# HHIF Lecture Series: Discounted Cash Flow Model

Save this PDF as:

Size: px
Start display at page:

## Transcription

1 HHIF Lecture Series: Discounted Cash Flow Model Alexander Remorov University of Toronto November 19, 2010 Alexander Remorov (University of Toronto) HHIF Lecture Series: Discounted Cash Flow Model 1 / 18

2 Background: Efficient Market Hypothesis Assumptions: market is efficient; many investors; no inside information Therefore any new information is immediately reflected in stock price via supply and demand At any point in time a stock trades at its fair value, i.e. only normal rate of return provided to investor Therefore can t beat the market and should just invest in an index fund Then how does one explain Warren Buffet s or Goldman Sachs prop trading success? If the market were rational we would not have the stock movement observed in the past 3 years Alexander Remorov (University of Toronto) HHIF Lecture Series: Discounted Cash Flow Model 2 / 18

3 Valuation Some stocks don t trade at their fair value Objective: determine the intrinsic value of a company and compare with market value If the two values significantly differ, this could be a signal to trade the stock How can we value a company? What aspects to consider? Extreme Case: Deep Value Investing - find extremely undervalued stocks (e.g. P/E below 7) This is how Warren Buffet started Alexander Remorov (University of Toronto) HHIF Lecture Series: Discounted Cash Flow Model 3 / 18

4 DCF Steps 1. Forecast revenue growth Revenue determines all other financial statement items However, company cost structure will probably change 2. Forecast Free Cash Flows (FCF) How much cash does the company have left to pay to investors? More cash means higher value 3. Determine discount rate \$100 today is not the same as \$100 one year from now 4. Calculate intrinsic value of the company Determine present value of all future FCFs Alexander Remorov (University of Toronto) HHIF Lecture Series: Discounted Cash Flow Model 4 / 18

5 Forecast Revenue Growth 1. Determine Forecast Period Slow growth: 1 year Relatively fast growth: 5 years (standard) High growth: 10 years 2. Forecast Revenue Growth Rate What aspects to consider? Historical growth, market share, economic situation, products, competition Not easy to estimate Could use analyst estimates 3. The big picture: How does the company make money? Will it be able to make money in the future If you can predict the firm s success (or failure) accurately, you win Alexander Remorov (University of Toronto) HHIF Lecture Series: Discounted Cash Flow Model 5 / 18

6 Forecast Revenue Growth - Example Wal-Mart Stores Inc. Take forecast period of 5 years Revenue growth : 0.9%; : 7.3% Yahoo Finance Analyst 5-year annual growth estimate: 10.35% Expect moderate growth in the near future; as US economy improves, revenue will grow faster Very mature market; hard to achieve very high growth (e.g. 14%) Table: Projected Revenue Growth Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 6.4% 8% 9% 10% 10% 10.5% 416.6B 449.9B 490.4B 539.5B 593.4B 655.7B Alexander Remorov (University of Toronto) HHIF Lecture Series: Discounted Cash Flow Model 6 / 18

7 Forecast Free Cash Flows FCF = NI (CapEx Dep) WC + (ND DR), where: FCF = Levered Free Cash Flow (to Equity) NI = Net Income CapEx = Capital Expenditure, Dep = Deprecitation WC = Change in Working Capital ND = New Debt, DR = Debt Repayment Unlevered Cash flow: FCF = EBITDA CapEx WC Assume ND = DR, then formula becomes: FCF = (R C I )(1 t) + Dep CapEx WC, where: R = Revenue, C = Operating Expenses, I = Interest paid, t = Tax Rate. Need to estimate future C, I, t, CapEx, WC based on projections for revenue. How? Alexander Remorov (University of Toronto) HHIF Lecture Series: Discounted Cash Flow Model 7 / 18

8 Forecast Free Cash Flows - Example Calculate as percentage of Revenue. Wal-Mart Stores Inc. - Historical TTM Revenue Op. Margin 94.1% 94.1% 94.2% 94.4% 94.1% 94.05% Op. Costs Interest (%) 0.54% 0.63% 0.66% 0.67% 0.64% 0.60% Interest Tax Rate 33.4% 33.6% 34.2% 34.1% 32.4% 32.6% Depr. (%) 1.68% 2.09% 1.87% 1.95% 1.84% 1.87% Depr CapEx (%) 4.62% 4.50% 3.93% 2.84% 3.14% 2.88% CapEx WC (1.2) (1.4) (0.6) (1.3) (4.3) (4.0) FCF Alexander Remorov (University of Toronto) HHIF Lecture Series: Discounted Cash Flow Model 8 / 18

