Write a 1,050- to 1,750-word paper in which you justify the current market price of the organization’s debt, if any, and equity, using various capital valuation models. Complete the following in your paper: The valuation of a company is planning, making decisions, and strategy. A way of building confidence and worth in a company is by putting a value on it, so that it shows sustainability. We will use the P&G annual report and choose a valuation model that will help to justify the current market price of P&G’s debt, if any, and equity. We will show calculations that will support our findings and include those that involve rates of return. An explanation of why we chose the valuation model will also be included. The text Principles of Managerial Finance states “Valuation is the process that links risk and return to determine the worth of an asset” (Gitman, L.J, 2009 Ch. 6). Valuation models are used as investment tools used to help with making investment decisions. Finding the market price of a debt or equity is the way to determine whether an asset is under or overvalued.
On the P&G ‘s balance sheet this exposes capital and current liabilities. Capital can be broken down into debt capital (long term borrowing and bonds) and equity capital. The purpose of Free Cash Flow Model is a method that determines the value of an organization as the present value of it’s expected free cash flow. (Gitman, 2005, p. 326) The formula is to calculate and find the organizations present value. This is a measure of how much cash a business is generating for equipment, expansion, dividends, debt management purposes. FCF=Operating cash flow minus capital Expenditures. Free cash flow=CFO- capital to maintain growth or Free Cash flow= CFO- capital expenditures. $15.8 B (operating income) $3.31B (capital expenditures) = $12 in cash flow. This weighs heavy on their net income of $11,797 M. The presence of free cash flow indicates room for growth, to develop and make new products and pay dividends and stock buybacks; which P&G is in the 98th percentile. This represents that the financial flexibility of P&G with a conversion ratio of 15% of sales and also pays nearly 50% of it’s free cash flows to shareholders due to the fact that they are a stable and mature company.
In Procter & Gamble’s most recent annual report, they show an amount of 70.35 billion dollars in total liabilities. Of that amount, 27.3 billion is from current liabilities, which will be paid off in the next year. There is 22 billion in long term debt and 21 billion in deferred income taxes and all other non-current liabilities. The total amount is an increase of almost 4 billion dollars from last year. P & G have and amount of 67.4 billion dollars in total equity. These totals give the company a Debt to Equity ratio of 1.05 which is about in the middle of what most capital intensive industries come up with. This number is also a nice decrease of the 1.1 which was last year’s ratio.
A company as well-known as P & G that has been around as long as they have shows their strong leverage. Although it looks like P & G has been somewhat aggressive in financing its growth with debt, it looks like it is generating more earnings than without the financing. As long as the cost of debt financing does not outweigh the return, shareholders would benefit because more earnings would be shared. Procter & Gamble’s long term financial targets are to grow their sales of organic products 1-2% faster that their competitors in this area. The company intends on delivering and (EPS) Earnings Per Share growth up to the low double digits, and to generate free cash flow productivity of 90% or greater.
Principles of Managerial Finance, Twelfth Edition, by Lawrence J. Gitman. Copyright © 2009 by Lawrence J. Gitman. bjyo Prekntiace Hjalol, a n Pekarsaon Ejdoucaktiona, In cj.
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