Project-Value Analysis Using EVA
Warren Buffet is one of the largest investors in The Coca Cola Company. He uses EVA as one of the primary tools to value companies. The Project is to identify a company that might be worth much more if it were broken into pieces and valued (using EVA) separately. The rationale for this difference can perhaps be explained by the difficult investors have valuing companies with multiple business units and/or accepting the insights of EVA analysis.
In addition to identifying a candidate for a breakup, the Project should include an EVA analysis of the combined company as well as the individual elements you recommend would be valued higher if they were separate. Also be sure to describe strategic advantages that could be gained from a breakup that are not rationalized only by EVA analysis. So, the rationale for your company selection should be based both strategic advantage and financial analysis
The Project should not be less than 1600 words, should be idea-driven, research based and include research citations and a brief executive summary.
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This report is prepared to analyze a company from an investor's point of view by performing both financial and non-financial analysis. In case of financial analysis, economic value added (EVA) valuation model is selected to use for determining the true value of a company. This report includes EVA analysis of the company as whole as well as separately as per its business segments or divisions. For this purpose, Samsung Electronics Company Limited is selected in order to determine whether its market value as whole is higher than sum of value derived separately on the basis of its divisions.
Samsung is a South Korea based multinational conglomerate company that engaged in different businesses including consumer electronics, information technology and mobile communications, and device solutions (Yahoo Finance, 2015). Samsung mainly operates in three segments that are: consumer electronics (CE), IT & mobile communication (IM) and devise solution (combination of semiconductor and display panel. This report includes estimation of Samsung's economic profit by considering this as one unit as well as by determining EVA separately for each segment than added to get total value of the company. Additionally, this report also discusses about potential strategic advantages that can gained from breakup this in individual elements.
EVA analysis is used to conduct financial analysis of Samsung to determine its viability as investment alternative. EVA is a measure of financial performance that is useful to estimate a firm's economic profit, which is quite significant in this case to measure performance of Samsung (Fabozzi & Grant, 2000). Following formula can be useful to determine value of EVA:
EVA = NOPAT - (C × WACC)
NOPAT = Net operating profit after tax
C = Capital invested for long-term purpose
WACC = Weighted average cost of capital
To perform EVA analysis, firstly needs to determine WACC of Samsung.
Calculation of WACC:
The equation below can be useful to calculate cost of capital or WACC of the company:
E (Market value of company's equity) = 778,047 (In millions of Korean won)
D (Market value of company's debt) = 101,671 (In millions of Korean won)
V (Total market value of the company) = 879,718 (In millions of Korean won)
T (Tax rate) = 16.07% (As per 2014 annual report)
Ke (Cost of equity capital): ...
EVA is an important measure to evaluate the worth of a company and also an important factor when making investment in a company. This response discusses a company that might be worth much more if it were broken into pieces and valued using EVA. separately.Also, strategic advantages are discussed that could be gained from a breakup that are not rationalized by EVA analysis.