9 Forecast Free Cash Flows - Example FCF = (R C I )(1 t) + Dep CapEx WC Wal-Mart Stores Inc. - Forecast TTM Year 1 Year 2 Year 3 Year 4 Year 5 Revenue Op. Margin 94.05% 94.05% 94.05% 94.05% 94.1% 94.1% Op. Costs Interest (%) 0.60% 0.61% 0.62% 0.62% 0.61% 0.60% Interest Tax Rate 32.6% 32.6% 32.6% 32.6% 32.5% 32.5% Depr. (%) 1.87% 1.89% 1.92% 1.95% 2.0% 2.05% Depr CapEx (%) 2.88% 2.95% 3.00% 3.10% 3.20% 3.30% CapEx WC (4.0) (4.1) (4.2) (4.3) (4.4) (4.5) FCF Alexander Remorov (University of Toronto) HHIF Lecture Series: Discounted Cash Flow Model 9 / 18

10 Determine Discount Rate WACC = W d R d (1 t) + W pr R pr + W e R e, where: WACC = Weighted Average Cost of Capital; W d = debt portion of financing, R d = cost of debt; W pr = preferred stock portion of financing, R pr = cost of preferred stock; W e = common stock portion of financing, R e = cost of common stock. WACC - weighted cost of all capital in the firm (same as the return the company requires to pay off all its capital providers) Often companies don t have preferred shares, so the preferred share term is not used WACC will give the discount rate at which to discount FCFs Alexander Remorov (University of Toronto) HHIF Lecture Series: Discounted Cash Flow Model 10 / 18

11 WACC - Where to get information WACC = W d R d (1 t) + W pr R pr + W e R e Want to determine market value of debt, preferred stock, and common stock to get weights Value of common stock = market cap Current share price # shares out Market value of preferred stock, debt - close to book value Get the numbers from most recent balance sheet Long Term Debt = Notes Payable + Current Portion of Long Term Debt + Long Term Debt Cost of debt = yield on company s corporate bonds Can find bond yields on Morningstar Can also use company credit rating listed on Standard & Poors Tax Rate - from past income statements Cost of equity - can use CAPM: R e = R f + β(r m R f ) Can find stock beta from any financial website R f - return on 20-year US bonds Alexander Remorov (University of Toronto) HHIF Lecture Series: Discounted Cash Flow Model 11 / 18

12 Determine Discount Rate - Example Wal-Mart Stores Inc. Has no preferred shares For Q2 2010: LT Debt = \$45242 MM Market Cap (as of September 26, 2010): \$ MM Debt portion: 18.7%, Equity portion: 81.3% Coupon Rate on most recent WMT bonds: 6.50% Forecast tax rate: 32.6% Cost of Equity: R e = ( ) = 4.5% Beta: year US bond rate: 3.50% (as of September 24, 2010) S&P 500 Return (historical): 7% Bond coupon Rate is greater than expected stock return?!? Alexander Remorov (University of Toronto) HHIF Lecture Series: Discounted Cash Flow Model 12 / 18

13 Determine Discount Rate - Example Wal-Mart Stores Inc. Has no preferred shares For Q2 2010: LT Debt = \$45242 MM Market Cap (as of September 26, 2010): \$ MM Debt portion: 18.7%, Equity portion: 81.3% Coupon Rate on most recent WMT bonds: 6.50% Forecast tax rate: 32.6% Cost of Equity: R e = ( ) = 4.5% Beta: year US bond rate: 3.50% (as of September 24, 2010) S&P 500 Return (historical): 7% Bond coupon Rate is greater than expected stock return?!? There is tax. But still, too close... Cost of Capital = = 4.48% This is too low Alexander Remorov (University of Toronto) HHIF Lecture Series: Discounted Cash Flow Model 12 / 18

14 Calculate Intrinsic Value Discount cash flows for the next 5 years using the WACC as discount rate PV (FCFs) = FCF 1 (1+r) + FCF2 (1+r) FCF5 2 (1+r) 5 Find terminal value of the company - value beyond 5 years Can use Perpetuity Growth Model: Term. Value = FCF f (1+g) r g, where: FCF f = cash flow in final year, g = long term FCF growth rate. Exit Multiple Model - assume business will be sold; Term. Value = FCF f FCF multiple, where: Market Cap FCF multiple = FCF Discount Terminal Value (divide by (1 + r) 5 ) Fair Value = PV (FCFs) + Term. Value (1+r) 5 Alexander Remorov (University of Toronto) HHIF Lecture Series: Discounted Cash Flow Model 13 / 18

15 Calculate Intrinsic Value - Example Wal-Mart Stores Inc. WACC = 4.48%; assume it is 6.5% PV (FCFs) = = \$72.5 B Using Perpetuity Growth Model Assume g = 3% (already low), then: Term. Value = = \$602.4 B Discounted: \$439.7 B. Way too high. Perpetuity Growth Model does not work here. Why? Using FCF multiplier (even though WMT is very unlikely to be sold soon) Current FCF multiplier: = 13.3 Term. Value = = \$263.3 B Discounted: = \$192.2 B 5 Fair Value = = \$264.7 B Fair Price = Fair Value # Shares Outstanding = = \$72.7 Alexander Remorov (University of Toronto) HHIF Lecture Series: Discounted Cash Flow Model 14 / 18

