ENTERPRISE VALUATION. Degree in Business Administration CORPORATE FINANCE. Szabolcs Sebestyén


 Juniper Matthews
 1 years ago
 Views:
Transcription
1 ENTERPRISE VALUATION Szabolcs Sebestyén Degree in Business Administration CORPORATE FINANCE Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 1 / 36
2 Outline 1 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Definition of FCFF Enterprise Value and Equity Value Free Cash Flow to Equity 2 Measuring Performance: Economic Value Added Market Value Added Discounted Cash Flow Valuation v EVA 3 Multiples Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 2 / 36
3 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Outline 1 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Definition of FCFF Enterprise Value and Equity Value Free Cash Flow to Equity 2 Measuring Performance: Economic Value Added Market Value Added Discounted Cash Flow Valuation v EVA 3 Multiples Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 3 / 36
4 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Definition of FCFF Outline 1 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Definition of FCFF Enterprise Value and Equity Value Free Cash Flow to Equity 2 Measuring Performance: Economic Value Added Market Value Added Discounted Cash Flow Valuation v EVA 3 Multiples Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 4 / 36
5 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Definition of FCFF The Discounted CashFlow Method The value of a firm lies in its potential to create wealth That is, its value does not depend on its current situation nor on its past, but on its capacity to generate future cash flows The discounted cashflow method (DCF) determines the value of the firm from a dynamic perspective rather than from a static one Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 5 / 36
6 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Definition of FCFF Free Cash Flow to the Firm (1) How to find cash flows for firm value calculation? The objective is to determine the free cash flow to the firm (FCFF): the amount of cash that a firm can pay out to investors after paying for all investments necessary for growth The cash inflow is The cash outflow is Hence, FCFF is given by EBIT (1 t c ) + Depreciation Capex + Change in NonCash NWC FCFF = EBIT (1 t c ) + Depreciation Capex Change in NonCash NWC Free cash flows can be negative for rapidly growing businesses Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 6 / 36
7 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Definition of FCFF Free Cash Flow to the Firm (2) An alternative way to calculate FCFF adds up the cash flows to all claim holders, FCFF = FCF to Equity + Interest Expense (1 t c ) + + Prinicipal Repayments New Debt Issues+ + Preferred Dividends Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 7 / 36
8 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Enterprise Value and Equity Value Outline 1 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Definition of FCFF Enterprise Value and Equity Value Free Cash Flow to Equity 2 Measuring Performance: Economic Value Added Market Value Added Discounted Cash Flow Valuation v EVA 3 Multiples Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 8 / 36
9 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Enterprise Value and Equity Value Enterprise Value Given the free cash flows, we can compute the enterprise value (EV) as FCFF t EV = (1 + R WACC ) t n t=1 where n is the valuation horizon The firm value (FV) is FV = EV + Market Value of NonOperating Assets Nonoperating assets are assets that are not essential to the ongoing operations of a business, but may still generate income or provide a return on investment Cash and marketable securities Holdings in other firms Other nonoperating assets (e.g., unused land) Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 9 / 36
10 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Enterprise Value and Equity Value Terminal Value (1) The valuation horizon, n, is often arbitrarily chosen Up to n the cash flows are explicitly estimated, and this period is typically characterised by extraordinary growth It is reasonable to assume further operation of the firm after the valuation horizon but at a stable growth rate The terminal value is generally calculated as the PV of a perpetuity, TV n = FCFF n+1 R WACC g n where g n is the constant growth rate after the valuation horizon, n Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 10 / 36
