Stock Listing and Valuation
Name
Instructor
Institution
Course
Date
Introduction
The Pound Land Corporation is a public limited company. The organization operates in the retail industry. The organization was founded in 1990, April. The founders of the organization were Dave Dodd and Steven Smith. The headquarters of the Pound Land Corporation is in England. The organization has 450 retail centres. The co-founder of the organization is David Dodd, (Michael, 2010). The chairman of the Pound Land Corporation is Colin Smith. The CEO of the Pound Land Corporation is Jim McCarthy. The organization offers grocery products, consumer products and electrical products. The organization reported revenue of 642 Million, (Baker, 2009). The operating expense for the Pound Land Corporation was recorded to be 16 million. The profit of the Pound Land Corporation was 11.8 million. The employees of the organization were 10020. The Pound Land Corporation wants to offer their stocks to the London stock exchange market. The stocks are valued at 700 million pounds. The organization has focused the organizational investment plan to originate from the cash flow. The IPO is expected to market the beginning of the end of the private equity ownership for the majority of the shareholders.
1.1. Scope
The discussion will assess the reasons for the Pound Land Corporation to seek a stock market listing. The assessment of the different valuation techniques for the London stock exchange market will be assessed. The analysis will look at the different approaches that can be applied in the measurement of the management’s support for activities.
1.2. Purpose
The discussion offers insight on the different stock valuation methods that can be applied in the assessment of the Pound Land Corporation. The evaluation will look at the assessment of the different approaches that will generate the operation of the organization.
1.3. Thesis
The Dividend Discount model is the best for valuing the organization’s stocks
Discussion
2.1. Stock market listing
The stock market listing supersedes the reason of realising capital or providing a market its share. The Pound Land Corporation offered the stock for listing due to the following reasons. The first reason is for the capital growth. The stock exchange offers the opportunity for the investors and the Pound Land Corporation to increase their control and capital. The management will be able to attain the overall finances that will increase its competitive advantage in the market. The second reason is the corporate profile elevation. The management will have increased publicity to the different stakeholders of the organization. The focus on the different issues of management will allow the increased assessment and auditing of the organization. The other reason is the improvement of the company’s valuation.
The Pound Land Corporation invests in the processes due to the institutional investment. The investment or listing of the stocks increases the organizations acknowledgement by investors. The different stock brokers will be able to assess the different requirements that assure the desires of the organizational approaches, (Zhang, 2010). The management will be able to enrol and encounter with shareholders that have expertise and influence of capital. The Pound Land Corporation will focus on the assessment of the trading platform. The management will be able to trade its shares in the stock exchange market, (Lee, 2011). The entry into the London stock exchange will assure the generation of the different tasks that increase the profitability and competence of the Pound Land Corporation. The other reason for the Pound Land Corporation to enter in to the market listing is the following, (Zhang, 2010). The management can reassure the customers and suppliers on the overall methods that will offer the improvement of the financial and business strength. The management can assess the operations through the assessment of the venture approaches that assure the success of the organization. The venturing into the business online will require the overwhelming idea for the hearing of the profitable approaches that assure the effectiveness of the business.
2.2. Valuation Techniques
2.2.1. Dividend Discount Model
The dividend discount model tests the intrinsic value of stock. This model is the best for the comparison of the nominal growth rate for the economy and the establishment of the dividend payout policies. The model offers the estimation of the stock in the Pound Land Corporations that is consistent to the payment that can be afforded and accumulated in the process. This price represents the current value of the revenue streams. The model incorporates the following assumptions for a valuation. The rate should be in a stable growth that is based in the area and size that the corporation serves and is regulated, (Baker, 2009). The other assumption is that the stock exchange market wills not all the Pound Land Corporation’s stock to grow to extraordinary rates. The Pound Land Corporation will be expected to be in stable leverage for the different activities that will be required to be performed.
The model is analyzed through Gordon Growth Model. The management will require the investors to purchase the stocks that she expected to obtain from the two types of cash flow dividends and through the periods that were held on the stock. The rationale of the technique is that the value of the asset and the present value of he expected future cash flow will offer the discounting rate for the overall riskiness of the cash flows, (Louse, 2009). The obtaining of the expected dividends affects the making of the assumption with regard to the return on stocks that are measured differently with different models, (Lee, 2011). The method requires the valuation of the Pound Land Corporation that is in the steady state of operation. The method assumes that the form will increase its dividends rate at a value that will increase forever. The model assumes that the Pound Land Corporation’s dividends and other earnings or measures of performance will grow at the same rate as compared to the other stock valuations.
The limitations of the model are expressed to be the following. The model offers a simplistic and convenient approach for the valuation of stocks. The stocks are extremely sensitive to the inputs for the different growth rates, (Louse, 2009). The wrong application of the model offers misleading yields and absurd results. The augmentation rate converges on the concession rate that is offered. The model expresses that, as the growth rate increases, the cost of equity for the value per share will be approaching infinity. The growth rate tends to exceed the cost of equity. The value per share for the Pound Land Corporation will be expected to be negative.
