Corporate Finance Report: Philip Morris Investment Analysis

This report, prepared for a corporate finance course, provides an investment analysis of a hypothetical acquisition. It begins with an executive summary outlining the strategic rationale for investment decisions, focusing on financial and non-financial factors, including market share, product quality, and competitor analysis. The report details project objectives, benefits, and potential risks, such as declining cigarette consumption and tax increases. It also presents different investment scenarios and includes references to relevant financial management literature. The analysis covers financial projects, risk assessment, and alternative scenarios to aid in decision-making. The report aims to provide a comprehensive investment analysis for management, covering both financial and non-financial factors, project risks, and business performance.

Executive Summary
• The report is designed by Philip Morris International in order to evaluate the
recommendations to acquire Teracycles. In the report the decision are analysed
the corporate finance even studying the outcome of those applications . By
evaluating the investment options utilizing the best option for the future growth.
Even the cash management models are studied through analysing the working
capital policy.

Strategic Rationale
• Investment needs is a vital part of the decision-making process. Some
of the main process encompassing the non-financial factors can be
seen with Philip Morris International meeting the regulatory
requirement of US norms.
• Additionally, it has emphasized on long-term sustainability initiatives
towards the stakeholders.
• The financial reasons for the investments can be recognised with
increasing net revenues, Operating income and Dividends declared
per share.

Background- Current Situation facing
the company
• In 2017, the international market share stood at 28%.
• The competing factor of the company can be traced with its excellence in the
product quality, loyalty, taste, customer service, innovation, R&D and setting of
retail price.
• The primary competitors of the company can be further depicted in terms of
three large international tobacco entities.
• The present portfolio of the company comprises of both international and local
and international brands of the is seen to be led by local brand which accounts
for 35% of the total cigarette shipment.
• Marlboro is considered to be complemented as a premium category of product
by the Parliament.

Project Objectives
 Providing a full investment analysis and recommendations which is needed for the
management for the purpose of accepting the project.
 The primary objective of the study has also included the approach which are
followed from inside the company and thee same is presented within the
investment committee of the company.
 The discussion and evaluation of the project objectives are further considered as
per the project risks, business performance and risk factors.
 The project has also aimed at discussing the main process encompassing the non-
financial and financial factors for investors. (Balazs et al. 2016).

Project Effects and Benefits
• Benefits of the project can be depicted as per the various types of information in
terms of identifying the total revenue, gross profit, net income, Return on Assets,
Current (Working Capital) Ratio and Return on Equity (ROI).
• The benefits of the project can be inferred as per the depth of understanding the
exploration, insight and research items. (Finkler et al. 2016).

Financial Projects
NPV All Equity Valuation ($16.48)
NPV Adjusted Present Value (APV) valuation $13.29
NPV under WACC $24.13

Project Risks
• Declining of the consumption of tax paid cigarettes
• Cigarettes are seen to be subject to significant amount of tax, which has
significantly increased the tax related to the products.
• Cigarettes are seen to be subject to significant amount of tax, which has
significantly increased the tax related to the products

Alternative Scenarios
• Scenario 1- Do nothing
• Scenario 2- Considering for investment with the performance ratio
• Scenario 3- Considering the decision for investment with market
performance ratio

Business Performance
v USD $ Million
Particulars 2017 2016 2015
Net Income 6035 6967 6873
Total Revenue 78098 74953 73908
Gross Profit 18316 17294 17429
Operating Income 11503 10815 10623
Total Asset 42,968 36,851 33,956
Current asset 21,594 17,608 15,804
Current Liabilities 15,962 16,467 15386
Stockholders’ Equity 42,968 36,851 33956
Ratio
Return on Asset 0.14 0.19 0.20
Return on Equity 0.14 0.19 0.20
Current Ratio 1.35 1.07 1.03

Appendix
Equity Valuation Value
Risk free rate 2.73%
Marker rate of return 6.64%
Beta 0.73
All Equity Valuation 5.58%
Particulars 2019 2020 2021 2022 2023
Sales 1200 1400 1600 1800 2000
COGS 816 938 1056 1170 1280
Gross profit 384 462 544 630 720
Operating expenses 192 231 272 315 360
EBITDA 192 231 272 315 360
Depreciation 195 199 203 207 211
EBIT -3 32 69 108 149
Tax expenses 1.1 11.1 24.2 37.8 52.2
EBIAT -1.9 20.8 44.9 70.2 96.9
CAPEX 20 20 20 20 20
Investment in working capital 25 -25
Cash Flow -975 148.1 199.8 227.9 257.2 312.9
Porject cost of debt 5.03%
Particulars 1 2 3 4 5
Debt 585 585 585 585 585
Interest rate 18.671 18.67148 18.67148 18.67148 18.67148
Savings 6.535 6.535018 6.535018 6.535018 6.535018
NPV of Tax savings $29.77
WACC valualtion Value
Debt 34339
Interest 1096
Debt cost 3.19%
Leveraged beta 1.2045
All Equity Valuation 7.44%
Equity 23296
Total capital 57635
Debt% 59.58%
Equity% 40.42%
WACC 4.24%

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