11 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Enterprise Value and Equity Value Terminal Value (2) The FCFF used in the perpetuity formula should correspond to a steady state where the value of both fixed assets and net working capital are growing at the rate g n Formally, FCFF n+1 = EBIT n (1 t c ) (1 + g n ) Invested Capital n+1 (boy) g n where boy stands for beginning of year, and Invested Capital n+1 (boy) = Net Capex n+1 (boy) + + NonCash NWC n+1 (boy) When the growth rate from year n 1 to n is g n then FCFF n+1 = FCFF n (1 + g n ) When g n = 0 then FCFF n+1 = FCFF n = EBIT n (1 t c ) Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 11 / 36
12 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Enterprise Value and Equity Value Growth Rate and ROIC The growth rate can be estimated as g n = ROIC n (1 Payout Ratio n ) = ROIC n Plowback Ratio n where the payout ratio is the ratio of dividends to EPS The return on invested capital (ROIC) is defined as ROIC n = EBIT n (1 t c ) Invested Capital n (boy) where Invested capital = B + S Book Value of NonOperating Assets ROIC can also be calculated in terms of sales margin and the turnover of invested capital as ROIC n = EBIT n (1 t c ) Sales n Sales n Invested Capital n (boy) Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 12 / 36
13 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Enterprise Value and Equity Value Enterprise Value Reloaded and Equity Value Taking into account terminal value, EV becomes EV = n t=1 where TV n = FCFF n+1 / (R WACC g n ) The equity value of a firm is Alternatively, FCFF t (1 + R WACC ) t + TV n (1 + R WACC ) n Equity Value = Firm Value Market Value of Debt Equity Value = EV + Market Value of NonOperating Assets Market Value of Debt Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 13 / 36
14 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Free Cash Flow to Equity Outline 1 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Definition of FCFF Enterprise Value and Equity Value Free Cash Flow to Equity 2 Measuring Performance: Economic Value Added Market Value Added Discounted Cash Flow Valuation v EVA 3 Multiples Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 14 / 36
15 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Free Cash Flow to Equity An Alternative: Free Cash Flow to Equity Alternative methods for calculating cash flows rely on cash flows available to shareholders after paying taxes, debt service and capex Dividends Free Cash Flow to Equity (FCFE) FCFE is defined as FCFE = Net Income + Depreciation Capex Change in NonCash NWC+ + New Debt Issued Debt Repayments For both alternatives the relevant discount rate is the cost of equity, and the PV of cash flows is the equity value Both lead to the same conclusion if Dividends = FCFE; or Dividends < FCFE, and the excess cash is invested in zeronpv projects Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 15 / 36
16 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Free Cash Flow to Equity Advantages of FCFF FCFF is the most widely used methodology for DCF calculations as FCFF is an unlevered cash flow because it is prior to debt payments it is consistent with a constant target debtequity ratio, thereby with WACC calculation The difference between FCFF and FCFE can be understood, assuming perpetual cash flows, from Firm Value = t=1 FCFF t (1 + R WACC ) t Equity Value = Firm Value Market Value of Debt = = t=1 FCFE t (1 + R S ) t Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 16 / 36
17 Measuring Performance: Economic Value Added Outline 1 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Definition of FCFF Enterprise Value and Equity Value Free Cash Flow to Equity 2 Measuring Performance: Economic Value Added Market Value Added Discounted Cash Flow Valuation v EVA 3 Multiples Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 17 / 36
18 Measuring Performance: Economic Value Added Outline 1 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Definition of FCFF Enterprise Value and Equity Value Free Cash Flow to Equity 2 Measuring Performance: Economic Value Added Market Value Added Discounted Cash Flow Valuation v EVA 3 Multiples Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 18 / 36
19 Measuring Performance: Economic Value Added Capital budgeting is like looking through the windshield while driving a car. You need to know what lies farther down the road to calculate a net present value. Performance measurement is like looking into the rearview mirror. You find out where you have been. Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 19 / 36
