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General motors

General motors. Module 7 : Valuation Using Residual Enterprise Income. Enterprise operations. General Motors. Client Strategy Template: GM . Strategies.

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General motors

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  1. General motors Module 7: Valuation Using Residual Enterprise Income

  2. Enterprise operations General Motors

  3. Client Strategy Template: GM Strategies Growth Strategy:Focus on “alternative propulsion strategies” (hybrid, electric, FlexFuel, hydrogen fuel cell) in an attempt to create environmental diversity and fuel efficiency throughout product line Financial Goals & Operating Priorities:Aim to be the industry leader in fuel efficiency, pursue top market share in both domestic and global market Characteristics of the Business Major Business Units: GMNA, GME, GMIO, GMSA, GM Financial Markets: Automotive assembly and manufacturing, financial services (leases, contracts), automotive safety technology Products: Chevrolet, GMC, Buick, Cadillac, OnStar technology, GM Financial services Customers: Auto wholesalers, Rental car agencies, Authorized dealerships Competitors:Toyota, Ford, Nissan Strategic Alliances/Joint Ventures: Mostly concentrated in China Potential Adverse Influences: Constant technology innovation, oil prices, raw material prices, government regulation, dependence on suppliers, product recalls (safety issues)

  4. Markets & products • Auto brands • Chevrolet • GMC • Buick • Cadillac • OnStar (wholly owned sub) • GM Financial • Formerly AmeriCredit Corp • Strategic Alliances • Concentrated in China • JV with SAIC Motor

  5. Parsimonious Forecasting General Motors

  6. Break down RNEA Enterprise Profit Margin (EPM) Enterprise Asset Turnover (EATO) Measure of profitability: How much operating profit does the firm earn from each sales dollar? Measure of efficiency: What level of sales does the firm realize from each dollar invested in enterprise assets?

  7. Parsimonious assumptions

  8. Valuation using cash flows • FCF = EPAT - ∆NEA • Discount rate  10% • Enterprise Value = 100,629

  9. Cost of capital & valuation General Motors

  10. “Government motors” • June 2009: filed Chapter 11 bankruptcy • July 2009: emerged from bankruptcy with ownership split between: • US Federal Government • United Auto Workers Association • Canadian Government • GM bondholders • November 2010: GM shares returned to the NYSE at $33 per share

  11. Cost of enterprise capital • rEnt = (rD * VD/VEnt) + (rEq * VEq/VEnt) • For GM: • VD = (5,419)  NFL • VEq = 52,482  Market cap • Implied VEnt = 47,063 • Calculated WACC = 13.83%

  12. WACC: Bloomberg

  13. Valuing GM • Estimate of Enterprise Cost of Capital = 10.1% • Enterprise Value = 99,264

  14. Residual enterprise income General Motors

  15. REI Model • Assumptions remain the same: • 2.7% sales growth • 5.7% EPM • 6.5 EATO • WACC = 10.1%

  16. DCF Check • Same enterprise value

  17. Module 8 Practice Problem • Depreciation = 1800 • Value = 7974

  18. Module 8 Practice Problem • Depreciation = 2400 • Value = 7974

  19. Questions?

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