cooperate finance
GSBS6130- Corporate Finance
1. Introduction
Even though the operating performance of Innovative Chemical Corporation (ICC) has been outstanding, there are some problems in respect of the share price appreciation. Firstly, P/E ratio will be used to evaluate the company’s stock and factors which affect company’s P/E ratio will be listed. Furthermore, discounted dividend valuation model will be demonstrated and fundamental factors which impact the share pricing will be analysed. Finally, the value of ICC at 30 June 2010 will be calculated using P/E ratio and DDM model. Meantime, the weakness of those two models will be illustrated, and alternative methodology will be applied to calculate the intrinsic valuation of ICC and then compare the result with closing price on 30 June 2010.
2. P/E ratio
There are two important factors will affect P/E ratio of a company, which is risk and growth opportunity. Since the company’s P/E ratio is higher than that of other companies, which means the less risk the investment will be in this company. The other factor is growth opportunity; the company’s P/E ratio is higher than that of other companies’ P/E ratio, which means the company has a substantial opportunity for growth. In that case, the current earning level is probably to be exceeded in the future, therefore when you evaluate a price today that will be “high” relative to current earning.
Moreover, other factors should be taken account are the prospect of the company and the economy of market conditions.
3. Discounted dividend model
P = D/k-g
The factors fundamental in share pricing, as implied by the discounted dividend valuation model is dividend, growth rate and the required rate of return.
Other factors impact the share price are the size of expected future cash streams. e.g periodic earnings EPS, retention policy (retained earnings), payout policy (dividends policy) and earnings quality (sustainability, growth, etc),and market interest rates, which is shown
1. Introduction
Even though the operating performance of Innovative Chemical Corporation (ICC) has been outstanding, there are some problems in respect of the share price appreciation. Firstly, P/E ratio will be used to evaluate the company’s stock and factors which affect company’s P/E ratio will be listed. Furthermore, discounted dividend valuation model will be demonstrated and fundamental factors which impact the share pricing will be analysed. Finally, the value of ICC at 30 June 2010 will be calculated using P/E ratio and DDM model. Meantime, the weakness of those two models will be illustrated, and alternative methodology will be applied to calculate the intrinsic valuation of ICC and then compare the result with closing price on 30 June 2010.
2. P/E ratio
There are two important factors will affect P/E ratio of a company, which is risk and growth opportunity. Since the company’s P/E ratio is higher than that of other companies, which means the less risk the investment will be in this company. The other factor is growth opportunity; the company’s P/E ratio is higher than that of other companies’ P/E ratio, which means the company has a substantial opportunity for growth. In that case, the current earning level is probably to be exceeded in the future, therefore when you evaluate a price today that will be “high” relative to current earning.
Moreover, other factors should be taken account are the prospect of the company and the economy of market conditions.
3. Discounted dividend model
P = D/k-g
The factors fundamental in share pricing, as implied by the discounted dividend valuation model is dividend, growth rate and the required rate of return.
Other factors impact the share price are the size of expected future cash streams. e.g periodic earnings EPS, retention policy (retained earnings), payout policy (dividends policy) and earnings quality (sustainability, growth, etc),and market interest rates, which is shown