16 Advantages and Disadvantages Advantages The concept of intrinsic value seems valid A reasonable way to estimate long-term value Cash is a better estimate of value than earnings Gives an idea of what effect certain numbers in financial statements will have on company value Alexander Remorov (University of Toronto) HHIF Lecture Series: Discounted Cash Flow Model 15 / 18

17 Advantages and Disadvantages Advantages The concept of intrinsic value seems valid A reasonable way to estimate long-term value Cash is a better estimate of value than earnings Gives an idea of what effect certain numbers in financial statements will have on company value Disadvantages Estimating too many numbers Sometimes hard to predict the values e.g. growth companies, recession Firms cook the books Model is very sensitive to discount and growth rates These are hard to estimate in current market Interest rate is low Alexander Remorov (University of Toronto) HHIF Lecture Series: Discounted Cash Flow Model 15 / 18

18 Concluding Remarks The steps: 1. Forecast revenue growth 2. Forecast Free Cash Flows (FCF) 3. Determine discount rate 4. Calculate intrinsic value of the company Alexander Remorov (University of Toronto) HHIF Lecture Series: Discounted Cash Flow Model 16 / 18

19 Concluding Remarks The steps: 1. Forecast revenue growth 2. Forecast Free Cash Flows (FCF) 3. Determine discount rate 4. Calculate intrinsic value of the company In the end: Every model has its own pros and cons It comes down to your own judgement of if the model is appropriate or not Pick a company and perform DCF on it yourself Alexander Remorov (University of Toronto) HHIF Lecture Series: Discounted Cash Flow Model 16 / 18

20 Any Questions? Upcoming Events: Speaker Event: John Propper - Top Five Principles of Investing Monday, November 22, 7:00-10:00 p.m., South Dining Room, Hart House HHIF First Quarterly Meeting Tuesday, November 23, 8:00-10:00 p.m., Debates Room, Hart House Alexander Remorov (University of Toronto) HHIF Lecture Series: Discounted Cash Flow Model 17 / 18

21 References 1. Investopedia DCF Analysis 2. Wikiwealth - WACC Cost of Capital Portal 3. Wikipedia - DCF, WACC articles capital 5. Morningstar WMT Financial Information http: //quote.morningstar.com/stock/s.aspx?t=wmt&region=usa 5. Google Finance WMT Financial Information Alexander Remorov (University of Toronto) HHIF Lecture Series: Discounted Cash Flow Model 18 / 18

### HHIF Lecture Series: Financial Statement Analysis

HHIF Lecture Series: Financial Statement Analysis Alexander Remorov Based on the Materials by Daanish Afzal University of Toronto November 5, 2010 Alexander Remorov, Daanish Afzal (University of Toronto)

### Equity Analysis and Capital Structure. A New Venture s Perspective

Equity Analysis and Capital Structure A New Venture s Perspective 1 Venture s Capital Structure ASSETS Short- term Assets Cash A/R Inventories Long- term Assets Plant and Equipment Intellectual Property

### INTERVIEWS - FINANCIAL MODELING

420 W. 118th Street, Room 420 New York, NY 10027 P: 212-854-4613 F: 212-854-6190 www.sipa.columbia.edu/ocs INTERVIEWS - FINANCIAL MODELING Basic valuation concepts are among the most popular technical

### TIP If you do not understand something,

Valuing common stocks Application of the DCF approach TIP If you do not understand something, ask me! The plan of the lecture Review what we have accomplished in the last lecture Some terms about stocks

### Cash Flow Analysis Venture Business Perspective

Cash Flow Analysis Venture Business Perspective Cash Flow (CF) Analysis What is CF and how is determined? CF Operating CF Free CF Managing CF Cash Conversion Cyclical CF Break-even Valuing venture businesses

### VALUATION JC PENNEY (NYSE:JCP)

VALUATION JC PENNEY (NYSE:JCP) Prepared for Dr. K.C. Chen California State University, Fresno Prepared by Sicilia Sendjaja Finance 129-Student Investment Funds December 15 th, 2009 California State University,

### NIKE Case Study Solutions

NIKE Case Study Solutions Professor Corwin This case study includes several problems related to the valuation of Nike. We will work through these problems throughout the course to demonstrate some of the

### Forecasting and Valuation of Enterprise Cash Flows 1. Dan Gode and James Ohlson

Forecasting and Valuation of Enterprise Cash Flows 1 1. Overview FORECASTING AND VALUATION OF ENTERPRISE CASH FLOWS Dan Gode and James Ohlson A decision to invest in a stock proceeds in two major steps

### Cash Flow Analysis Venture Business Perspective

Cash Flow Analysis Venture Business Perspective Cash Flow (CF) Analysis What is CF and how is determined? CF Free CF Managing CF Cash Conversion Cyclical CF Break-even Valuing venture businesses based

### Corporate Finance: Final Exam

Corporate Finance: Final Exam Answer all questions and show necessary work. Please be brief. This is an open books, open notes exam. For partial credit, when discounting, please show the discount rate

### LECTURE- 4. Valuing stocks Berk, De Marzo Chapter 9

1 LECTURE- 4 Valuing stocks Berk, De Marzo Chapter 9 2 The Dividend Discount Model A One-Year Investor Potential Cash Flows Dividend Sale of Stock Timeline for One-Year Investor Since the cash flows are

### Current Ratio: Current Assets / Current Liabilities. Measure of whether company has enough cash to cover immediate expenses

1 Beta: a measure of a stock s volatility relative to the overall market (typically the S&P500 index is used as a proxy for the overall market ). The higher the beta, the more volatile the stock price.

