Nokia is a world leader in mobile communications. Backed by its experience, innovation, user friendliness and secure solutions, the company has become the leading supplier of mobile phones and a leading supplier of mobile, fixed broadband and IP networks. By adding mobility to the Internet, Nokia has created new opportunities for Companies as well as enriching the daily lives of people. Nokia comprises two business groups: Nokia Mobile Phones and Nokia networks. In addition, the company includes a separate Nokia Ventures Organization and a corporate research unit.
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Business and results of operations have been affected in recent years by a number of important trends. The global telecommunications market has experienced rapid growth, especially as the areas of voice and data transmission has become converged and digitalized. The mobile phone market in particular has grown rapidly in the last few years in line with the demand for, and use of, mobile phones. Growth in the use of the Internet also contributed to the increase in demand for mobile Internet and related mobile data and Internet applications.
“The availability of broadband is expected to increase the speed, data transmission ability and graphic quality that 3rd generation systems and their applications require. ” (www. nokia. com) As the telecommunications move to the third generation of mobile telecommunications technology, Nokia intends to take determined decisions in all areas of the business to align their operations with the changing market conditions. Share price is calculated using the free cash flow and the industry average of WACC method.
The free cash flow FCF is assumed to be between 1% and 3% based on previous calculations of average FCF, and the industry average of between 14. 40%-18. 40% chosen for WACC, with the optimal WACC rate been 16. 40%. (File http://giddy. org/dbs/Nokia%202000%20case. doc. ) The sensitivity of share price to WACC and changes in growth of free cash flow FCF are shown on the data tables. It’s seen that even a change in either the growth rate, WACC or both gives quite a substantial change in the share price of Nokia.
The chosen sales growth rate also has bearing on the free cash Flow FCF and hence the share price. The share price changes with corresponding changes in growth rate and scenarios. Changes in the communication industry, are expected to increase competition and change the competitive landscape, which would affect sales negatively, by decreasing sales by a further 2%. A decrease of 2% because in the previous year sales of the firm dropped by 4%, and with an increase in competition in the communication industry, it was prudent to reduce sales by a further 2%.
Investments in Research and Development would increase by a further 2% from 2003 onwards, with a corresponding increase of 2% in operating expenses. In 2002, Nokia continued to invest in its Research and Development. It increased by a further 2% (16% in 2001), (18% in 2002) and now (20% from 2003 onwards) from our projections We chose to keep the rate at 2% because we felt that the firm would be careful in this challenging environment as specified in scenario 2 and the fact that there would be a corresponding increase on their operating expenses which affect their sales and profits.
It is important to specify that investments in research and development are long term and that their positive effects on sales of the firm would not be felt now but in the long-term future. This is a function in Excel, which has been used in making this model user friendly. A user of the model can make use of this function to get around the model easily. As part of this model, are two forms introducing the firm’s logo and the other introducing the firm. The model also makes use of labeled buttons, which makes it easier for the user to navigate through the model.
The chosen scenarios are only projections, and might not be what actually happens in reality. Financial models work by turning the real world, with all its complexity, into a nice series of logical relationships. For instance, these scenarios will give you an idea of what will happen in the future, but they do not give you any better idea of whether or not it would happen. The real world, and this model more than most, is often not rational. Nokia may gain rave reviews, but then again customers might prefer to buy products from other rival companies like Sony-Ericsson or Motorola.
These are questions of style and taste and the financial model is absolutely hopeless at dealing with these qualitative subjective issues. These same factors could however be the very matters that lead to the success of Nokia . Models do not create knowledge. One of the principal reasons for this is that financial models can only analyze existing knowledge or information. Although this seems obvious, it is common to hear people saying things like ‘ we will build a model to tell us what our sales will be’ when all they intend to do is input a few guesses about revenue into the model.