Firm value and share price strategy Essay

BAE facing ch all(prenominal)enges on Intensive competition and budget defence cuts by their major customers should focus on increasing component partholders impartiality by reducing of damages, adapting capabilities to the changing priorities of their customers and improve their Programme execution. Directors should monitor working detonating device expenditures to ensure that unnecessary further debt would be incurred that inevitably has an effect on book values. higher(prenominal) book values (stockholders uprightness) act as a positive in a buyers assessment of purchase price, to some extent providing at least the illusion of a floor in value (Nations Business 2006).4) Recommendations dealing with corporate governance Currently BAE Systems has faced problems facing its shareholders imputable to its criticism received on corporate governance and ethical conduct (Daily Mail 2010). As a recommendation, BAE should follow the financial reporting council (FRC) proposition on putti ng greater emphasis on the principles of UKs corporate governance code, and apply the annual shareholder re-election. This would have a significant impact a wider engagement for the companys shareholders.A necessary midyear review process should be conducted by an external facilitator to help in the emilitary rating process, metrics much(prenominal) as board effectiveness by dealing with issues in a timely manner should be considered. Having a wide and complex set of operations, training dissemination in a timely manner is very important to ensure appropriate decisions. Key performance Indicators should be the guideline across all the managing directors and their performance will be evaluated by comparison of their developed results from targets.5) Critical evaluation of the model used Using financial models can provide actual figures for projection analysis that can create awareness for a companys board of directors (Palmgren 1999). The Residual Income Model can be used as a val uation of the firm, based on its total book value and relief income ( pecuniary Education 2010). During recent historic period it has been used as the primary valuation method due(p) to its measurement of internal corporate performance and feasible estimation of the intrinsic value of common stock.The difference between a residual income and traditional financial statements are for the latter its purpose of preparation is to reflect gelt available to its owners, charges incurred for equity capital and dividends are not included, while the former(prenominal) adds the comp 1nt of cost of equity capital for its calculation (Dodd 2001). Another limitation of the traditional income model is that it may not actually reflect the value of definite business activities.Such in our case with BAE systems numerous acquisitions, on its accounting model it seems that BAE have significantly improved profitability on its strategies, however this could not be all false, but using the residual i ncome approach some of the acquisitions doesnt have the kind of effect, due again to the cost of equity capital (Bild, Guest,Cosh and Runsten 2002). 6) Conclusion BAE Systems being in an industry where intense competition exists should apply necessary strategies to ensure profitability in the coming years both for continuous operation and maximizing shareholders equity.Their current strategies for acquisition may have get aheaded them but the cost of violation of regulation procedures have definitely wedge over all operations. Using financial models like the residual income model, the board of directors can see, what would happen if they continue with their current policies on corporate strategy and governance, it has shown a negative impact on present firms value, thus the recommendation for consideration of a new effective strategy to be enforced across the board. List ofReferences BAE Systems (2010) one-year Report 2009.PDF uncommitted from http//bae-systems-investor- relat ions-2009. production. investis. com/results-reports-and-presentations. aspx 09 May 2010. Brylawski, M. (1995). Developing a circumstance-based Innovation Strategy for a Midsized Aerospace ManufacturerFostering Entreprenuership, Opening Boundaries and Seeding Disruption. PDF Available from . 09 May 2010. Bild, M. , Guest,P. , Cosh, A. , and Runsten, M. (2002). Do takeovers create value? A residual income approach on UK data. PDF Daily Mail (2010).BAE flies into storm with shareholders. Available from . 09 May 2010. Dodd, J. (2001). direct income, residual income and EVA Which metric is more value relevant. Journal of Managerial Issues. Financial Education (2010). The Residual Income Valuation Model. Available from http//financial-education. com/2007/10/30/the-residual-income-valuation-model/ 09 May 2010. Financial Times (2010). FT Market Data BAE Systems.Available from http//markets. ft. com/ft/tearsheets/analysis. asp? s=BA.LSE. 09 May 2010. Nations Business (1996). 10 ways to join on your firms value realise Worth. Available from http//findarticles. com/p/articles/mi_m1154/is_n11_v84/ai_18818240/. 