### Q3: What is the quarterly equivalent of a continuous rate of 3%?

SESSION 1: Pre-requisites: a reminder Time value of money, annuities Q1: You wish to buy a new house but would need to borrow part of the required amount. In view of your revenues you have been able to

### Evaluation of Google and Apple

Xing Chen & Yuanyuan Pan FIN 5190---Special Topics: Financial Modeling Prof. Michael D. Boldin Final Project Evaluation of Google and Apple Overview of project and modeling objectives The objective of

### CHAPTER 9 Stocks and Their Valuation

CHAPTER 9 Stocks and Their Valuation Preferred stock Features of common stock etermining common stock values Efficient markets 1 Preferred Stock Hybrid security. Similar to bonds in that preferred stockholders

### Today s Agenda. DFR1 and Quiz 3 recap. Net Capital Expenditures. Working Capital. Dividends. Estimating Cash Flows

Today s Agenda DFR1 and Quiz 3 recap Net Capital Expenditures Working Capital Dividends Estimating Cash Flows Net Capital expenditures Net capital expenditures = capital expenditures - depreciation Depreciation

### Bank Valuation: Comparable Public Companies & Precedent Transactions

Bank Valuation: Comparable Public Companies & Precedent Transactions Picking a set of comparable companies or precedent transactions for a bank is very similar to what you d do for any other company here

### ACCOUNTING III Cash Flow Statement & Linking the 3 Financial Statements. Fall 2015 Comp Week 5

ACCOUNTING III Cash Flow Statement & Linking the 3 Financial Statements Fall 2015 Comp Week 5 CODE: CA\$H Administrative Stuff Send an email to trentnelson@college.harvard.edu if you have not been added

### Cost of Capital and Project Valuation

Cost of Capital and Project Valuation 1 Background Firm organization There are four types: sole proprietorships partnerships limited liability companies corporations Each organizational form has different

### Chapter 13, ROIC and WACC

Chapter 13, ROIC and WACC Lakehead University Winter 2005 Role of the CFO The Chief Financial Officer (CFO) is involved in the following decisions: Management Decisions Financing Decisions Investment Decisions

### U + PV(Interest Tax Shield)

CHAPTER 15 Debt and Taxes Chapter Synopsis 15.1 The Interest Tax Deduction A C-Corporation pays taxes on proits ater interest payments are deducted, but it pays dividends rom ater-tax net income. Thus,

### Interview Questions. From Joshua Rosenbaum and Joshua Pearl Co-authors of Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions

Interview Questions From Joshua Rosenbaum and Joshua Pearl Co-authors of Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions How do the three primary financial statements link

### IFRS Financial Ratios.

100 IFRS Financial Ratios Author s preface Dear readers, in order to make solid investments, investors compare companies within their peer group. For this purpose, key ratios such as EBIT, working capital

### Running head: THE VALUATION OF WAL-MART 1

Running head: THE VALUATION OF WAL-MART 1 The Valuation of Wal-Mart CPT Becky Lux, CPT Ino Ruiz, and ENS Jujuane Hairston Army-Baylor MHA/MBA Graduate Program THE VALUATION OF WAL-MART 2 In fiscal year

HOW TO VALUE STOCKS Three valuation methods explained Table of Contents Foreword... 3 Method 1: Price-Earnings multiple... 4 Method 2: Discounted Cash Flow (DCF) model... 7 Method 3: Return on Equity valuation...

### Techniques in Finance & Valuation

Techniques in Finance & Valuation 1 What is Valuation? Valuation: Methods of quantifying how much money something should be exchanged for today, considering future benefits. We will teach 4 valuation methods

### ENTREPRENEURIAL FINANCE: Strategy Valuation and Deal Structure

ENTREPRENEURIAL FINANCE: Strategy Valuation and Deal Structure Chapter 9 Valuation Questions and Problems 1. You are considering purchasing shares of DeltaCad Inc. for \$40/share. Your analysis of the company

### Valuation of Marriott International Hotels, Incorporated

Valuation of Marriott International Hotels, Incorporated Prepared by: Allison Johnston Finance 129 Dr. K.C. Chen May 15, 2007 Table of Contents Company Overview... 3 Background... 3 Awards and Recognition...

