The Value of Hennes & Mauritz Essay Example for Free

The Value of Hennes Mauritz EssayIn the last twelvemonth the military man economic recovery has come a long way. The Swedish saving has been at the forefront of that recovery and has showed impressive GDP growth. With still a dance orchestra of economic stress worldwide, mostly concerning national debt, it is still unclear if we have seen solely that the financial crises, culminated in the late 2008, has to offer. With this said, the last years high excitableness in the financial markets, leave behind have an impact on this dissertation. In almost all forms of paygrade, some input will always be historical, why the past extreme years will affect the valuation.The nonpluss that ar being used are the Dividend Discount deterrent example and Free Cash Flow To Firm. deuce of these valuation method has a couple of governing assumptions mainly the assumptions of no transaction cost, perfect information and perfect competition. In reality nvirtuoso of these assumptions is d egree centigrade percent accu roam. There exist transaction costs, everybody has not the aforesaid(prenominal) level of information, and there is evidence of not perfect competition. Nonetheless presentors use these models and assume that the assumptions cumber good enough for their purposes.This is Hennes MauritzHM (Hennes Mauritz) is a Swedish clothing gild headquartered in Stockholm, Sweden. The business idea is Fashion and Quality at the best Price. With 87 000 employers in forty countries and with revenues over 126 000 000 000 SEK it is the third largest chain store in the world. HM has over 2200 stores on four continents and their goal is to increase the number of stores with 10-15% per year and keep a high profitability and increase sales in comparable numbers. In 2010 HM opened 218 new stores and in 2011 250 new stores are planned to open1. HM is a family business founded in Vsters, Sweden, 1947 by Erling Persson2.Today Erling Perssons son, Stefan Persson, is chairman of the board and Stefan Perssons son, Karl-Johan Persson is chief executive. As a token of the success of HM Stefan Persson is now the second richest man in Sweden and thirteenth richest in the world, with 159 000 000 000 SEK in wealth3. In 2008 Financial Times announced HM as the most valuable brand in Europe4. In the upcoming years HM is planning to expand in Kina, USA and Great Britain. blush though they are first and foremost a clothing company HM is also active in home equipment, shoes and cosmetics5 HM rents all their storage space or set up stores as franchise. In UK, Germany, Sweden, Norway, The Netherlands, Finland, Denmark and Austria online shopping is available. All expansion and growth is financed by equity6.The PurposeThe purpose of this thesis is to establish the value of Hennes Mauritz. The valuation will eventuate in the conclusion if the stock is under- or overvalued. To arrive at this conclusion we will use two valuation methods Dividend Discount Model and The Free Cash Flow to Firm valuation method.2. Theoretical Framework2.1. The concepts of Value and Discounted Cash Flow valuation ahead we are getting into the theoretical aspects of our two valuation models, we are going to give a brief explanation about the concept of value for shareholders and discounted bills flow valuation. The most basic question one can ask about a valuation is What is Value? When talking about a companys performance there tends to be a focus on honorarium and revenues. But must two companies that have the exact same salary and revenues, over time, be worth equally?The answer to this question is no and the reason is that the cash flow may differ. Cash flow is the difference between earnings and invested capital. Even if earnings and revenues are the same, one of the companies may have to invest a lot more capital to gain the same earnings and revenues. This leads to a difference in cash flows between the companies. Value for shareholders is created when the c ompany generates cash flows at rates of return higher than the cost of capital. When this condition is effect a faster growth rate will create even more value. If the return on capital equals the cost of capital it doesnt occasion how fast the company grow, no value will be created. The conclusion is that managers main focus should be on improving cash flows because that is what creates value for shareholders. whatever action that doesnt increase cash flows doesnt create value. 7 In this thesis we are going to use the Discounted Cash Flow (DCF) valuation in order to calculate the value of a company. DCF is built upon the concept that money has a time value. This means that the longer in the future one will receive a fixed amount of money the less it is worth. The reason is that if one receives the fixed amount immediately one can invest it and earn interest. In the DCF valuation the first step is to estimate all future cash flows. The second step is that the cash flows have to be change for the time value. Since the purpose is to find out how much the company is worth today, one has to discount the cash flow to its present value. The discount rate will reflect the riskiness of the estimated cash flows. The riskier the estimation is the higher discount rate should be used.2.2 Discounted Dividend ModelThe first method we are going to examine is the Discounted Dividend Model (DDM). The DDM uses earnings per share, discounted by the Cost of Equity to arrive at a value per share. The general version of the DDM8 looks like thisWhereE(DPSt)= Estimated dividend per share at time tke = the Cost of Equityt = time in yearsTo this general composition there exist several extensions. Some of these extensions are going to be examined below.2.2.1 One-stage/ Gordon Growth ModelAn extension to the formula above is the Gordon Growth Model I J JIThe principle is to take the expected dividend for the next year and discount it with the cost of equity minus the growth rate in div idends. An obvious restriction for the model is that the growth rate can never excel the cost of capital, since the stock price in that case becomes negative9. Due to the simplicity with a constant growth rate it is far from possible to apply this model on every firm. The model is best suited for firms growing at a rate equal to, or lowers than, the nominal growth in the economy and which have well established dividend payout policies that they intend to continue into the future10.Since this model only contains one single growth rate, it is called one-stage model. The assumption is that the firm continues to grow at the same rate to infinity. However, it is not likely that a firm can maintain a high growth forever. Sooner or later the growth rate will decrease and a more stable and lower growth rate will emerge. This limitation takes us to the next model, the Two-Stage model, which is an extension to the One-stage model.