20 Measuring Performance: Economic Value Added Example: Economic Value Added (1) Example Many years ago, Henry Bodenheimer started Bodie s Blimps, one of the largest highspeed blimp manufacturers. Because growth was so rapid, Henry put most of his effort into capital budgeting. He forecast cash flows for various projects and discounted them at the cost of capital appropriate to the beta of the blimp business. However, these projects have grown rapidly, in some cases becoming whole divisions. He now needs to evaluate the performance of these divisions to reward his division managers. How does he perform the appropriate analysis? Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 20 / 36
21 Measuring Performance: Economic Value Added Example: Economic Value Added (2) Example (cont d) Henry first measured the performance of his various divisions by return on invested capital (ROIC). For example, if a division had aftertax earnings of e 1,000 and invested capital of e 10,000, the ROIC would be e1, 000 ROIC = e10, 000 = 10% He calculated the ROIC for each division, paying a bonus to each of his division managers based on the size that division s ROIC. Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 21 / 36
22 Measuring Performance: Economic Value Added Example: Economic Value Added (3) Example (cont d) While ROIC was generally effective in motivating his managers, there were a number of situations where it appeared that ROA was counterproductive. Sharon Smith s division had aftertax earnings of e 2,000,000 on an invested capital base of e 2,000,000 (ROIC= 100%), and the R WACC of the division was 20%. Henry suggested a project to Smith that would earn e 1,000,000 per year on an investment of e 2,000,000. This was clearly an attractive project with an ROIC= 50%. However, Smith did everything she could to kill the project. As Henry later figured out, Smith was rational to do so. If the project were accepted, the division s ROIC would become ROIC = e2, 000, e1, 000, 000 e2, 000, e2, 000, 000 = 75%, leading to lower division ROIC and lower bonus for Smith. Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 22 / 36
23 Measuring Performance: Economic Value Added Example: Economic Value Added (4) Example (cont d) Henry was later exposed to the economic value added (EVA). a : EVA n = (ROIC n R WACC ) Invested Capital n (boy) Without the new project, the EVA of Smith s division would be EVA = (100% 20%) e2, 000, 000 = e1, 600, 000 while with the new project included, the EVA would jump to EVA = (75% 20%) e4, 000, 000 = e2, 200, 000 If Smith s bonus were based on EVA, she would now have an incentive to accept, not reject, the project. a Stern Stewart & Company have a copyright on economic value added and EVA. Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 23 / 36
24 Measuring Performance: Economic Value Added Some Remarks on EVA EVA differs substantially from ROIC ROIC is a percentage number, while EVA is a monetary value EVA correctly incorporates the fact that a high return on a large division may be better than a very high return on a smaller division (c.f., scaling problem in capital budgeting) Since ROIC Invested Capital = AfterTax Earnings, the EVA formula can be rewritten as EVA n = AfterTax Earnings n R WACC Invested Capital n (boy) Thus EVA can be viewed as earnings after capital costs If the cost of capital is a necessary input to capital budgeting, it should also be a necessary input to performance measurement Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 24 / 36
25 Measuring Performance: Economic Value Added Advantages of EVA EVA can increase investment for firms that are currently underinvesting However, many managers are so focused on on increasing earnings that they take on projects for which profits do not justify the capital outlays They are either unaware of capital costs or they choose to ignore them By using EVA, it is difficult to ignore capital costs It is stark It is either positive or negative EVA analysis makes liquidation easier and more justified EVA generated by the firm exhibits significant correlation with its market value It is an easy way to see how the management works for the shareholders interests Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 25 / 36
26 Measuring Performance: Economic Value Added Disadvantages of EVA EVA has little to offer for capital budgeting It focuses only on current earnings By contrast, NPV analysis uses all future cash flows It may increase the shortsightedness of managers Under EVA a manager will be well rewarded today if earnings are high today The manager has an incentive to run a division with more regard for shortterm than longterm value The problem is not with EVA per se but with the use of accounting numbers in general Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 26 / 36
27 Measuring Performance: Economic Value Added Market Value Added Outline 1 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Definition of FCFF Enterprise Value and Equity Value Free Cash Flow to Equity 2 Measuring Performance: Economic Value Added Market Value Added Discounted Cash Flow Valuation v EVA 3 Multiples Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 27 / 36