09 May 2010.Palmgren, B. (1999). The Need for Financial Models. Available from http//www. ercim. eu/publication/Ercim_News/enw38/palmgren. html. 09 May 2010. Smith, T & Frost,L. (2008). BAE Buys Tenix defence to Double Sales in Australia. Online Available from 09 May 2010. Wachman, R. (2010). BAE Systems hit by defence cuts.Available from http//www. guardian. co. uk/business/2010/mar/22/bae-systems-defence-spending-cuts 09 May 2010. West, K (2010). BAE goes aggrandizement of the global arms league. Online Available from 09 May 2010. Appendices Appendix 1 Five year Summary Income Statement of BAE Systems. Source retrieved 9 May 2010 Extract from annual Report 2009 http//bae-systems-investor-relations-2009. production. investis. com/financial-information/five-year-summary. aspx Appendix 2 Group Income Statement.Source Extract from one-year Report 2009 for the year ended 31 December. Retrieved 10 May 2010 http//bae-systems-investor-relations-2009. production. investis. com/financial-information/group-income-statement. aspx Notes 2009 ?m intact 2009 ?m 2008 ?m Total 2008 ?m Continuing operations Combined sales of Group and equity accounted investment fundss 3 22,415 18,543 Less share of sales of equity accounted investments 3 (2,041) (1,872) Revenue 3 20,374 16,671 Operating be 4 (20,060) (15,386) Other income 5 465 415 Group operating profit excluding amortisation and impairment of intangible assets 2,038 2,003.amortization 11 (286) (247) Impairment 11 (973) (56) Group operating profit 779 1,700 Share of results of equity accounted investments excluding finance costs and taxation expenditure 233 132 Financial ( disbursement)/income of equity accounted investments 6 (7) 44 Taxation expense of equity accounted investments (23) (37) Share of results of equity accounted investments 14 203 139 Goodwill impairment in respect of equit y accounted investments 14 (121) Contribution from equity accounted investments 203 18 EBITA1 excluding non-recurring items 2,220 1,897 Profit on disposal of businesses2 9.68 238 Pension curtailment gains2 261 Regulatory penalties3 (278) EBITA1 2,271 2,135 Amortisation (286) (247) Impairments (973) (177) Financial (expense)/income of equity accounted investments 6 (7) 44 Taxation expense of equity accounted investments (23) (37) Operating profit 3 982 1,718 Finance costs 6 Financial income 1,573 3,380 Financial expense (2,273) (2,727) (700) 653 Profit before taxation 282 2,371 Taxation expense 8 UK taxation (105) (351) Overseas taxation (222) (252) (327) (603) (Loss)/profit for the year (45) 1,768 Attributable toBAE Systems shareholders (67) 1,745 Minority interests 22 23 (45) 1,768 (Loss)/earnings per share 10 Basic ( breathing out)/earnings per share (1. 9)p 49. 6p Diluted (loss)/earnings per share (1. 9)p 49. 5p Appendix 3 Group Balance Sheet as at 31 December. Source Extract from Annual Report 2009. Retrieved 10 May 2010 http//bae-systems-investor-relations-2009. production. investis. com/financial-information/balance-sheet. aspx Notes 2009 ?m 2008 Restated ?m Fixed assets Tangible assets 2 4 5 Investments in subsidiary undertakings 3 7,070 5,663 7,074 5,668 Current assets Debtors due within one year 4.7,468 9,339 Debtors due after one year 4 14 3 Other financial assets due within one year 262 703 Other financial assets due after one year 5 179 478 Cash at bank and in hand 5 2,804 1,988 10,725 12,511 Liabilities move due within one year Loans and overdrafts 6 (37) (49) Creditors 7 (14,490) (12,873) Other financial liabilities 5 (255) (598) (14,782) (13,520) Net current liabilities (4,057) (1,009) Total assets less current liabilities 3,017 4,659 Liabilities move due after one year Loans 6 (233) (258) Creditors 7 (3) (6) Other financial liabilities 5 (327) (574).(563) (838) Provisions for liabilities and charges 8 (61) (120) (2,393) (3,701) Capital and reserves Issued share capital 10 90 90 Share premium account 12 1,243 1,238 Statutory reserve 13 202 202 Other reserves 12 119 164 Profit and loss account 12 739 2,007 Equity shareholders funds 2,393 3,701 Appendix 4 Group Cash Flow for the year ended 31 December. Source Extract from Annual Report 2009. Retrieved 10 May 2010 http//bae-systems-investor-relations-2009. production. investis. com/financial-information/ exchange-flow. aspx Notes 2009 ?m 2008 ?m (Loss)/profit for the year (45) 1,768.Taxation expense 327 603 Share of results of equity accounted investments 14 (203) (139) Net finance costs 700 (653) Depreciation, amortisation and impairment 1,600 755 Gain on disposal of property, plant and equipment 4, 5 (17) (33) Gain on disposal of investment property 5 (5) Gain on disposal of businesses 5 (68) (238) Cost of equitysettled employee share schemes 52 51 Movements in provisions 52 (115) Decrease in liabilities for retirement benefit obligations (657) (272) Decrease/(increas e) in working capital Inventories 6 46 Trade and other receivables 52 (5).Trade and other payables 433 246 Cash inflow from operating activities 2,232 2,009 arouse paid (250) (249) Interest element of finance lease rental payments (2) (5) Taxation paid (350) (261) Net cash inflow from operating activities 1,630 1,494 Dividends received from equity accounted investments 14 77 89 Interest received 66 156 Purchases of property, plant and equipment (483) (520) Purchases of intangible assets (42) (32) harvest-festival from sale of property, plant and equipment 36 44 Proceeds from sale of investment property 5 Purchase of subsidiary undertakings 27, 29 (357) (1,078).Cash and cash equivalents acquired with subsidiary undertakings 27 33 2 Purchase of equity accounted investments 27 (1) (12) Proceeds from sale of subsidiary undertakings 9 2 131 Cash and cash equivalents disposed of with subsidiary undertakings (60) Proceeds from sale of equity accounted investments 9 70 16 Net proceeds f rom (purchase)/sale of other deposits/securities (209) 164 Net cash outflow from investing activities (808) (1,095) Capital element of finance lease rental payments (13) (18) Proceeds from issue of share capital 5 16 Purchase of own shares (25) (43) Equity dividends paid 28.(534) (478) Dividends paid to minority interests (5) (11) Cash inflow/(outflow) from matured derivative financial instruments 36 (440) Cash (outflow)/inflow from movement in cash collateral (11) 106 Cash inflow from loans 920 Cash outflow from repayment of loans (133) (306) Net cash inflow/(outflow) from support activities 240 (1,174) Net increase/(decrease) in cash and cash equivalents 1,062 (775) Cash and cash equivalents at 1 January 2,605 3,046 Effect of foreign exchange rate changes on cash and cash equivalents 11 334 Cash and cash equivalents at 31 December 3,678 2,605.