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Equity Valuation | Financial Statements | Rolls Royce, Cobham, Avon Paper

   

Added on  2020-02-18

22 Pages5994 Words75 Views
1Equity ValuationName:Course Professor’s nameUniversity nameCity, StateDate of submission

2Introduction This paper seeks to provide comprehensive analysis of four companies that are aerospace and defence industry. The paper also aims to show how how the companies report their financial staments using IFRS nad IAS guidelines. The companies in focus are; Rolls Royce holdings,Cobham, Avon Rubber and Cohort plc. The following are some of the terminologies that they use when preparing the financial statements. net asset value :, the net asset value is used by their shareholders (of the four companies) to know at the time of publication the price at which the companies can be liquidated or acquired. Usually the fund manager publishes it every day, after the closing of the markets or at a specific time if it includes stocks of markets from different continents (A Basic Guide for Valuing a Company, 2002). For Rools roysce holding the net asset value is 16,5 pounds/share , Cobham is 12.93punds /share.Market value-This is the price that the asset would fetch in the Bourse, it is also known as market capitalization and is obtained by multiplying the number of ordinary shares by the share price currently(Britton and Waterston, 2013). The investor will calculate the return on his investment by the difference between the net asset value at the time of purchase andthe net asset value at the time of his redemption, having to tax for the capital gains obtained(Cragg and Malkiel, 2009). The market value for each of the four companies under review is different.Discount cash flow- The investment managers at the four companies use the following valuation method that helps the investor to estimate the attractiveness of an investment opportunity. This method uses future cashflow projections and then discounts them toarrive at an

3estimated present value, which is consequently used to evaluate the potential of an investment. Ifthe present value is greater than the current cost then the investment opportunity is a good one(Damodaran, 2013).Dividend pay- This is a distribution of the earnings that a company receives in a particular year to its shareholders. Dividend pay is dicided by the board of directors and is paid as either interim or final at the year end. The dividend for the four companies vary depending on the performance and companies policies and also industry’s performace.Dividend growth- This is the rate of growth in perentage that a stock’s dividend undergoes over a period of time.That is to say, since the net asset value represents the evolution of the value of the investment fund, it will be a relevant indicator to know the performance that this product provides during theperiod between the moment of its purchase and the moment of its sale or liquidation, as well as the withholding that will be applied on the same from the tax point of view (ELLIOTT, 2017).Analysis of the aerospace and defense industryBritains aerospace industry is the second largest in the world. Failure to secure a good brexit dealhas hurt the industry and it is expected that aerospace companies turnover could decrease in the near future. This means that dividends paid out, earnings per share and price of the share may fall in companies in this industry. On the other hand, the defence industry is on a positive trajectory, with many governments increasing their military wares, companies in this industry have improved dividend growth as well as share price for their shareholders.Methods of valuing a company

4The valuation of a company, whether we are talking about a company own or others, is a delicateand crucial exercise in the world of investment. Calculating the value of your business is not easy, just as it is not easy to determine the economic value of any tangible asset or service(Fernández López, 2002).If we let ourselves be led by our intuitive knowledge and by framing any economic activity within a market economy, we could conclude that any material good or any service has the exact value that a hypothetical buyer is willing to pay for itWhat is the value of a company?It is true that any quantification of an economic value always entails some subjective component.Everything will depend on what the good situation we are valuing and our intentions with that good.In the case of a company, it is not the same valuing it with intentions in mind or others. We can value a company of our own because we want to get rid of it and put it up for sale. But also to seek financing using its value as collateral, or because we want to take to market shares of our company.In an opposite situation, we may want to value an outside company to acquire it, to obtain part of its shares, to invest in it through other type of formulas, etc (Kimmel, Kieso and Weygandt, n.d.). In this sense, our intention as investors is fundamental in determining the procedure that we must use to value a company. And this procedure, in turn will drastically change the outcome of our assessment.Accounting valuation vs market valuation, market value per C/S

5The market value on many occasions with the price and is that this is not only what is really worth, but what some people are willing to pay for that company at any time of the timeline.It is very interesting therefore in these moments, in which the company faces temporarily in a moment of serious economic recession and crisis of values of many markets, considering an extra differentiation between two concepts that are more different and at the same time diffuse ofwhat appear, market value and book value but with a clear objective point of view (Lin and Wang, 2017).The book value is an undeniable price, a so-called theoretical price that has both the company as a whole and each of its parts in the so-called shares that correspond to its own owners, shareholders. The book value or theoretical price is basically knowing the assets, liabilities and net that the company counts as well as the synergies by know how and positioning of the company in the market.The book value may vary over time, but in a more measured and safe manner than the market value. The market value is an very explosive value and depends directly on what happens along acertain time line. If the company, for example, gives good news, although it is at that moment its theoretical price has not risen, its market value because many people will start to buy shares of said company and appreciate it will rise.Under these conditions it is inevitable therefore that many oscillators indicate that we must buy shares of companies, since we can buy them for a much cheaper price than what these shares really are worth and also can contribute each year in the form of dividends. It is therefore very significant the current situation of the markets in terms of market value and accounting value that

6certainly give meaning to the famous phrase that is always run between analysts(Koller, Goedhart and Wessels, 2015).Hitorical and Current figuresIn financial accounting historical price of shares are important because they are used to show the growth of the share in terms of both dividend growth and share price. On the other hand, current figures are the ones that show the shares current price (Kurokawa, 2010).Diffent methods of market valuationThese are methods developed by experts in business and finance, so that their implementation involves a certain degree of complexity. But we can do a simplified approach to understand whatfactors related to the company takes into account each one of them and which may be more appropriate depending on what situations.1. The book valueIt is a valuation method based on the balance of accounts of the company and is one of the simplest to calculate. It only takes into account the net worth of the company.In this method, the assets of the company are taken, that is, the assets that it has at that moment (contributions from different partners, movable and immovable property, retained earnings over time of the company activity, etc. .) and then you subtract the liabilities (what the company owes its debts) (Madden, 2003).As is assumed, this type of valuation method will be especially

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