Business Valuation Assignment Sample

Ques1)

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The valuation method which has been used in the case study of Ferrari Company is Discounted Cash Flow Method because by this we can get the value of the cash generated by the sales. The method has helped us to grow the profit margin which is nearly 30% in the starting and has increased after the IPO was issued by the company[1]. It has also been observed that the Net profit has also increase which was due to the increase in the volume of the sales over the 15 months of period. Next, it has been clearly seen that it has increased from 302 to nearly 943 which is approximately 3 times when the company has not issued IPO. The value per share comes to nearly $62 per share which is quite low when compared to the big companies like Ferrari. The Fixed Cash flow during this time frame has also increased drastically and the equity value has also increased because of this. The sales price growth under this method has also doubled up and which states that it brings a multinational company the IPOs was a bit success because by investing a less sum in IPO it has got profitability. The EBIT has considerably increased over these months and the Gross Profit also but yes somehow it fell in the later months but initially it showed a positive response[2]. The cost of capital under WACC comes to be nearly 8% which is also somewhat high because the company has beard a great cost while going public and this has affected the gross profit margin under the Discounted Cash Flow Analysis. The cash has gone by 136 to nearly 388 which are also not that good by analysing all the values. The company should look into the equity value and try to invest more in the big projects to earn more profit and stand by in the future. This method has given us a fair idea about Ferrari NPG also which is somewhat less in terms of value[3].

Ques2)

Some strengths of using market comparables are:

A sound analysis could be made through this method, which is preferred by all the companies
It is easy to calculate large amount of data just as Ferrari
It is very easy to communicate across a variety of market participants
It is independent of any previous values
This uses data which is reliable and up to date as per the records, which is of the utmost importance
It is solely public method which the investors like about the company

Some major disadvantages here are,

It only calculates the values for short duration and not the values of long duration
It changes the value to a series of values, which is quite complex here and not preferable to work with[4]
It affects company’s intrinsic value of the company which holds to be the biggest disadvantage
Is less flexible when compared to the other methods which is somewhat not preferred by the company
Various questions are being also raised by the public when the company uses such method
It is less comparable when compared with other method

B) The characteristics which define good comparables are

These should be evident enough to make a good comparison
We should look for those companies which is of somewhat same profitability
Various bid are made accordingly to the good comparables by the investors
The conditions should also be in equivalent to the subject matter so that easy comparability can be done
The capital should also be taken into consideration because of the comparability criteria
The size of the firm is another characteristics of good comparables
The growth rate should also be taken into consideration which is of due importance while comparing.
Another characteristic is the industry classification here which is needful while comparison[5]

Ques3)

The main reason for Ferrari shares to be undervalued was the less of production of its vehicles, because to maintain the distinction they didn’t increase the volume of the vehicles. Everyone has presumed that the IPO price would be great but that what somewhat not the one[6]. The main aim of going public was to increase the achieved profitable growth in the emerging markets but the capital raised was not targeted to reinvest into the business but to provide more profit to the owner. This was the major reason to which the IPO was undervalued. Apart from this, the portfolio of Ferrari is also very low as compared to the other companies and when it is compared to the automakers growth rate is relatively small. When the company will increase the manufacturing of automobiles up to great extent then the price will be increased in the future and the price which I think should be set for the Ferrari IPO is somewhat around $10,032 MM ($10B) Valuation. This has been observed from the various analyses and the income statement so that there should be a great revenue in the nearby future. Apart from this, price per share is similar to the target price given by the baseline discounted cash flow analysis. When it has been using forward earning approach which is somewhat similar to the price setting strategy the target price should be more realistic. The shareholders who are expecting to earn more profit in the future are always in the mindset to earn profit in the future(Marra,2016).

the shareholders who invest in their equity will be expecting a return on

their investment in the long run.

the shareholders who invest in their equity will be expecting a return on

their investment in the long run

Ques4)

Benefits of Ferrari going public are:

It can clear its huge existing debt
It can increase its revenue and profit amount
By going public the main of the company was to increase its existing capital
It will increase the trustworthiness among the investors
The liquidity is also increased by going public here
The government also provides various benefits to the public company
Here it will be easy for Ferrari in Financial Reporting
The increasing public awareness is another benefit for Ferrari
Potential buyers sense a belongingness in the public company
Raising capital is the foremost reason to go public for Ferrari here in this case
Here, the risk is also distributed while going public now
The shareholder base gets widened too in this case[7].

