Finance Report: Encore International and Drillago Company Analysis

This report offers a comprehensive analysis of financial concepts and techniques, focusing on stock valuation and project evaluation through two case studies. The first case study examines Encore International, calculating its stock price using the Capital Asset Pricing Model (CAPM) and assessing its potential for expansion. The second case study analyzes Drillago Company's project using Net Present Value (NPV), Internal Rate of Return (IRR), and payback period methods to determine its financial viability. The report concludes that Encore should expand its business, while Drillago's project is acceptable based on NPV and IRR but not on the payback period. The report emphasizes the importance of investment appraisal techniques in evaluating proposals and projects. The report includes references to support the analysis and findings.

RUNNING HEAD: FINANCE IN GLOBAL MARKET
Finance

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Contents
Introduction...........................................................................................................................................2
Analysis of cases...................................................................................................................................2
Case 1 – Encore International............................................................................................................2
Case 2 – Drillago Company...............................................................................................................2
Conclusion.............................................................................................................................................3
References.............................................................................................................................................4

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Introduction
This report contains an evaluation of the current stock price of Encore International and the
project evaluation of Drillago Company. The first part of the report includes a case study of
Encore International, which contains the calculation and valuation of firms’ stock price. The
second part deals with the capital budgeting techniques used for evaluating Drillago’s project,
followed by conclusion of both the cases.
Analysis of cases
Case 1 – Encore International
a. Book value per share = $60,000,000/$2,500,000
a. = $24
b. Current P/E Ratio: $40/6.25 = 6.4
c. By using CAPM formula, required rate of return is calculated. In both the cases, same
formula is used. In case 1 required return is 14.80% and in case 2, where the company
expands its business in European and American markets, new required return is 16%
(Sharifzadeh, 2010).
d. Value per share = $25.
Case 2 – Drillago Company
a. NPV provides an idea about the profitability of a project. If it is positive and high,
then the project is suitable for the investment. NPV of the project is $1,698,543,
which means it is acceptable (Gotze, Northcott and Schuster, 2016).
b. IRR is that rate where PV of cash inflow is equal to PV of cash outflow. A proposal
having high IRR is more desirable. The IRR of Drillago project is 15% and the
company can accept the proposal.
c. If both IRR and NPV give same results, then more preference is given to NPV as it
deals with project’s profitability.

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d. The payback period is 10 years which is more than the company’s condition. Drillago
accepts proposals having payback between 1-7 years. This project is not acceptable as
it has longer payback period.
Conclusion
The above report concludes that Encore should expand its business as it gives more return
than the current required return percentage. Also, Drillago can accept the project from NPV
and IRR point of view but not from Payback period’s standpoint. It also shows that
investment appraisal techniques are very important for evaluating any proposal or project.

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References
Gotze, U., Northcott, D. and Schuster, P. (2016). INVESTMENT APPRAISAL. 2nd ed. New
York: SPRINGER-VERLAG BERLIN AN.
Sharifzadeh, M. (2010). An Empirical and Theoretical Analysis of Capital Asset Pricing
Model. USA: Universal-Publishers.