AFE7002-A: Corporate Finance Project - British American Tobacco

This report presents a valuation study of British American Tobacco, employing methods such as the economic valuation model, net asset valuation model, total shareholder return (TSR), comparable ratio analysis, and discounted cash flow (DCF) to assess the company's investment position. The EVA analysis indicates a current value of $4,743,796.77, while the total shareholder return over the past five years is 28.39%, reflecting a strong market position. However, the DCF valuation suggests that the intrinsic value is lower than the market value, implying the stock is overvalued. Based on this analysis, the report concludes that the stock price of British American Tobacco is overvalued, making it a less favorable investment choice.

Running Head: Corporate Finance
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Project Report: 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)

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Further, the comparison has been done among the stock price of the British American
tobacco Plc and the competitors valuation and it has been found that the overall position of
the company is very lowered in the industry in terms of P/E ratio, Price book ratio, price sales
ratio etc. (Jiashu, 2009) the below image depicts that the huge changes are required to be
done by the company in order to improve the overall performance of the business (Jiashu,
2009). The changes could help the company to improve the overall performance in the
market.
Net asset value:
Net asset value is the valuation model which describes that total value of the business
on the basis of an organization’s assets minus the liabilities value of the business. The net
asset value of a company is recognized in order to identify the overall performance of the
business and the total equity value of the business to run the operations of the business
smoothly (Horngren, 2009). The net asset value method has been applied on BRITISH
AMERICAN TOBACCO PLC to recognize the worth of the business on the basis of its
equity amount.
In case of BRITISH AMERICAN TOBACCO PLC, it has been found that the net
asset value of the company has been improved in the year of 2017 at huge level. The overall
value of the company was better in earlier months as well but in the recent year, a huge
increment has been seen. The net shareholder value of the business has been improved from $
348.97 to $ 2974.75 from 2013 to 2017. It express that the worth of the company has been
improved at great level and thus the company is a good choice for the purpose of investment.

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Figure 3: Net asset value method
(Yahoo Finance, 2018)
Comparable ratios:
Ratio analysis is one of the financial analysis tools which are applied on the financial
statement of the company to recognize the various financial level of the business. It makes it
easier for the business and the stakeholders of the business to identify the changes into the
business at different level. The comparable ratios of the BRITISH AMERICAN TOBACCO
PLC have been done to recognize the changes into the performance of the company. The
different ratios of the company have been calculated which are as follows:
Price earnings ratio:
Price earnings ratio is an investment ratio which depicts the total price and earnings
relation in a business (Higgins, 2012). The comparison has been done among the price
earnings ratio of the British American tobacco Plc and the competitors and it has been found
that the overall position of the company is much lowered in the industry in terms of P/E ratio.
The below image depicts that the PE ratio of BTI is 2 and the industry average is 14.2 which
depict huge differences. And thus the business is required to improve the profitability level
and market position so that the PE level could be improved.
Price book value ratio:

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Further, the Price book ratio has been calculated which is also an investment ratio and
depicts the total market price of a stock against the book stock price of the company. The
comparison has been done among the price book ratio of the British American tobacco Plc
and the competitors and it has been found that the overall position of the company is very
lowered in the industry in terms of price book ratio (Horngren, 2009). The below image
depicts that the Price book ratio of BTI is 1.3 and the industry average is 7.2 which depict
huge differences. And thus the business is required to improve the market position so that the
PE level could be improved.
EV/EBITDA:
Further, the EV/EBITDA ratio has been calculated which is also an investment ratio
and depicts the total enterprise value of a business against the earnings before the interest,
taxes, dividend and the amortization of the company (Hillier, Grinblatt and Titman, 2011).
The comparison has been done among the price book ratio of the British American tobacco
Plc and the competitors and it has been found that the overall position of the company is very
lowered in the industry in terms of managing the enterprise value against the EBITDA. The
company is required to make the changes into the financial strategies and policies so that the
profitability level of the company could be improved and the company get succeed to make a
better position in the market.
Discounted cash flow:
Discounted cash flow method is one of the crucial business valuation models. It takes
the concern on the historical cash flows position of the business to estimate the future cash
flows of the business. On the basis of which an intrinsic value of the business is calculated
and it is compared to the market book price of the company to identify that how much
changes have taken place into the overall position of the company in a given period of time
(Higgins, 2012).
The discounted cash flow method has been applied on BRITISH AMERICAN
TOBACCO PLC. Firstly, the future cash flows of the business have been calculated on the
basis of the last 5 years cash flows of the business. It has been found that the FCFF of the
company is $ 34,27,444.60. the growth rate among the dividends of the company are 12.67%
which is quite higher in the industry and thus the industry data has been taken to measure the
overall growth of the business which s 3.33% (Appendix).