### VALUATIONS I Financial Metrics, Ratios, & Comparables Analysis. Fall 2015 Comp Week 6

VALUATIONS I Financial Metrics, Ratios, & Comparables Analysis Fall 2015 Comp Week 6 CODE: COMPS Timeline Date Topic 9/10/15 Introduction to Finance 9/17/15 Qualitative Analysis: SWOT and Porter s Five

### Valuation of! AirThread Connections. J. Zhang Consulting: Mohammad Alkhamis, Marci McCall, Lindsay Ramirez, Sarah Spring, Mavis Yu ACC

Valuation of! AirThread Connections J. Zhang Consulting: Mohammad Alkhamis, Marci McCall, Lindsay Ramirez, Sarah Spring, Mavis Yu Review of AirThread Acquisition Opportunity to acquire AirThread Connections

### Company Valuation. Assignment 1. Group Members: Sammy Keene, Teemu Mikkonen, Jacub Jankowski, Jordan Dick. Owner [Type the company name]

Company Valuation Assignment 1 Group Members: Sammy Keene, Teemu Mikkonen, Jacub Jankowski, Jordan Dick Owner [Type the company name] Contents 1. Abstract... 2 2. Introduction... 3 3. Stock Performance...

### GESTÃO FINANCEIRA II PROBLEM SET 5 SOLUTIONS (FROM BERK AND DEMARZO S CORPORATE FINANCE ) LICENCIATURA UNDERGRADUATE COURSE

GESTÃO FINANCEIRA II PROBLEM SET 5 SOLUTIONS (FROM BERK AND DEMARZO S CORPORATE FINANCE ) LICENCIATURA UNDERGRADUATE COURSE 1 ST SEMESTER 2010-2011 Chapter 18 Capital Budgeting and Valuation with Leverage

### CHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING

CHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING Answers to Concepts Review and Critical Thinking Questions 1. No. The cost of capital depends on the risk of the project, not the source of the money.

### Chapters 3 and 13 Financial Statement and Cash Flow Analysis

Chapters 3 and 13 Financial Statement and Cash Flow Analysis Balance Sheet Assets Cash Inventory Accounts Receivable Property Plant Equipment Total Assets Liabilities and Shareholder s Equity Accounts

### Using the Bloomberg terminal for data

Using the Bloomberg terminal for data Contents of Package 1.Getting information on your company Pages 2-31 2.Getting information on comparable companies Pages 32-39 3.Getting macro economic information

### 30% 20% 10% 0% -10% -20% -30% -40% 20% 10% 0% -10% -20% -30% -40% 60% 50% 40% 30% 20% 10% 0% \$20,000 \$15,000 \$10,000 \$5,000 \$120,000 \$100,000 \$80,000

Applied Portfolio Management Intel Corporation Sector: Information Technology TRIM Report Date: 5/6/2013 Market Cap (mm) \$103,018 Annual Dividend.89 2-Yr Beta (S&P 500 Index) 0.98 Return on Capital 30.3%

### MacIC Beginner Question Bank

Accounting MacIC Beginner Question Bank Here are the 5 most important Accounting concepts you need to know: The 3 financial statements and what each one means How the 3 statements link together and how

### STUDENT CAN HAVE ONE LETTER SIZE FORMULA SHEET PREPARED BY STUDENT HIM/HERSELF. FINANCIAL CALCULATOR/TI-83 OR THEIR EQUIVALENCES ARE ALLOWED.

Test III-FINN3120-090 Fall 2009 (2.5 PTS PER QUESTION. MAX 100 PTS) Type A Name ID PRINT YOUR NAME AND ID ON THE TEST, ANSWER SHEET AND FORMULA SHEET. TURN IN THE TEST, OPSCAN ANSWER SHEET AND FORMULA

### CHAPTER 14 COST OF CAPITAL

CHAPTER 14 COST OF CAPITAL Answers to Concepts Review and Critical Thinking Questions 1. It is the minimum rate of return the firm must earn overall on its existing assets. If it earns more than this,

### Chapter 3 Free Cash Flow Valuation

Solutions Chapter 3 Free Cash Flow Valuation 1. \$100 increase in: Change in FCFF Change in FCFE A. Net income +100 +100 B. Cash operating expenses 60 60 C. Depreciation +40 +40 D. Interest expense 0 60

### 15.535 Class #2 Valuation Basics. 15.535 - Class #2 1

15.535 Class #2 Valuation Basics 15.535 - Class #2 1 Homepage Address http://mit.edu/wysockip/www Or (Click on Analysts ) Check here for examples of projects from prior years. 15.535 - Class #2 2 Where

### Valuing Companies. Katharina Lewellen Finance Theory II May 5, 2003

Valuing Companies Katharina Lewellen Finance Theory II May 5, 2003 Valuing companies Familiar valuation methods Discounted Cash Flow Analysis Comparables Real Options Some new issues Do we value assets

### Discussion of Valuation Methods and Model Templates. May 6, 2013

Discussion of Valuation Methods and Model Templates May 6, 2013 Introduction The following presentation discusses the SPT Business Development valuation template and the key considerations related to each

Business Value Drivers by Kurt Havnaer, CFA, Business Analyst white paper A Series of Reports on Quality Growth Investing jenseninvestment.com Price is what you pay, value is what you get. 1 Introduction

### Chapter 14 Capital Structure in a Perfect Market

Chapter 14 Capital Structure in a Perfect Market 14-1. Consider a project with free cash flows in one year of \$130,000 or \$180,000, with each outcome being equally likely. The initial investment required

### NIKE Case Study. Professor Corwin. An overview of the individual questions and their relation to the lecture topics is provided below.

