Consumers goods Essay Example | Topics and Well Written Essays - 3000 words

Consumers goods - Essay Example Based on the Annual Report of GKN (2005) the company is using the Option Pricing Model as its model in calculating the target price. First, it was reported that the Earnings per Share (EPS) was computed at 7.7 in 2005. The EPS is actually the net profit after tax divided by the outstanding shares of the company On the other hand, adjustments made in the financial report showed substantial reports. The value of EPS was subsequently changed to 22.1 after the adjustments were made. This is good news for the investors because the each share earned an additional 14.4 Sterling Pounds. According to the report, the change was made because of the impact of the restructuring and impairment charges, profits on the sale of business, and charges in the fair value of derivative financial instruments. The nature of the business suggests that the Discounted Cash Flow Model is the best model to be used in determining target prices.Premier Foods PLC uses Discounted Cash Flow as the model for computing target prices. Basically, all forecasted values provided by the firm emanate from the aforementioned model. In 2005, the actual EPS of the company is valued at 34. This is further divided into continuing and discontinuing EPS. The former accumulated an EPS of 15 and the latter contributed 19 earnings for share. The figures, however, were changed because of IFRS rules. The EPS of the company was reduced to 33.7 with the continuing and discontinuing registering 14.9 and 18.8 EPS respectively. ... Several changes were observed in the manner in which non-operating activities were reported. The decrease was made since most non-operating activities were excluded from the computation of the items needed to value the EPS of the company. Other changes in the business because of the IFRS have impacted the valuation of several elements. Still, the model used by the company is effective because Discounted Cash Flow value considers the effect of inflation in the computation of the future values in the financial statement. Using the Option Pricing Model is prevalent among firms with diverse operations. The target prices computations of Scottish and Newcastle PLC suggest that the Option Pricing Model was used. The Annual Report (2005) of the company has underlined several changes after the IFRS rules were mandated. Specifically, the effects of the changed were observed in the inclusion of cash and cash equivalents. In the EPS, the use of IFRS as guide for accounting has produced significant changes. Before the approval of IFRS use, the EPS was only 40. Using the guidelines provided by IFRS, the EPS of the firm ballooned to 200. Although other adjustments not related to IFRS were made, the value added after the use of IFRS was immense. Indeed, there is a possibility that the values were overstated. Hence, using the Discounted Cash Flow Model will provide an accurate view of target prices in the future operations. The group Annual Report (2005) of British American Tobacco has pointed that the model used for valuation of target prices is the Historical Cost convention. This supports the claim of financial analysts of the effect of inflation rates in the values reflected in the financial statements. According to the report, the company recorded an EPS of