In order to determine the long-term growth rate, we have calculated the average growth rate of the industry that HSBC operates in for the last 5 years. Capital IQ was used to gather data from other banks operating in the same industry as HSBC. The long-term growth rate assumed for HCBC bank is 3.
72, slightly lower than the short-term growth that was obtained in figure 4.5.The assumed long-term growth rate demonstrates that the industry will continue to grow in the foreseeable future. 4.5 Calculations of Cost of EquityThe cost of equity is defined as the return required to gauge whether investment meets capital return requirements. The company uses cost of equity to evaluate the attractiveness of the investment for both external and internal acquisition opportunities.
(Pierre. V., Pascal. Q., Maurizio.
D). The value that we got after calculating the cost of equity is 6.0023%Beta-risk Premium= 0.75Market Premium =6%Risk free rate of return= 1.50230000%Table 4.64.6 Calculations for Cost of DebtThe cost of debt is the return that the company provides to its debtor holders.
The calculation provided here produced a final amount of 7.0124%Cost of debt= interest expense/total book valueTable 4.74.7 Weighted Average Cost of Capital CalculationsA company’s Weighted Average Cost of Capital (WACC) illustrates its cost of capital across all the sources, including preferred shares, common shares and debt. The cost of capital is weighted by its percentage of total capital and they are added together.
(Corporate finance institute). The weighted average cost of capital amounts to 5.01%. Table 4.64.8 Calculating the Value of the CompanyThe value of the company helped us to compare the fair share price against the actual traded price.
It is a good investment when the fair price is higher than the price the share is traded at as this indicates that the price is expected to grow. It is not a good investment when the fair price is lower than the price the share is actually sold at. This shows that the future growth rate of the entity is below 0. 4.
9 Calculating the Fair Share PriceFair Share Price = Company Value/Outstanding Shares4.10 ConclusionThe understate share price in our computation and the comparison to the traded share value depicts that it’s a good choice of investment. Furthermore, we analysed the risk faced by the sector and the quantifying Matrix done to measure the risk to ensure that the investment decision is secure and generates growth prospects. SUMMARY AND CONCLUSIONThis paper focused on providing recommendations on the investment in the shares of HSBC by analysing various risks (both qualifying as well as quantifying risks) and calculating the fair share price for HSBC using the discounted cash flows method.HSBC is an British multinational financial services company and also the largest banking services institution in Europe. It mainly has four business sectors which include wealth management, global banking, retail banking and private global banking.
its current revenue is USD 51,445 billion with its total assets amounting up to USD2.541 trillion.In order to assess qualifying risk we have analyzed 5 different risks (risk rating, Geo-political risk, compliance and regulation enforcement risk, Global technological risk and credit risk). From our analyst, HSBC will be affected by Brexit and the company should also improve its internal audit as there was a breach on the regulatory and internal control failures in the company. The quantification risk has been done by analyzing HSBC’S volatility and its squared correlation coefficient, the result obtained was 0.
022 which is lower than the one obtained from S;P500 ().0242). The valuation of the company and its share price were obtained using the figure from HSBC’s annual report its short term growth rate was calculated and the result for 5 years was 4.69% which is a bit higher than the long term growth rate. After analysing the qualifying risk faced by HSBC , we generate SWOT and PEST analysis and there exist the measure to quantifying the risks of HSBC using various quantifying measures such as the Sharpe ratio, volatility index and squared correlation coefficient it is quite evident that HSBC is equally volatile as the S&P 500.
while comparing the company value with the outstanding shares the current share price of the company is at low . our view is to buy the stock at low rate and we forecast is it will generate better return in the future. The understate share price in our computation and the comparison to the traded share value depicts that it’s a good choice of investment.