CAPM and Market Premiums Quiz

Bachelor Thesis: Valuation of BMW

• Authors: Rasmus Ramshøj Pløen (Exam no. 282821, BSc (B/IM)) and Mikkel Kronborg Olesen (Exam no. 283755, BSc (B))
• Academic Advisor: Nicolai Borcher Hansen (ASB, Aarhus School of Business)
• Date: May 3rd, 2010

Table of Contents

• The thesis is structured with multiple sections, outlining the analysis and valuation techniques
• Historical financial analysis is performed to assess the company's past performance, including a reorganization of financial statements for accurate economic profit analysis
• Estimating market value weights and tax and the cost of equity and debt are core aspects of the cost of capital calculation
• External analysis considers the general environment using PEST analysis, and competitor analysis using Porter’s Five Forces
• Internal analysis employs McKinsey’s 7S model and VRIO framework to determine internal capabilities
• Forecasting and valuation involves both discounted cash flow (DCF) and economic value added (EVA) models to yield a market value for BMW's equity and different stock classes
• Appendices provide detailed analyses for certain factors (financial statements in appendix 2, beta calculation in appendix 3, PEST analysis in appendix 5, etc.)

Preface

• The report is intended for an academic audience with assumed basic economic knowledge
• A CD containing the report and spreadsheets is included for easier access
• Spreadsheets were created from scratch, allowing for a deeper understanding of the company's accounts and financial statements
• A PowerPoint slide show containing appendices is included for easier navigation during reading
• The report follows the guidelines set by Aarhus School of Business for bachelor theses

Problem Statement

• Maintaining operations is a major concern for the company
• The volatility of BMW’s stock prices (during the 2005-2009 period), needs a market value assessment considering strategic and financial factors and a comparison between preferred and common stocks
• Research question: What is the market value of BMW's equity and its stock types?

Historical Financial Analysis

• Focus is on economic profit rather than accounting profit
• Key measures:
  • NOPLAT (Net Operating Profit After Taxes)
  • ROIC (Return on Invested Capital)
  • FCF (Free Cash Flow)
• Consistent accounting standards (IFRS) for easier interpretation during analyses

Cost of Capital

• Valuation methodology is based on discounting future cash flows with the weighted average cost of capital (WACC)

External Strategic Analysis

• Industry analysis using the Degree of Turbulence (DOT) model and Porter’s Five Forces model.
• The analysis highlights changes in the environment, emphasizing the importance of social factors, economic factors, technological aspects and political factors.
• Socio-cultural trends (growing middle class, demand for green products);
• Economic factors (GDP growth, interest rate risk, raw material costs, currency fluctuations),
• Political factors (new laws, political instability in emerging markets)
• Technological factors (environmental friendly solutions)

Internal Strategic Analysis

• Evaluation of internal resources using the VRIO Framework and McKinsey's 7S model
• Tangible assets: facilities in multiple countries, financial management to support operations
• Intangible assets (brands, R&D, employee skills), and organizational capabilities (strategic alliances)

Forecasting and Valuation

• Valuation method (DCF and EVA) and sensitivity analysis
• Forecast drivers, focusing on short-term, mid-term, and long-term forecasts to estimate value drivers
• Variables and metrics used in the analysis (revenue, cost of goods sold, sales and administrative costs, R&D, operational income and expenses, equity investments, interest expenses, and tax)

Key Factors of Success

• Identifies key factors affecting success in the automotive industry (customer base, corporate strategy, competitors, relevant business areas)

SWOT Analysis

• Summarizes external and internal analysis to determine opportunities and threats for BMW
• Prioritizes strategic challenges and areas for long-term improvement

Conclusion

• Provides a summary of the findings, confirming the undervalued stock classes based on a multi-faceted analysis.
• Discusses the key factors that could drive valuation in a positive direction (brand, innovation, operational efficiency)

Test your knowledge on the Capital Asset Pricing Model (CAPM) and market premiums. This quiz covers key concepts such as historical market premiums, risk-free rates, and the estimation methods used by scholars. Challenge yourself with questions that delve into the nuances of financial theories.