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In addition, firstly the future cash flows of the next 10 years have been calculated and
it has been found that the terminal cash flow of the business is $ 49,14,644.57. The present
value method has been applied on the future cash flows and the terminal cash flows of the
business to identify the current worth of the business (Appendix). The WACC i.e. 1.17% rate
has been applied on the future cash flows and terminal cash flows of the business and it has
been found that the total PV of next 10 year cash outflows of the business are $
38,569,707.91 (Investing, 2018).
The present value of terminal cash flows of the business is $ 52,622,162.78 which
was earlier $ 4,914,644.57. On the basis of present value of terminal cash flows of the
business, the valuation process has been applied on the financial figures of the company.
Firstly, the total worth of the business has been calculated through adding the terminal cash
flows and the PV of future cash flows of the business (Appendix). The total value of the firm
is $ 91,191,870.68. Further, the total debt amount of the company has been deducted from the
total value of the firm to recognize the value of the equity of the business.
The total value of equity of the business has been estimated $ 26.501,870.98. The
total stock price of the company has been dividend by the outstanding shares of the company
i.e. 20,440 to identify the per share value of equity off the business which is 1296.57. It
express that the intrinsic value of the company is $ 1296.57. However, the market price of the
company is $ 4848 (Yahoo Finance, 2018). It express that the market position of the
company is overvalued.
Conclusion:
On the basis of the various valuation model of the company, it has been found that the
BRITISH AMERICAN TOBACCO PLC has made various changes into the financial
strategies and policies in last 5 years which impact could be seen in the valuation process of
the business. However, on the basis of the overall financial valuation model, it has been
found that the stock price of the company is undervalued. The market price of the company is
$ 4848 in current market. On the other hand, the intrinsic value of the company from the
entire valuation model is lower the market value and thus it is concluded that the stock price
of the company is undervalued.

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The valuation method makes it easier for the investors and the financial analyst to
identify the economical profit and worth of the business and make better decision about the
investment level of the business.

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References:
Gapenski, L.C., 2008. Healthcare finance: an introduction to accounting and financial
management. Health Administration Press.
Government publications. 2018. Rates and allowances. [online]. Available at:
https://www.gov.uk/government/publications/rates-and-allowances-corporation-tax/rates-
and-allowances-corporation-tax (accessed 17/9/18).
Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Hillier, D., Grinblatt, M. and Titman, S., 2011. Financial markets and corporate strategy.
McGraw Hill.
Home. 2018.Britsih American tobacco plc. [online]. Available at: http://www.bat.com/
(accessed 17/9/18).
Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education
India.
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year-bond-yield-historical-data (accessed 17/9/18).
Jiashu, G., 2009. Study on Fair Value Accounting——on the essential characteristics of
financial accounting [J]. Accounting Research, 5, p.003.
Lee.C.F and Lee, A, C,.2006. Encyclopedia of finance, Springer science, new York
Lord, B.R., 2007. Strategic management accounting. Issues in Management Accounting, 3
(2). P. 17.
Lumby,S and Jones,C,.2007. Corporate finance theory & practice, 7th edition, Thomson,
London
Madura, J. 2014. Financial Markets and Institutions. Cengage Learning.
Morningstar. 2018.Britsih American tobacco plc. [online]. Available at:
http://investors.morningstar.com/ownership/shareholders-overview.html?
t=BTI&region=usa&culture=en-US (accessed 17/9/18).