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Corporate valuation Assignment

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Added on: 2023-01-28 13:29:22
Order Code: TV452
Question Task Id: 0
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    Australia

Introduction

In this study, discussion shall be made on the calculation process of the ownership and voting stake of stakeholders in corporate finance. Initially, the voting stake and the wedge of Medco would be calculated along with testing the control premium. On the other hand, the relationship between the intrinsic price and the target price of the company will also be discussed in the final part of the study. Moreover, the recommendation to the company would also to be made by considering the difference in the value of stock and the price of the share of the company.

Calculation of ownership, voting stakes and wedge for all stakeholders Bid scenario 1 (44.9%):

In the initial phase of the investment, CEO of Medco Energi Internasional would acquire the share of the company by considering leverage buyout process. In this regard, it is to mention that the 44.9% holding in Medco Energi Internasional would be considered as minority interest in the company according to the corporate law in the Indonesia (Sjöholm, 2016). In this regard, it is to mention that the 44.9% holding in the company could help the investor to enhance the influence in the Board. However, it is also to mention that the voting stake of the company of Hilmi Panigoro would be 49.9%. In this context, it is also to mention that the ownership value of the 49.9% stake in the company would be IDR 1849.793

Bid scenario 2 (50.1%):

In bid scenario 2, it has been seen that the ownership in the company would be IDR 1857.207. In case of 50.1% holding in the company, the present CEO would be the most influential party in the board. The voting right of Hilmi Panigoro would be the maximum in this scenario.

Recommended stock price of Medco and existence of control premium in the valuation of stocks of the company

Bumi Resources and Pertamina have been considered as the companies to make comparative analysis of the stock prices of Medco as these companies are the nearest competitors of Medco Energi Internasional. In this context, it is to mention that the stock price of Bumi Resources was IDR 752 on the valuation date. On the other hand, Pertamina had a stock price of IDR 501 as on 31st December 2004. On the same date, the market price of Medco was IDR 596. Therefore, it can be said that stock price of Medco is lower than the other comparable firms. Thus, it is to state that the share price of Medco could rise in future. In addition to that it is to state that the low market price of Medco could create an acquisition situation in the market. On the other hand, it has been seen that the price of the stock is lower than the value; therefore it is to mention that the control premium does not exist in this valuation process.

Intrinsic price and the target price of stocks of Medco

In the analysis, it has been seen that the target value of Medco Energi Internasional is $351043 million. On the other hand, it has been seen that the company had 3106 million shares outstanding as on 31 December 2004. Therefore, the intrinsic value of the stock would be $113. In this same context, Sumarno et al. (2016) stated that the intrinsic value of the stock of a company would be the target price as the intrinsic value of a share is the equilibrium price. In this regard, it is also to mention that the target price is lower than the market price of the share. The market price of the stock is IDR 2075. Hence, it can be said that the market price of the stock is significantly high at the time of valuing the stock of Medco.

Existence of control premium in the valuation process

From the above analysis and discussion, it has been found that the market price of Medco is more than the intrinsic value of the stock. Therefore, it is to note that the investor would require paying a higher amount as compared to the intrinsic value. Hence, it can be said that the valuation process considered the present value of assets and liabilities of the company. Therefore, it can be said that the valuation process is reliable and accountable (Lee et al. 2017). Finally, it can be said that the enhanced market price of the stocks of Medco reflects that there is a control premium in the valuation of the stock.

Conclusions

This study discloses valuation process of stocks for making acquisition decisions. In the initial part of the study, it has been seen that the value of the stock of Medco Energi Internasional is IDR 1849.793 in the scenario of holding 49.9% stake and IDR 1857.207 in case of 50.1% holding. Furthermore, it has also been found that the stock is underpriced and therefore it has been concluded that the control premium exists in the valuation of the stock price of the entity. Finally, it is to state that the target price of the company is suggested by the intrinsic value of the stock. Moreover, it has been found that the CEO of the company is recommended to acquire the stake in the company as it has a low stock price.

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  • Posted on : January 28th, 2023
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