHP Group. The Unified Board and the management
run and manage this group. (BHP, 2019).
The group has been positioned three amongst the top 2000 companies operating
in Australia. Primary source of revenue for the group is Metal Ore Mining in
Australia. The company earned $59,714,816,000 of revenue in 2018, which
includes the figures of sale and other types of revenue. At present, the company
is carrying out its business under the stewardship of Andrew Stewart Mackenzie,
the Chief Executive Officer (CEO) of the group.
The company is conducting the business in the following divisions:
1. Iron Ore: The division is involved in finding and extracting the iron ore and
supplying the commodity to the worldwide markets. Also, it is the largest
supplier of this commodity.
2. Coal: For the industrial applications and power generation thermal coals
are used. This thermal coal is produced and marketed by this division of
BHP Group. The coking coals which are used in the steel manufacturing
are also being produced and supplied by this division.
3. Petroleum and Potash: This division manages the process of exploring and
extracting the petroleum and gas and also market them worldwide. It
deals in the products like, crude oil and condensate, LNG, LPG and natural
gas. The division is also into potash pre-development.
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Corporate Finance
4. Copper: This area of BHP Group is responsible for exploring and mining of
silver, molybdenum, uranium, nickel, copper, lead, zinc, and gold.
BHP and Billiton merged with each other in 2001, and therefore, BHP Group
was earlier named as BHP Billiton. Billiton started its operation in 1860s as a
mining company and BHP started in the year 1885 as silver, zinc and lead
producer in Broken Hill, Australia. In 2001, BHP and Billiton merged with each
other and therefore, was renamed as BHP Billiton and became the World’s
largest diversified resource company. At present, BHP Billiton is known as
BHP group (Bloomberg, 2019). Billiton has been removed from the company’s
name because of rebranding campaign of worth $10 million with the objective
of increasing a focus on Australian roots. This rebranding campaign included
television ads of 30-second, online video of three minutes and also a new
slogan. From the mid-2016, the company is using a fresh logo and a new
slogan that is “Think Big”. Earlier, the slogan was “Resourcing the Future”.
Corporate purpose of BHP Group involves discovery, acquisition, developing
and marketing of the natural resources. If we have a look at Figure 1, then we
can see the trend of the share price of BHP Group. It has shown an increasing
trend over the last five years.
Figure 1: Share Price Growth Rate of BHP Group
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