28 Measuring Performance: Economic Value Added Market Value Added Market Value Added Market Value Added (MVA) measures the difference between the market value of the firm (equity and debt without nonoperating assets) and the amount of invested capital, MVA = Enterprise Value Invested Capital Equivalently, MVA equals the PV of future expected EVAs: MVA = n t=1 EVA t (1 + R WACC ) t MVA measures an accumulated performance: when positive, the market expects a return higher than the cost of capital invested Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 28 / 36
29 Measuring Performance: Economic Value Added Market Value Added Firm Value The firm value can be calculated by using MVA, thus it can also be used for valuation The enterprise value is Then the firm value is EV = Invested Capital + MVA = = Invested Capital + n t=1 EVA t (1 + R WACC ) t FV = EV + Market Value of NonOperating Assets Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 29 / 36
30 Measuring Performance: Economic Value Added Discounted Cash Flow Valuation v EVA Outline 1 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Definition of FCFF Enterprise Value and Equity Value Free Cash Flow to Equity 2 Measuring Performance: Economic Value Added Market Value Added Discounted Cash Flow Valuation v EVA 3 Multiples Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 30 / 36
31 Measuring Performance: Economic Value Added Discounted Cash Flow Valuation v EVA EVA v DCF EVA is not a new valuation theory, but a reformulation of the DCF model However, the two approaches may provide different results The firm value obtained by these two methods are identical only under the same assumptions, in particular, when the terminal value is computed as FCFF n+1 R WACC g n versus EVA n+1 R WACC g n and either g = 0 after period n, or g is equal to the growth rate from n to n + 1 DCF cannot be used for performance measurement Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 31 / 36
32 Multiples Outline 1 Discounted Cash Flow Analysis: Free Cash Flow to the Firm Definition of FCFF Enterprise Value and Equity Value Free Cash Flow to Equity 2 Measuring Performance: Economic Value Added Market Value Added Discounted Cash Flow Valuation v EVA 3 Multiples Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 32 / 36
33 Multiples Introduction Comparison of firms is difficult because of different dimensions Multiples are useful for such situations They are relative measures, intuitive, easy to calculate them and provide comparable figures across companies Valuation by multiples allows for measurement of the value of the firm relative to market value However, the choice of the peer group of firms and of the multiples is very subjective Hence, it is a complement to DCF or EVA rather than a substitute Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 33 / 36
34 Multiples Earnings Multiples PriceEarnings Ratio (P/E): P/E = Market Value per Share Earnings per Share (EPS) Perhaps the most commonly used multiple It depends strongly on capital structure EV/EBITDA or EV/EBIT It is capital structure neutral = companies with different debt levels can be easily compared Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 34 / 36
35 Multiples Book Value Multiples BooktoMarket ratio or PricetoBook ratio (P/B) P/B = Market Value of Equity Book Value of Equity EV/IC Since intangible assets (e.g., patents, brands, etc.) are typically not included into book value, it may not be appropriate for certain firms EV/IC = Enterprise Value Invested Capital A cleanedup version of P/B Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 35 / 36
36 Multiples Revenue Multiples PricetoSales ratio (P/S) P/S = Market Value of Equity Sales Inconsistent as, while sales represent income for both bondholders and shareholders, the numerator only considers equity It is typically calculated for unprofitable companies for which P/E cannot be computed EV/Sales EV/Sales = Enterprise Value Sales More consistent than P/S Sebestyén (ISCTEIUL) ENTERPRISE VALUATION Corporate Finance 36 / 36
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,
More informationBasic valuation and accounting guide
Basic valuation and accounting guide 1 Five Forces and SWOT INDUSTRY Scoring range 1 5 (high score is good) Power of suppliers A concentration of suppliers will mean less chance to negotiate better pricing.
More informationVALUATIONS 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
More informationCHAPTER 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.
