An Empirical Analysis Of European Automobiles Using Emh, Capm, Strategical And Sva

The purpose of this research was to estimate the shareholder value of the European Automobile companies. The values were found using a DCF method. As shown in the historical financial analysis, European Automobiles has considerably improved its financial status after the financial crisis. In particular, its revenue dropped quite low during the crisis but it picked up quickly and rose higher than ever before. Furthermore, NOPLAT has increased by considerable amounts in 2010 compared to 2009. This evidence clearly shows that as the economy stabilized European automobiles have bounced back into business. Therefore, the economy and external environments affect the automobiles considerably. The static WACC was estimated for each of the companies. Also, the EVA was calculated for each of the companies for year 2010. The German automobile companies that created shareholder value did not perform well in the market over five year period from 2006 to 2010, whereas the other companies that did not created shareholder value outperformed the market; measured using CAPM based Jensen alpha. Therefore, my finding supports Palliam (2006) that having positive EVA does not necessary mean that the investors will outperform the market. However, it cannot be generalized because it was just an observation. The strategic analysis was used to assess the external environment of European automobile industry. It outlined the turbulence in the market for past, short run and long run future. The market was evaluated to be changing but still predictable. Furthermore, the general environment was described in a PEST analysis. The overall impact of the market was evaluated to be almost unchanged in the future. However, there were changes in socio-cultural factors and economic factors. There is a positive market for automobile industry and for the companies because there is an expected increase in the demand for green products. However, there is a negative impact on the companies in the future because of economic factors; higher raw material costs and fuel price increase. The forecast drivers were estimated using strategic and historical analysis. The results of the valuation of the companies were underestimated. CIMA, (2004) stated that "Only 10 percent felt they really nailed it" in demonstrating cause and effect relationships between value drivers, creation and future financial results. Therefore, to understand the changes in variables, a sensitivity analysis was carried out. The equity value is highly sensitive to changes in WACC and that deviations from these forecasted values would result in a significantly different equity value and future stock prices. The limitation of the research is that book values of equity to debt ratio were used instead of the market values, as it was not possible to get the market values of the companies. Geofferey (2010) mentions that it is ideal to work out WACC using the firm's capital structure market values, rather than book values. Also, the standard approach of working out the risk premium by averaging the market return over a period of time was not used because the value did not realistically reflect the risk premium as the data was of daily ending prices. So, 5% was estimated as a risk premium because in the literature review it is mentioned that the average risk premium over a five-year horizon period is 6.7% and Koller and most practitioners' estimate at 4 to 6% (Eades, et al., 1998) and the businesses are no longer in a financial crisis. In total the valuations of the companies are undervalued because the SV calculated are much lower to Yahoo finance's current market capitalization of the companies.