Grand Metropolitan Plc Essay

1304 Words Aug 4th, 2008 6 Pages
The issue:
Grand Metropolitan PLC is the world’s largest wine and spirits seller. It mainly operated in London, USA. In 1991, it beats market expectation with a 4.8% increase in pretax profits, and the company Chairman stated that company’s goal “to constantly improve on”. Despite the great performance in the world recession in 1991, the price of GrandMet shares was 10% below the average price/earnings ratio of the companies in the Standard & Poor’s 500 index. And more important, rumors had that GrandMet, valued at more than $14 billion in the stock market, maybe a takeover target. The management dilemma is to understand why the company’s stock is traded below of what considered being the right price and whether the company is truly
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Calculated price per share is: $14.79, so it’s 35.91% undervalue, assuming that the company grows at 4.8% per year. See Exhibit 3 for scenario analysis of different growth rates.

Based on our calculation of the Grant Metropolitan equity beta we can see that the company appears to have higher perceived risk (higher equity beta) due to the fact its debt-to-equity ratio is higher then those of comparable companies/industries. (See Exhibit 1) Since investors would require higher return from the highly levered company the company’s stock would tend to trade at lower price. In addition, the economy recession does not allow investors to stay optimistic about Grant Metropolitan growth rate. According to our scenario analysis in Exhibit 3 the drop in growth rate would reduce the price that investors are willing to pay for the company’s stock. Also, the bad economy means that the company is facing higher risk of not meeting its debt obligations which makes investment in company’s stock even more risky. Exhibit 1.

Exhibit 2.
Cost of Debt 8.63% 62% 3.48%
Cost of Equity 15.59% 38% 5.92%
WACC 9.40%
Assumed Growth 4.80%
Pre Tax on 1991 963.00
Post Tax on 1991 625.95
Terminal Value after 1991 14,252.91
Value of Equity 14,878.86
Shares outstanding 1,005,896,041
Calculated price per share $ 14.792

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