NIKE Case Study Professor Corwin This case study includes several problems related to the valuation of Nike. We will work through these problems throughout the course to demonstrate some of the most important

### FLAME Investment Lab With The Masters - 2015

FLAME Investment Lab With The Masters - 2015 Lecture on Valuation by Samit Vartak, CFA Co-Founder & CIO June 10-15, 2015 www.sageoneinvestments.com Investment Advisors LLP Valuation as a Profession Tragedy:

Module 3: The Venture Capital Negotiation and Investment Process Valuations Module 3: The Venture Capital Negotiation and Investment Process Valuations 1.0 BUILDING PRO-FORMA FINANCIAL STATEMENTS 1.01

### Homework Solutions - Lecture 4

Homework Solutions - Lecture 4 1. Estimate fundamental growth in EBIT for Nike based on the firm s reinvestment rate and ROC in the most recent year. Be sure to incorporate any necessary adjustments made

### Non GAAP to GAAP Reconciliation November 2014

Non GAAP to GAAP Reconciliation November 2014 LTM September 30, 2014 Adjusted EBITDA Supplementary Information Non GAAP Earnings Before Interest, Taxes, Depreciation & Amortization LTM 9/30/2014 (\$ in

### 1. What are the three types of business organizations? Define them

Written Exam Ticket 1 1. What is Finance? What do financial managers try to maximize, and what is their second objective? 2. How do you compare cash flows at different points in time? 3. Write the formulas

### BONDS VS. STOCKS IN A VALUE PORTFOLIO. Ben Graham Centre's 2013 Value Investing Conference

BONDS VS. STOCKS IN A VALUE PORTFOLIO Ben Graham Centre's 2013 Value Investing Conference BONDS VS. STOCKS I hunt for bargains and it has been my experience that when I find an undervalued stock often

### Presentation Outline. Why Value? Determining Business Value Difficult to Value Businesses Strategies to Increase Value

Business Value Presentation Outline Why Value? Determining Business Value Difficult to Value Businesses Strategies to Increase Value My Background Investment Fund Manager Business Valuation Consultant

### Chapter 7. . 1. component of the convertible can be estimated as 1100-796.15 = 303.85.

Chapter 7 7-1 Income bonds do share some characteristics with preferred stock. The primary difference is that interest paid on income bonds is tax deductible while preferred dividends are not. Income bondholders

### Corporate Finance: Final Exam

Corporate Finance: Final Exam Answer all questions and show necessary work. Please be brief. This is an open books, open notes exam. 1. DayTop Inns is a publicly traded company, with 10 million shares

Review for Exam 3 Instructions: Please read carefully The exam will have 25 multiple choice questions and 5 work problems. You are not responsible for any topics that are not covered in the lecture note

### Valuation approaches to Mergers & Acquisitions

Valuation approaches to Mergers & Acquisitions Sagar Gokani, Chief Manager M&A & IR, Piramal Healthcare Limited 7 th July 2012 Contents Approaches to Valuation Discounted Cash Flow Relative Valuation Valuing

### Chapter 17 Corporate Capital Structure Foundations (Sections 17.1 and 17.2. Skim section 17.3.)

Chapter 17 Corporate Capital Structure Foundations (Sections 17.1 and 17.2. Skim section 17.3.) The primary focus of the next two chapters will be to examine the debt/equity choice by firms. In particular,

### USING THE EQUITY RESIDUAL APPROACH TO VALUATION: AN EXAMPLE

Graduate School of Business Administration - University of Virginia USING THE EQUITY RESIDUAL APPROACH TO VALUATION: AN EXAMPLE Planned changes in capital structure over time increase the complexity of

### Class #4 Using Accounting Earnings for Valuation aka EBO Valuation or Abnormal Earnings Valuation or Residual Income Valuation. 15.

