Bank of America Analysis Harvard Case Solution & Analysis

PERFORMANCE OF BANK IN TERMS OF CORPORATE GOVERNANCE

The corporate governance system designed by the management of the company is performing very well. The company had transformed its set of values into specific codes of conduct. The employees of Bank of America all share the same set of values. The focus on four important things that is to act responsibly, delivering together, realizing the power of the people and trusting them.

The Bank of America had worked with civil servants, officials and the agencies of the government to build a system of finance that is based on strong grounds and that this system is globally spread. The company had also taken steps to place controls so that fraudulent and money laundering activities should be prevented. Also the current credit rating of the company regarding its senior debts shows that the company has good credit ratings which reflect that the bank is not much aggressive in raising long term debt and that the company has always maintained high credit ratings. The directors of the bank have always had good dialogue with the credit rating agencies.

Regarding the performance effectiveness of the company’s corporate governance system, the company has made contingency plans to meet the performance standards still in difficult scenarios. These include the notification procedures and also the communication procedures that should be adopted at the time of stress. Apart from that the managers of the company and the board of directors approve the risk management framework to analyze the risk being faced by the bank. These all corporate governance policies show that the governance system at Bank of America is transparent, open and strong.

SUSTAINABILITY AND ENTERPRISE PERFORMANCE

The Board of directors are constantly scanning the external environment surrounding the Bank of America. They are always seeking for opportunities and are also making themselves aware about the threats surrounding them. The company considers all the environmental and social factors. These responsibilities are then fulfilled by the audit committees and the enterprise risk committees. If the shareholders of the company have any issues regarding the social or environmental risk factors than they can easily voice their issues at the annual general meeting through voting rights.

When the management of the company decides to make certain decisions, they also consider all the environmental risk factors and social issues before reaching on to any decision. They get help to make these decisions perfect through energy policy, credit policy, climate change policy and the equator principles. In 2014, green bond principles were formed by the bank. This was a consortium of environmental groups and financial institutions. These institutions help people by giving them advice related to the impact of green bond investments due to environmental risk factors.

The bank’s greater concern for the surrounding environment and the sustainability increases the reputation of the bank and it shows that the bank’s management is much concerned about the surrounding environment. This in turn increases the confidence of the investors to invest in the bank.

ACQUISITION OF BANK OF AMERICA

The firm value of the Bank of America has been calculated on the basis of free cash flows of the 7 year period from Dec 07 to Dec13. The free cash flows were adjusted for all non-cash charges and the capital expenditure was also deducted to calculate the net free cash flow of the firm. To calculate the cost of capital, the cost of debt and the cost of equity has been calculated. The cost of debt is the after tax of the average interest rates of the bank of America. The cost of equity has been calculated through the capital asset pricing model formula. Apart from that the terminal value growth rate has also been calculated. The WACC has been calculated based on the 2013 annual report values. This gives us a reasonable cost of capital of 7%, the present value for each year and the terminal value of the last year has been calculated to find the value of the firm which is $ 1595735 million. This is the most reasonable estimate of the value of the Bank of America. Calipers should bid for this amount to acquire the Bank of America.

Looking at the corporate governance practices at the Bank of America, it seems that Calipers can also offer a higher price equal to the premium to acquire the Bank of America. The financial analysis of the band shows that the bank is performing well in its industry.  The terminal growth rate is also based on certain assumptions. If it holds true, than the bank is a good acquisition for Calipers...................................

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