Accounting and Finance
Henkel AG is a multinational company focusing its brand and technologies in three business areas that include Beauty Care, Laundry & Home Care and Adhesive Technologies. Established in 1976, the company holds its global market positions in both the consumer and industrial products with well-known brands that include Lactate, Persil, and Schwarzkopf. Henkel's headquarter is in Dusseldorf in German and the company has over 47,000 employees globally. Typically, the company is considered among the most "internationally aligned German-based companies in the global marketplace." (Henkel 2012).
Objective of this paper is to use various financial models to carry out financial analysis and valuation of financial Henkel AG.
Valuation Model
One of the methods to carry out the valuation of a company is to use enterprises discounted cash flow (DCF). The DCF could be carried out using WACC (weighted average cost of capital) that represents the opportunity costs that investors will face when they decides to invest their funds in the capital market. To determine WACC, the three components are used which include after-tax cost of debt, the company target capital structure and the cost of equity. However, none of the variables is observable, various models, approximations and assumptions are used to estimate each of the components.
To carry out the valuation of Henkel AG, the report uses the market data of the company and examines the most appropriate method to carry out the valuation of the company.
Answer to Question 1
a. Generally, the cost of equity is built on three factors, which include the market risk premium, a company specific risk adjustment and the risk. Typically, a commonly used model to estimate the cost of equity is CAPM (capital asset pricing model. To determine the CAPM it is critical to estimate the following:
A Risk-free rate
Market risk premium and,
Market Beta
This report determines the risk free rate by using the U.S. Treasury rates.
Determination of a Risk Free Rate using U.S. Treasury Rates
Theoretically, risk free rate is the rate of returns of an investment that carries no risk of financial loss. The interpretation is that the risk free rate represents the total interests that investors would expect from their investments over a given period. (Damodaran, 2008).
In other word, a risk free rate is an investment where limited rate of return could be obtained with limited credit risks. The U.S. government treasury bill of short-term investment and back by the U.S. government is considered an investment that involves the risk free rates. U.S. Treasury securities are generally considered risk free and considered safest of all investments because the federal government full backs them. (Fleming, 2000). Due to the degree of safety of the treasury bills, the interest's rates are generally low compared to other securities in the capital market.
Thus, this paper uses the three-month U.S. Treasury bill of which maturity is three months to carry out the valuation of Henkel Company. Theoretically, a risk free rate of U.S. Treasury bill is considered short-term investment of approximately three-month U.S. Treasury bill. This paper collects three-month data of the U.S. Treasury bill to determine the risk free rate. This paper chooses the three-month U.S. Treasury bill to value the company because the three-month Treasury bill is carrying the least risks since it is less affected by the fluctuation of the interest rates and the state of the economy such as inflation. However, when the investment on U.S. treasury bills is more than three months, the risks will become high because Treasury bill may be affected by interest rates risks and inflation. Three-month Treasury rate is 0.07% as of April 05, 2013. The three-month Treasury data that determine the risk-free rate of Treasury rate is revealed in Table 1. The company cost of debt is 4.1% and is calculated using the 3-month risk free rate of 8%, where the company beta is 0.7.
Table 1: Three-Month Treasury Risk Free Rate.
BANK DISCOUNT
COUPON EQUIVALENT
BANK DISCOUNT
COUPON
U.S. Treasury (2013).
b). The paper performs regression analysis of 10-year monthly returns of Henkel AG personal product against MSCI World Index. The result of regression analysis is presented in Table 2.
Table 2: SUMMARY OUTPUT of Regression Analysis
Regression Statistics
Multiple R
0,308866
R Square
0,095398
Adjusted R. Square
0,095041
Standard Error
14,47243
Observations
ANOVA
df
SS
MS
F
Significance F
Regression
1
55994,17
55994,17
267,3377
3,3E-57
Residual
530958,5
209,4511
Total
586952,7
Coefficients
Standard Error
t Stat
P-value
Lower 95%
Upper 95%
Lower 95,0%
Upper 95,0%
Intercept
37,42416
0,289694
129,1853
0
36,8561
37,99222
36,8561
37,99222
X Variable 1
0,011502
0,000703
16,35046
3,3E-57
0,010122
0,012881
0,010122
0,012881
Results of regression analysis of Henkel since 2003 against MCI...
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