Class #4 Using Accounting Earnings for Valuation aka EBO Valuation or Abnormal Earnings Valuation or Residual Income Valuation 15.535 - Class #4 1 Where have we been & where are we going? Where have we

### Management Accounting Financial Strategy

PAPER P9 Management Accounting Financial Strategy The Examiner provides a short study guide, for all candidates revising for this paper, to some first principles of finance and financial management Based

### CHAPTER 8. Problems and Questions

CHAPTER 8 Problems and Questions 1. Plastico, a manufacturer of consumer plastic products, is evaluating its capital structure. The balance sheet of the company is as follows (in millions): Assets Liabilities

### Class #3 Cash Flow Analysis. 15.535 - Class #3 1

Class #3 Cash Flow Analysis 15.535 - Class #3 1 Quickie Announcements In class on Thursday: Submit form with names of team members and your 3 company choices for project. Matching team members. 15.535

### II. Estimating Cash Flows

II. Estimating Cash Flows DCF Valuation Aswath Damodaran 61 Steps in Cash Flow Estimation Estimate the current earnings of the firm If looking at cash flows to equity, look at earnings after interest expenses

### CFAspace. CFA Level II. Provided by APF. Academy of Professional Finance 专 业 金 融 学 院

CFAspace Provided by APF CFA Level II Equity Investments Free Cash Flow Valuation Part I CFA Lecturer: Hillary Wang Content Free cash flow to the firm, free cash flow to equity Ownership perspective implicit

### New Venture Valuation

New Venture Valuation Antoinette Schoar MIT Sloan School of Management 15.431 Spring 2011 What is Different About Valuing New Ventures? Higher risks and higher uncertainty Potential rewards higher? Option

### Things to Absorb, Read, and Do

Things to Absorb, Read, and Do Things to absorb - Everything, plus remember some material from previous chapters. This chapter applies Chapter s 6, 7, and 12, Risk and Return concepts to the market value

### DUKE UNIVERSITY Fuqua School of Business. FINANCE 351 - CORPORATE FINANCE Problem Set #4 Prof. Simon Gervais Fall 2011 Term 2.

DUK UNIRSITY Fuqua School of Business FINANC 351 - CORPORAT FINANC Problem Set #4 Prof. Simon Gervais Fall 2011 Term 2 Questions 1. Suppose the corporate tax rate is 40%. Consider a firm that earns \$1,000

### Leveraged Buyout Model Quick Reference

Leveraged Buyout (LBO) Model Overview A leveraged buyout model shows what happens when a private equity firm acquires a company using a combination of equity (cash) and debt, and then sells it in 3-5 years.

### Use the table for the questions 18 and 19 below.

Use the table for the questions 18 and 19 below. The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value): Maturity (years) 1 3 4 5 Price

### Revisiting WACC) By S. K. Mitra Institute of Management Technology, Nagpur, India.

Global Journal of Management and Business Research Volume Issue Version.0 November 20 Type: Double Blind Peer Reviewed International Research Journal Publisher: Global Journals Inc. (USA) Online ISSN:

### Advanced Corporate Finance Valuation I. Thomas J. Chemmanur Carroll School of Management Boston College

Advanced Corporate Finance Valuation I Thomas J. Chemmanur Carroll School of Management Boston College Valuation A variety of circumstances where value has to be established without using market value:

### Chapter 9 Valuing Stocks

Chapter 9 Valuing Stocks 9-1. Assume Evco, Inc., has a current price of \$50 and will pay a \$2 dividend in one year, and its equity cost of capital is 15%. What price must you expect it to sell for right

### Chapter 11 Calculating the Cost of Capital

Chapter 11 Calculating the Cost of Capital (def) - Cost of obtaining money to fund asset purchase - use as estimate of r (discount rate) If we can earn more than the cost of capital (r) from a project

### Valuation Free Cash Flows. Katharina Lewellen Finance Theory II April 2, 2003

Valuation Free Cash Flows Katharina Lewellen Finance Theory II April 2, 2003 Valuation Tools A key task of managers is to undertake valuation exercises in order to allocate capital between mutually exclusive

### DUKE UNIVERSITY Fuqua School of Business. FINANCE 351 - CORPORATE FINANCE Problem Set #7 Prof. Simon Gervais Fall 2011 Term 2.

DUKE UNIVERSITY Fuqua School of Business FINANCE 351 - CORPORATE FINANCE Problem Set #7 Prof. Simon Gervais Fall 2011 Term 2 Questions 1. Suppose the corporate tax rate is 40%, and investors pay a tax

FINC 3630: Advanced Business Finance Additional Practice Problems Accounting For Financial Management 1. Calculate free cash flow for Home Depot for the fiscal year-ended February 1, 2015 (the 2014 fiscal

### Barrick Gold Corporation NYSE: ABX. Highlights. Business Summary. Investment Thesis

Analysts: Michelle Oliver, Kari Bellinger, & Brady Rothrock Student Investment Fund Portfolio Recommendation: BUY Market Cap: \$50.98 billion Current Price: \$47.00 Sector: Mining Dividend Yield: 0.9% 12-month

### UTILITY REGULATOR WATER. Water & Sewerage Services Price Control 2015-21

Water & Sewerage Services Price Control 2015-21 Final Determination Annex A Financing Investment December 2014 Contents Page Water and Sewerage Services Price Control 2015-21 Final Determination Annex