B.The costs that Ferrari will bear by going public are:

The requirements which are mandatory before it went public
The major audit fees which is of major cost
The financial reporting documents which are mandatory for Ferrari
Various remuneration fees now to the top members
The extra investor relation departments will also now bear a major cost to Ferrari
Issuing prospectus and maintain privacy is another factor which will increase cost
The regulatory requirements are too high which covers a major cost here
The decision making bodies is to be maintained which involve great cost
The financial commitments are high which involve a huge cost in the company[8]

Ques5)

To comment on the performance of the shares of the company Ferrari, It can be said that

The company has made the profit of nearly 265 million which has increased from the time it has gone public but the profit has gone down in the first half of the 2015 year[9]. It has also been observed that the sales have also increased to some extent after the well known brand has gone public. In the first three months of 2015, €109 million, or 17.6% of the auto maker’s net revenue, came from sponsorship, commercial and brand, which covers merchandising, licensing and royalty income, according to the prospectus. That is up from 16.3% for the same period in 2014[10].
The IPO is just 10% of the company which is somewhat very less and it was presumed according to the market news to give much return which unfortunately did not happen for a big company like Ferrari and at the same time, FCA shareholders will own 80% of the rest of the company, and Piero Ferrari the final 10%. These factors combined may cause volatility in trading and block new shareholders from influencing management decision making. According to S&P 500 it has been assumed to increase the share price. Ferrari has soared 431% since bottoming out in early 2016. That’s more than five times the S&P 500’s return over the same period. This states that it is nearly about 86% according to the S&P 500. The stock had been nearly cut in half. But this was exactly the right time to buy Ferrari stock. It would bottom out and double over the next 12 months. This method has given us a fair idea about the value in absolute terms and according to the S&P also.

References

Brown, Nerissa. ‘Going Public: The benefits and pitfalls of non-GAAP metrics.’ Revista de Educação e Pesquisa em Contabilidade (REPeC) 14.2 (2020).

Cecere, Riccardo. ‘IPO and spin off: instrumental to value creation? A comparison with Aston Martin's IPO’. (2019).

Fischer, Harald M., and Timothy G. Pollock. "Effects of social capital and power on surviving transformational change: The case of initial public offerings." Academy of Management Journal 47.4 (2014): 463-481.

Gagliardo, Gerardo. "How to create value for shareholders: the Ferrari case and the impact of its carve-out and spin-off on FCA." (2017).

Marra, Antonio. "The pros and cons of fair value accounting in a globalized economy: a never ending debate." Journal of Accounting, Auditing & Finance 31.4 (2016): 582-591.

Pollock, Timothy G., and Violina P. Rindova. "Media legitimation effects in the market for initial public offerings." Academy of Management journal 46.5 (2013): 631-642.

Probert, William JM, et al. "Decision-making for foot-and-mouth disease control: objectives matter." Epidemics 15 (2016): 10-19.

Schill, Michael J., and Jenny Craddock. "Ferrari: The 2015 Initial Public Offering." Darden Case No. UVA-F-1775 (2017).

[1] Fischer, Harald M., and Timothy G. Pollock. "Effects of social capital and power on surviving transformational change: The case of initial public offerings." Academy of Management Journal 47.4 (2014): 463-481

[2] Gagliardo, Gerardo. "How to create value for shareholders: the Ferrari case and the impact of its carve-out and spin-off on FCA." (2017).

[3] Schill, Michael J., and Jenny Craddock. "Ferrari: The 2015 Initial Public Offering." Darden Case No. UVA-F-1775 (2017).

[4] Marra, Antonio. "The pros and cons of fair value accounting in a globalized economy: a never ending debate." Journal of Accounting, Auditing & Finance 31.4 (2016): 582-591.

[5] Schill, Michael J., and Jenny Craddock. "Ferrari: The 2015 Initial Public Offering." Darden Case No. UVA-F-1775 (2017).

[6] Marra, Antonio. "The pros and cons of fair value accounting in a globalized economy: a never ending debate." Journal of Accounting, Auditing & Finance 31.4 (2016): 582-591.

[7] Probert, William JM, et al. "Decision-making for foot-and-mouth disease control: objectives matter." Epidemics 15 (2016): 10-19.

[8] Cecere, Riccardo. ‘IPO and spin off: instrumental to value creation? A comparison with Aston Martin's IPO’. (2019).

[9] Brown, Nerissa. ‘Going Public: The benefits and pitfalls of non-GAAP metrics.’ Revista de Educação e Pesquisa em Contabilidade (REPeC) 14.2 (2020).

[10] Cecere, Riccardo. ‘IPO and spin off: instrumental to value creation? A comparison with Aston Martin's IPO’. (2019).