Grand Metropolitan Plc Essay

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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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Due to the fact that non UK companies' betas were calculated in relation to specific country stock markets we believe that using the total industry average betas shown in the Exhibit 8 of the case that include betas of non UK is going to provide us skewed results. Using the data from exhibit 8 of the case we calculated asset betas for UK based companies involved in the same industries as Grant Metropolitan. (see Exhibit 1) Using specific companies’ asset betas we calculated average asset betas for Restaurant – retailing, food processing and drinks industries. Next using Grant Metropolitan balance sheet (exhibits 3 and 9 of the case) we identified the debt-to-equity ratio and tax rate. Next we calculated levered equity beta for each of the industries that Grant Metropolitan is involved in. Using the net assets percentages by industry we calculated weighted average levered equity beta for Grant Metropolitan which is 1.51. (see Exhibit 1). Next we determined that most of Grant Metropolitan debt was for 5 year term therefore we used the U.K. Gilts 5 year yield as risk free rate (10%) for the purpose of cost of equity calculation. We used UK risk free rate due to the same reasons as we used UK companies to calculate industry asset betas. Using exhibit 9 of the case we identified the market risk premium to be 3.9%. Using this date and formula
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