### FSA Note: Summary of Financial Ratio Calculations

FSA Note: Summary of Financial Ratio Calculations This note contains a summary of the more common financial statement ratios. A few points should be noted: Calculations vary in practice; consistency and

ENTERPRISE VALUATION Szabolcs Sebestyén szabolcs.sebestyen@iscte.pt Degree in Business Administration CORPORATE FINANCE Sebestyén (ISCTE-IUL) ENTERPRISE VALUATION Corporate Finance 1 / 36 Outline 1 Discounted

Review for Exam 3 Instructions: Please read carefully The exam will have 25 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation

### Homework Solutions - Lecture 2

Homework Solutions - Lecture 2 1. The value of the S&P 500 index is 1286.12 and the treasury rate is 3.43%. In a typical year, stock repurchases increase the average payout ratio on S&P 500 stocks to over

### Test3. Pessimistic Most Likely Optimistic Total Revenues 30 50 65 Total Costs -25-20 -15

Test3 1. The market value of Charcoal Corporation's common stock is \$20 million, and the market value of its riskfree debt is \$5 million. The beta of the company's common stock is 1.25, and the market

### t = 1 2 3 1. Calculate the implied interest rates and graph the term structure of interest rates. t = 1 2 3 X t = 100 100 100 t = 1 2 3

MØA 155 PROBLEM SET: Summarizing Exercise 1. Present Value [3] You are given the following prices P t today for receiving risk free payments t periods from now. t = 1 2 3 P t = 0.95 0.9 0.85 1. Calculate

### Chapter 11. Stocks and Bonds. How does this distribution work? An example. What form do the distributions to common shareholders take?

Chapter 11. Stocks and Bonds Chapter Objectives To identify basic shareholder rights and the means by which corporations make distributions to shareholders To recognize the investment opportunities in

### Overview of Financial 1-1. Statement Analysis

Overview of Financial 1-1 Statement Analysis 1-2 Financial Statement Analysis Financial Statement Analysis is an integral and important part of the business analysis. Business analysis? Process of evaluating

### Fundamental analysis

Fundamental analysis 2 June 2016 CERN Finance Club c.laner@cern.ch Introduction Let s cover the two main types of investment analysis used in traditional investing Today: Fundamental analysis Next time:

### Financial Statement Analysis!

Financial Statement Analysis! The raw data for investing Aswath Damodaran! 1! Questions we would like answered! Assets Liabilities What are the assets in place? How valuable are these assets? How risky

### Stock Valuation: Gordon Growth Model. Week 2

Stock Valuation: Gordon Growth Model Week 2 Approaches to Valuation 1. Discounted Cash Flow Valuation The value of an asset is the sum of the discounted cash flows. 2. Contingent Claim Valuation A contingent

### Contribution 787 1,368 1,813 983. Taxable cash flow 682 1,253 1,688 858 Tax liabilities (205) (376) (506) (257)

Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2012 Answers 1 (a) Calculation of net present value (NPV) As nominal after-tax cash flows are to be discounted, the nominal

### Practice Exam (Solutions)

Practice Exam (Solutions) June 6, 2008 Course: Finance for AEO Length: 2 hours Lecturer: Paul Sengmüller Students are expected to conduct themselves properly during examinations and to obey any instructions

### Financial & Valuation Modeling Boot Camp

TARGET AUDIENCE Overview 3-day intensive training program where trainees learn financial & valuation modeling in Excel using in a hands-on, case-study approach. The modeling methodologies covered include:

### Bonds, Preferred Stock, and Common Stock

Bonds, Preferred Stock, and Common Stock I. Bonds 1. An investor has a required rate of return of 4% on a 1-year discount bond with a \$100 face value. What is the most the investor would pay for 2. An

### I m going to cover 7 key points about FCF here:

Free Cash Flow Overview When you re valuing a company with a DCF analysis, you need to calculate their Free Cash Flow (FCF) to figure out what they re worth. While Free Cash Flow is simple in theory, in

### Pre and Post Tax Discount Rates and Cash Flows A Technical Note

Pre and Post Tax Discount Rates and Cash Flows A Technical Note Wayne Lonergan When discounting pre tax cash flows it is often assumed that discounting pre tax cash flows at pre tax discount rates will

### HOLD. Ticker: MCD Sector: Consumer Services Industry: Restaurants and Bars. Recommendation:

Ticker: MCD Sector: Consumer Services Industry: Restaurants and Bars Recommendation: HOLD Data: Price 52-wk high 52-wk low \$54.23 (14-Sept-09) \$65.47 (19-Sept-08) \$45.79 (10-Oct-08) Market cap \$59.18B

### Estimating Cost of Capital. 2. The cost of capital is an opportunity cost it depends on where the money goes, not where it comes from

Estimating Cost of Capal 1. Vocabulary the following all mean the same thing: a. Required return b. Appropriate discount rate c. Cost of capal (or cost of money) 2. The cost of capal is an opportuny cost