2.2.2. Discounted cash flow method
The discounted cash flow model requires the definition and forecasting of the future cash flows and estimating the appropriate discounting rates. The assets offer the assessment of the value that aims at the current value of the expected future cash flows. The method offers two alternatives, (Baker, 2009). The alternatives are the free cash flow model and the residual income model. The free cash flow model focuses on the finances that are provided to the Pound Land Corporation as the cash flow from the different operations minus the capital expenditures. The free cashflow to equity is assessed for the analysis of the operations minus the capital expenditure and the net payments for the debt holders, (Lawson, 2011). This approach focuses on the principal and the interest paid.
The free cash flow method looks at the present value of the future cash flow forecast. The worth of the equity is the current value. The value is subtracted from the market value of the outstanding debt. The presentment value of the future cash flow equity is discounted through WACC. The discounted rate for FCFE offers the cost of equity for the Pound Land Corporation through the analysis of the required rate of return for the equity, (Baker, 2009). The management can assess the dividends from the cash flows that are paid to the stockholders. The cash flows are placed at the desired distribution levels. The method looks at the cash flow that is available to the Pound Land Corporation from the common equity holders after the operating expense, principal payments and interests are paid to the Pound Land Corporation.
The discounted rate determination assures the assessment of the discount rate that is applied for the analysis of the present value for the future cash flow. The risk premiums are required to be analyzed. The premium involves the compensation requirement for the risks that are measured and are relative to the risk free rate, (Baker, 2009). The required rate of return assures the minimum return is required for the investors to invest in the asset. The cost of equity focuses on the assessment of the required rate of return on the common stock, (Michael, 2010). The discounted cash flow can be accessed through the application of the following CAPM formula.
2.2.3. Asset based valuation
The asset based valuation focuses on the value of the asset for the price that are offered through the different organizational audits. The valuation focuses on the asset, market or the income approach. The asset approach assesses the asset net of liabilities. The market approach compares the business from the recent transactions of the organization. The income approach assesses the measurement of value through the conversion of the streams that are expected for the economic benefits. The asset based method assesses the financial position of the organization for the business, (Lloyd, 2009). The assessment focuses on the tangible assets for the organization, asset and goodwill and the worth that other people will pay for the activities. The management can increase or decrease the values of their assets through the overall price that is provided. The asset evaluation method assesses the balance sheet to identify the financial condition for the organization. The balance sheet assesses the assets, liability and the capital invested. The assets comprise of all the valuable things that a corporation owns, (Baker, 2009). The net worth or the owner’s equity focuses on the quantity that is injected in the businesses. The idea of the balance sheet is that the owner’s equity equals the assets minus the liabilities. The assessment focuses on the cost basis and the market basis.
Analysis
The best approach to implementing will be the Dividend discount Model. The method offers an approach for the valuation of stocks that are based on the dividends that they pay. The model helps the investors to assess what the dividends mean. The method is simple to calculate and does not engage a lot of technical calculations. The discounted cash flow method has the flaw of understating the value of the balance sheet assets. The basing of the valuation on a forecasted discounted assures the perception of the business to be perceived as riskier. The projections of the organization discounted cash flow method offers minimal guarantees, (Lloyd, 2009). These were the reasons for not using the discounted cash flow method. The reasons for not using the asset valuation are due to the probability of understatement for the firm’s value due to the aggressive strategies of taxable income. The asset valuation overlooks the value of tangible or intangible assets through the reliance of the potential future growth.
Conclusion
In conclusion, the Dividend Discount model is the best for valuing the organization’s stocks. The dividend discount model tests the intrinsic value of the stock. The discounted cash flow model has the flaw of focusing on the present value of the future cash flow forecasts. The asset based valuation, on the other hand, summarizes the position of the organization. The reasons for the firm to become listed in the stock exchange was to increase visibility in London Market, assess the firm’s index eligibility, assure the institutional investment, assess the market support and assure the well regulated and fully automated marketplaces.
Reference
Baker, H. (2009). Liquidity and Stock swap Listing: Journal on Financial Review, 25, 2, 231-249
Lawson, C. (2011). The Effect of compensation Methods on Risk repugnance: Journal on Economics, 39, 3, 249-260.
Lee A. (2011). Forecasting linear dynamical systems Appling subspace methods. Journal on Time Series Analysis, 32, 5, 541- 590
Lloyd, W. (2009). Exchange Listing and extent: Effects On surfeit Returns. Journal on Business Finance and Accounting, 16, 5, 675-680
Louse, C. (2009). Cross-Listing and effective Performance: data from Exchange-Listed American Depositary proceeds. Journal on Business Finance and Accounting, 36, 99-129.
Michael L. (2010). Corporate Political donations and Stock proceeds. The Journal on Finance, 65, 2, 687-724.
Zhang, Y. (2010). Cross-listing and deal on the Domestic bazaar: substantiation from Canada-US Partial Holidays. Journal on Business Finance and Accounting, 35, 1245-1275.
