Finance 365 Stock Valuation: Corporate Finance Analysis of GM

This project provides a comprehensive corporate finance analysis of General Motors Company (GM), a global automotive company. It includes a company introduction, market risk premium analysis using historical and fundamental approaches, cost of equity calculation using the capital asset pricing model (CAPM), and stock price estimation using the dividend discount model (DDM) under optimistic, moderate, and pessimistic scenarios. The analysis concludes that GM's stock is undervalued, suggesting it as a potential investment opportunity based on its intrinsic value compared to its current stock price. The project utilizes data from various sources, including Nasdaq.com and Finance.yahoo.com, to support its findings and recommendations.

Running head: CORPORATE FINANCE ANALYSIS
Corporate finance analysis
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1CORPORATE FINANCE ANALYSIS
Table of Contents
Section 1.....................................................................................................................................2
Section 2.....................................................................................................................................2
Section 3.....................................................................................................................................3
Section 4.....................................................................................................................................3
Section 5.....................................................................................................................................6

2CORPORATE FINANCE ANALYSIS
Section 1
Founded in the year 1908 by William C. Durant, General Motors Company (GM) is
the global automotive company and the company with its subsidiaries build, design and sells
trucks, cars, automobiles parts and crossovers all over the world. The company operates
through 3 segments that include GM Financial, GM International and GM North America.
Mission of the company is to earn the customers for life through building the brands that can
inspire loyalty and passion not only through technologies but also through improving and
serving the communities under which they operate (Gm.com 2018).
Main competitor of General Motors Company from the automobile industry is the
Toyota Motor. Various other competitors from consumer discretionary sector are Honda
Motor, Daimler and Ford Motor Company.
For the past few years the performance of GM added luster to legend Mary Barra after
she became the CEO of the company towards the end of the year 2013. Under Ms Barra, the
company’s stock became the consistent income play and the dividend is now yielding 3.7%.
Over the last few months the company regained the title as most valuable company for car in
the country from Tesla Inc.
Section 2
Market risk premium (MRP) = average annual index return – Average return on risk free
bond
Historical risk premium, MRP = 0.49% - 0.31% = 0.18%
Fundamental approach

3CORPORATE FINANCE ANALYSIS
The economy of United States on the aspect of GDP is likely to increase at the 3.72%
on an average over the next 3 years as per the estimate of World Bank. With GDP if the
inflation rate of 2.18 is added it will result into the growth of GDP by (3.72+2.18) = 5.90%.
However, the correlation between the GDP and S&P 500 comes at 0.96 that is they are
positively correlated. Therefore, increase in GDP will increase the S&P index almost at the
same rate. therefore the stock market are likely to rise at 5.90% rate. Finally if the dividend
yield of 2.30% is added to boost the return, it will come as (5.90+2.30) = 8.20%
Market risk premium = 8.20% - 2.94% (risk free rate) = 5.26%
Section 3
Cost of equity of the stock
For calculation the cost of equity, capital asset pricing model will be used and the data
from the fundamental approach under section 2 will be used. From the above, it is expected
that the market growth will be at 8.20% that leads to the market rate premium of 5.26%.
Cost of equity (Ke) = Rf + β ( Rm – Rf ) (Corporate Finance Institute 2018).
Where, Rf = risk free rate = 2.94%
Β = beta = 0.31 (through regression)
Rm = market risk premium = 5.26%
Therefore, Ke = 2.94 +0.31*(5.26 – 2.94) = 3.659%
Section 4
Value of the stock

4CORPORATE FINANCE ANALYSIS
Share price of General Motors Company was trading at $ 40.21 on 31st December
2017 and it gave $ 1.52 as dividends for the year. Sales of the company was increased from
2015 to 2016, however again it reduced in the year 2017. Proportionately the operating
income of the company also increased in 2016 as compared to 2015 and again reduced in
2017.
(Source: Nasdaq.com 2018)
It can be further observed from the above image that irrespective of lower market cap,
share price of Federal Signal Corporation, Ferrari N.V and Flat Chryster Automobiles for last
1 year is better as compared to the General Motors Company. Therefore, GM shall raise the
price or cut off the prices to compete in the market (Finance.yahoo.com 2018). Further, the
changes in the exchange rates also have an impact on the global business of GM.
Further, the dividend growth for the last 4 years is as follows –
Year
Dividen
d
Growt
h
2014 1.2
2015 1.38
15.00
%
2016 1.52 10.14

5CORPORATE FINANCE ANALYSIS
%
2017 1.52 0.00%
(Source: Nasdaq.com 2018)
Further, as per the estimates of NASDAQ, the company’s growth rate for the long 5
years term will be at 8.37%. Further, the future for the automobile industry is expected to
grow at significant rate.
Constant dividend growth model
1. Optimistic approach
Price of share (P0) = d / (Ke – g)
Where, d = dividend = 1.52, Ke = cost of equity = 3.66%, g = growth rate = 2%
P0 = 1.52 / (3.66 – 2) = $ 91.57

6CORPORATE FINANCE ANALYSIS
This situation may be experienced by the company as since the month of January
stock of GM has increased by approximately 7% in market. Further, the domestic rival Ford
Motor Company’s performance is expected to be down by 7%.
2. Moderate approach
Price of share (P0) = d / (Ke – g)
Where, d = dividend = 1.52, Ke = cost of equity = 3.66%, g = growth rate = 1%
P0 = 1.52 / (3.66 – 1) = $ 57.14
79 million cars sold worldwide during the year 2017 that revealed 2.3% increase in
the sales in last year. However, for 2018 the industry is expecting sales of 81.6 million that is
just lower than 3.3%. Therefore, the growth of the company is expected to be moderate.
3. Pessimistic approach
Price of share (P0) = d / (Ke – g)
Where, d = dividend = 1.52, Ke = cost of equity = 3.66%, g = growth rate = -1%
P0 = 1.52 / (3.66 + 1) = $ 32.62
Though the company is expected to grow at 7%, its main competitor Toyota Motor
Corp is performing well and may cause fall of the GM’s stock in the coming year.
Section 5
Conclusion
Based on the analysis and computation of the data for General Motors Company it can
be stated that the General Motor Company’s stocks are undervalued. The main reason is that

7CORPORATE FINANCE ANALYSIS
the market cap of the company is more than other companies. Secondly, the as per the
valuation the intrinsic value of the share is ranged between $ 91.57 and $ 57.14 under
optimistic and moderate approach which is more than the current stock price of $ 40.21.
Therefore, it is suggested that the General Motors Company can be considered for investment
as the stock price of the company is expected to increase even if the growth rate is moderate.

8CORPORATE FINANCE ANALYSIS
Reference
Corporate Finance Institute. (2018). Cost of Equity - Formula, Guide, How to Calculate Cost
of Equity. [online] Available at:
https://corporatefinanceinstitute.com/resources/knowledge/finance/cost-of-equity-guide/
[Accessed 10 Apr. 2018].
Finance.yahoo.com. (2018). GM : Summary for General Motors Company - Yahoo Finance.
[online] Available at: https://finance.yahoo.com/quote/GM/ [Accessed 10 Apr. 2018].
Gm.com. (2018). General Motors | Official Global Site | GM.com. [online] Available at:
https://www.gm.com/ [Accessed 10 Apr. 2018].
Nasdaq.com. (2018). General Motors Company Analyst Forecasts Earnings Growth. [online]
Available at: https://www.nasdaq.com/symbol/gm/earnings-growth [Accessed 10 Apr. 2018].