More informationINTERVIEWS  FINANCIAL MODELING
420 W. 118th Street, Room 420 New York, NY 10027 P: 2128544613 F: 2128546190 www.sipa.columbia.edu/ocs INTERVIEWS  FINANCIAL MODELING Basic valuation concepts are among the most popular technical
More informationEquity 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
More informationFSA 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
More informationChapters 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
More information: Corporate Finance. Valuation and Capital Structure
380.760: Corporate Finance Lecture 9: Advanced Valuation with Capital Structure Professor Gordon M. Bodnar 2008 Gordon Bodnar, 2008 Valuation and Capital Structure In the real world with market imperfections,
More informationTIP 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
More informationCHAPTER 18. Capital Budgeting and Valuation with Leverage. Chapter Synopsis
CHAPTER 18 Capital Budgeting and Valuation with everage Chapter Synopsis 18.1 Overview of Key Concepts There are three discounted cash flow valuation methods: the weighted average cost of capital (WACC)
More informationLECTURE 09. Valuation Berk, De Marzo Chapter 18
1 LECTURE 09 Valuation Berk, De Marzo Chapter 18 2 Overview of Key Concepts Assumptions in this chapter The project has average risk. The firm s debtequity ratio is constant. Corporate taxes are the only
More informationWHY NOT VALUE EQUITY CFs DIRECTLY?
WHY NOT VALUE EQUITY CFs DIRECTLY? WHAT HAVE WE DONE SO FAR? Discount the firm s projected Free Cash Flows at their Weighted Average Cost of Capital to get the aggregate value of the firm s securities
More informationGESTÃO 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 20102011 Chapter 18 Capital Budgeting and Valuation with Leverage
More informationRegulatory Requirements under Income Tax Act and FEMA
Discounted Cash Flow Valuation Ahmedabad Branch of WIRC of ICAI CA. Parag Ved May 4, 2013 Regulatory Requirements under Income Tax Act and FEMA 2 1 Income Tax Act Sec.56(2)(vii) Where a firm or a private
More informationChapter 17: Financial Statement Analysis
FIN 301 Class Notes Chapter 17: Financial Statement Analysis INTRODUCTION Financial ratio: is a relationship between different accounting items that tells something about the firm s activities. Purpose
More informationCompany Share Price Valuation using Free Cash Flow To Equity
Financial Modeling Templates Company Share Price Valuation using Free Cash Flow To Equity http://spreadsheetml.com/finance/valuation_freecashflowtoequity.shtml Copyright (c) 20092014, ConnectCode All
More informationEssential Learning for CTP Candidates TEXPO Conference 2016 Session #03
TEXPO Conference 2016: Essential Learning for CTP Candidates Session #3 (Mon.1:45 3:00 pm) Overview of Basic CTP Math from ETM4 Chap 07: Earnings Credits Chap 09: Working Capital Chap 18: Fin. Statements
More informationFinancial Modeling & Corporate Valuations
Financial Modeling & Corporate Valuations Presented by Affan Sajjad ACA Cell # 03219400788 Presenter Profile Passed CA exams in December 2004 Became Associate Member of ICAP in November 2005 Completed
More informationTYPES OF FINANCIAL RATIOS
TYPES OF FINANCIAL RATIOS In the previous articles we discussed how to invest in the stock market and unit trusts. When investing in the stock market an investor should have a clear understanding about
More informationChapter 5: Valuation. Albert BanalEstanol
Corporate Finance Chapter 5: Valuation Company valuation Valuation methods: Based on comparables or multiples Discounting cash flows: Weighted average cost of capital (WACC) Adjusted present value Flow
More informationLECTURE 4. Valuing stocks Berk, De Marzo Chapter 9
1 LECTURE 4 Valuing stocks Berk, De Marzo Chapter 9 2 The Dividend Discount Model A OneYear Investor Potential Cash Flows Dividend Sale of Stock Timeline for OneYear Investor Since the cash flows are
More informationWeek 1: Solutions to HW Problems
Week 1: Solutions to HW Problems 101 a. Payback A (cash flows in thousands): Annual Period Cash Flows Cumulative 0 ($5,000) ($5,000) 1 5,000 (0,000) 10,000 (10,000) 3 15,000 5,000 4 0,000 5,000 Payback
More informationCIMA F3 Course Notes. Chapter 11. Company valuations
CIMA F3 Course Notes Chapter 11 Company valuations Personal use only  not licensed for use on courses 144 1. Company valuations There are several methods of valuing the equity of a company. The simplest
More informationProblem 1 Problem 2 Problem 3
Problem 1 (1) Book Value Debt/Equity Ratio = 2500/2500 = 100% Market Value of Equity = 50 million * $ 80 = $4,000 Market Value of Debt =.80 * 2500 = $2,000 Debt/Equity Ratio in market value terms = 2000/4000
More informationValuation 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
More informationValue Enhancement: EVA and CFROI. Aswath Damodaran 1
Value Enhancement: EVA and CFROI Aswath Damodaran 1 Alternative Approaches to Value Enhancement Maximize a variable that is correlated with the value of the firm. There are several choices for such a variable.
