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Executive Summary

The aim of this paper was to value InvoCare Limited using five different approaches to valuation namely, the Dividend Discount Model, The Cash Flow Valuation Model, the Price Earnings ratio, the Price-to-Book ratio and the Net tangible asset backing model. The study began by analysing some background information concerning the global economy, the Macroeconomic environment in Australia as well as a General overview of InvoCare Limited. A valuation based on each of the above models was presented.

The results show that the value provided by 3 of the models the Dividend discount model, the cash flow model and the Net tangible asset backing model are less that that predicted by the capital market, which imply that capital markets are inefficient and that the stock is overpriced thus recommending a sell decision.. On the other hand the P/E ratio and the P/B ratio provided values higher than that predicted by capital markets implying that the stock is under-priced thus implying a buy and hold decision.

However, we conclude that the P/E ratio and the P/B ratio were the most plausible models in valuing the firm since they are based on expected future earnings of the company. 1. Introduction. Globalisation, the new information technology, and deregulation of financial markets has eased the provision and search of finance. Millions of shares are traded every day on the world’s stock markets. (Penman, 2003). Investors who trade on these stocks are often forced to ask themselves whether they are buying or selling at the right price.

(Penman, 2003). They often attempt to provide answers to these questions by turning to various media including internet chat rooms, printed press, “talking heads” on television and financial networks, who often voice opinions on what they feel the stock prices should be. (Penman, 2003). In addition, investors consult investment analysts who provide an almost endless stream of information and recommendations to sort out. There are often claims that some shares are undervalued and vice versa. (Penman, 2003).

This information at times becomes confusing leaving the investor with no clear indication of what the true prices of stocks should be. (Penman, 2003). Under such circumstances, the investor is forced to make the investment decision following his/her instinct or based on the information provided by the market. (Penman, 2003). Investors who make the decision based on instinct are referred to as intuitive investors while those who make investment decisions based on capital market efficiency are referred to as passive investors. (Penman, 2003).

Passive investors carry out their investment decisions based on the assumption that the market price is a fair price for the risk taken, that is, that market forces have driven the price to the appropriate point. (Penman, 2003). These investment mechanisms appear to be very simple, as they do not require much effort. (Penman, 2003: pp 3). However, both investors run risks that are even more than the risks of the firms they are investing in since they can either pay too much or sell for less and as a result suffer a decrease in returns on their investments.

(Penman, 2003). According to Penman (2003), the intuitive investor has the problem of the intuitive bridge builder: “one may be pleased with one’s intuition but, before building gets underway, it might pay to check that intuition against the calculations prescribed by modern engineering as not doing so may lead to disaster”. (Penman, 2003: pp 3). The passive investor runs the risks of either paying too much or selling for less should stocks be mispriced.

(Penman, 2003). Although economic and modern finance theory (Bodie et al, 2002; Penman, 2003) predicts that capital markets are perfect it is good practice to check before taking action. (Penman, 2003). Therefore, both the passive and intuitive investor run the risk of trading with someone who has done his homework well, that is, someone who has analysed the information thoroughly. (Penman, 2003). The aim of this paper is to presents a valuation of InvoCare Limited.

It is good practice that when carrying out investment analysis and valuation of a company, both internal and external information concerning the company should be analysed. In this light, we will begin the analysis by presenting some general information about the global economic environment since such information is important for both the company’s competitiveness in the global context, next we present information concerning the Australian Macroeconomic environment. This too has an important role to play on the company’s profitability and future growth prospects.

After carrying out a macroeconomic analysis, we will analyse the funeral industry in Australia. Next the study will carry out valuations for InvoCare using different valuation techniques. A comparison will be carried out and the end to see the relative strengths and weaknesses of each technique in measuring the true value of the firm. Section 2 presents a picture of the global economic environment, in section 3; a discussion of the current macroeconomic environment in Australia is presented. Section 4 presents an analysis of the funeral industry in Australia.

Section 5 presents an overview of InvoCare Limited, including its history, mission, products, competitors, strategy and future prospects. Section 6 gives the different valuations including the dividend growth valuation, the Cash flow valuation, the price earnings valuation and the 2. The Global Economy Bodie et al (2002) states that the international economic environment might affect a firm’s export prospects, the price competition it faces from competitors, or the profits it makes on investments abroad.

Although economies are linked to each other in a global macro economy, there exist considerable differences in the economic performance across countries. (Bodie et al, 2002). It is therefore necessary for an investment or security analyst to consider these differences before providing investment advice. According to the IMF World Economic Outlook (2007), The global economy remains on track for continued robust growth in 2006 and 2007 although only at a moderate rate than in 2006. The 2007 outlook also reports that downside risk to the outlook seems less threatening that at the time of the September 2006 outlook.

This is because oil price declines since last august and generally benign global financial conditions have helped to limit spillovers from the corrections in the US housing market and to contain inflation pressures. (IMF World Economic Outlook, 2007). There was a vigorous expansion in the global economy in 2006, with a growth rate of 5. 4% implying a ? percentage increase in growth rate than anticipated. Activity in the United States faced strong headwinds from a sharp downturn in the housing market, while corporate investment in plant and equipment has also softened.

(IMF World Economic Outlook, 2007). Consumption in the US was sustained by continuous growth in employment (especially in the services sector. In the euro area, there was an acceleration of growth to its fastest pace in six years following a boost in domestic demand by increase in business confidence and am improvement in the labour market. ( IMF World Economic Outlook, 2007). Another important factor that contributed to this growth acceleration was the FIFA soccer world cup held in June 2006. ( IMF World Economic Outlook, 2007).

Japan witnessed a slowdown in economic activity by the mid-2006 but it however, regained its track toward the end of the year 2006. ( IMF World Economic Outlook, 2007). In the case of emerging markets and developing countries, China and India took the lead. China witnessed a growth rate of 10. 75% in 2006 as a result of growth in investment and exports notwithstanding an easing in the second half as policy tightening helped to cool the pace of fixed asset investment. (IMF World Economic Outlook, 2007). India registered a growth rate of 9.25% following an increase in expansion momentum in the course of the year. (IMF World Economic Outlook, 2007).

In the rest of the world, growth was sustained at robust rates, as a result of high commodity prices and favourable financial conditions. In the advanced economies, following a drop in fuel costs the inflation rates as measured by the consumer price index (CPI) dropped quite sharply after the summer. (World Economic Outlook, 2007). Core inflation in the United States in the US fell sharply although prices for food and energy remained high. (World Economic Outlook, 2007).

However, the rate remained higher above the comfort zone of the Federal Reserve. (World Economic Outlook, 2007). The oil price declines from August largely reflected some easing of security tensions in the Middle East, improved supply-demand balance in oil markets, and favourable weather conditions in the second half of 2006. (World Economic Outlook, 2007). The US dollar continued depreciating against the pound and the euro. The yen on its part also loose value against many currencies because prospects for continued low interest rates have encouraged capital outflows.

(IMF World Economic Outlook, 2007). The Chinese renminbi despite appreciation against the dollar has depreciated in real effective terms. (IMF World Economic Outlook, 2007). The US current account deficit continues to rise recording 6. 25% of GDP in 2006. (IMF World Economic Outlook, 2007). However, the non-oil trade deficit declined as a percentage of GDP as exports accelerated. Japan, China and the Middle Eastern oil-exporting countries witnessed increased surpluses in their current accounts. (IMF World Economic Outlook, 2007).

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