More informationChapter 8. Stock Valuation Process. Stock Valuation
Stock Valuation Process Chapter 8 Stock Valuation: Investors use risk and return concept to determine the worth of a security. In the valuation process: The intrinsic value of any investment equals the
More informationFinancial 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
More informationVALUATION CA Bhavik Shah 16 May 2015
VALUATION CA Bhavik Shah 16 May 2015 Presentation Overview Valuation Concept Purpose of Valuation Principal Methods of Valuation Net Assets Value (NAV) Method Price to Book Multiple (P/B) Method Price
More informationFundamental 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:
More informationFNCE 3010 (Durham). HW2 (Financial ratios)
FNCE 3010 (Durham). HW2 (Financial ratios) 1. What effect would the following actions have on a firms net working capital and current ratio (assume NWC is positive and current ratio is initially greater
More information15.535 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
More informationValuation Overview. Valuation. General Thoughts on. Valuation. Valuation Models
Valuation Overview Valuation Valuation Discounted cash flow models DDM FCFE Relative valuation over time across assets at a given time relative to comparables relative to the market 1 2 General Thoughts
More informationToday 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
More informationFundamentals Level Skills Module, Paper F9. Section A. Monetary value of return = $3 10 x 1 197 = $3 71 Current share price = $3 71 $0 21 = $3 50
Answers Fundamentals Level Skills Module, Paper F9 Financial Management December 2014 Answers Section A 1 A Monetary value of return = $3 10 x 1 197 = $3 71 Current share price = $3 71 $0 21 = $3 50 2
More informationCorporate 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
More informationMBA Financial Management and Markets Exam 1 Spring 2009
MBA Financial Management and Markets Exam 1 Spring 2009 The following questions are designed to test your knowledge of the fundamental concepts of financial management structure [chapter 1], financial
More informationForecasting 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
More informationHomework 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
More informationLecture 6. Forecasting Cash Flow Statement
Lecture 6 Forecasting Cash Flow Statement Takeaways from income statement and balance sheet forecasting Elias Rantapuska / Aalto BIZ Finance 2 Note on our discussion today Discussion today: Rather highlevel
More informationMarti Otel. Martı REIT OUTPERFORM MARKETPERFORM. 01 November 2010. Equity / Small Cap. / Tourism. Upside Potential* 38%
Equity / Small Cap. / Tourism 01 November 2010 Marti Otel Bloomberg: MARTI TI Reuters: MARTI IS Equity / Small Cap. / Real Estate Investment Trust Martı REIT Bloomberg: MRGYO TI REIT IPO unlocks the value
More informationValuation for merger and acquisition. March 2015
Valuation for merger and acquisition March 2015 Flow of presentation Valuation methodologies Valuation in the context of Merger and Acquisition Indian Regulatory Environment and Minority Interest Safeguard
More informationRelative valuation and Technical Analysis
Relative valuation and Technical Analysis Relative vs. fundamental valuation The DCF model is a method of fundamental valuation. Value of equity is the present value of future cash flows. Ignores the current
More informationFINC 3630: Advanced Business Finance Additional Practice Problems
FINC 3630: Advanced Business Finance Additional Practice Problems Accounting For Financial Management 1. Calculate free cash flow for Home Depot for the fiscal yearended February 1, 2015 (the 2014 fiscal
More informationFundamentals Level Skills Module, Paper F9. Section A. Mean growth in earnings per share = 100 x [(35 7/30 0) 1/3 1] = 5 97% or 6%
Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2015 Answers Section A 1 A 2 D 3 D Mean growth in earnings per share = 100 x [(35 7/30 0) 1/3 1] = 5 97% or 6% 4 A 5 D 6 B 7
More informationLOS 42.a: Define and interpret free cash flow to the firm (FCFF) and free cash flow to equity (FCFE).
The following is a review of the Equity Investments principles designed to address the learning outcome statements set forth by CFA Institute. This topic is also covered in: Free Cash Flow Valuation This
More informationII. 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
More informationCFAspace. 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
More informationSolutions to Chapter 4. Measuring Corporate Performance
Solutions to Chapter 4 Measuring Corporate Performance 1. a. 7,018 Longterm debt ratio 0. 42 7,018 9,724 b. 4,794 7,018 6,178 Total debt ratio 0. 65 27,714 c. 2,566 Times interest earned 3. 75 685 d.
More informationQUADRANT SKEW CAPITAL Syllabus
QUADRANT SKEW CAPITAL Syllabus OVERVIEW Quadrant Skew Capital s Equity Research Program focuses on material, content and skills that are directly applicable to realworld application. Our program provides
More information] (3.3) ] (1 + r)t (3.4)
Present value = future value after t periods (3.1) (1 + r) t PV of perpetuity = C = cash payment (3.2) r interest rate Present value of tyear annuity = C [ 1 1 ] (3.3) r r(1 + r) t Future value of annuity
More informationMATELAN Research. Intelligent Transportation Systems MEGATRENDS DRIVE MARKET GROWTH FINANCIALS ACCELERATING IVU AND INIT SHOW HIGHEST UPSIDES
MATELAN Research Intelligent Transportation Systems MEGATRENDS DRIVE MARKET GROWTH FINANCIALS ACCELERATING IVU AND INIT SHOW HIGHEST UPSIDES 2/5/12 2/7/12 2/9/12 2/11/12 2/1/13 2/3/13 2/5/13 2/7/13 2/9/13
More informationREIT valuation. Real estate finance
REIT valuation Real estate finance (a) Basics Basics Real Estate Investment Trusts 1. buy, sell and hold real estate assets on behalf of a diffuse shareholder base 2. manage these and other assets 3. are
More informationModule 3: The Venture Capital Negotiation and Investment Process TABLE OF CONTENTS
Module 3: The Venture Capital Negotiation and Investment Process Valuations Module 3: The Venture Capital Negotiation and Investment Process Valuations 1.0 BUILDING PROFORMA FINANCIAL STATEMENTS 1.01
More informationCash Flow, Taxes, and Project Evaluation. Remember Income versus Cashflow
Cash Flow, Taxes, and Project Evaluation Of the four steps in calculating NPV, the most difficult is the first: Forecasting cash flows. We now focus on this problem, with special attention to What is cash
More informationEquity Valuation. Lecture Notes # 8. 3 Choice of the Appropriate Discount Rate 2. 4 Future Cash Flows: the Dividend Discount Model (DDM) 3
Equity Valuation Lecture Notes # 8 Contents About Valuation 2 2 PresentValues 2 3 Choice of the Appropriate Discount Rate 2 4 Future Cash Flows: the Dividend Discount Model (DDM) 3 5 The TwoStage DividendGrowth
More informationCHAPTER 15 FIRM VALUATION: COST OF CAPITAL AND APV APPROACHES
0 CHAPTER 15 FIRM VALUATION: COST OF CAPITAL AND APV APPROACHES In the last two chapters, we examined two approaches to valuing the equity in the firm  the dividend discount model and the FCFE valuation
More informationValuating the levered firm. Ch. 18 Valuation and Capital Budgeting for the Levered Firm
Valuating the levered firm Ch. 18 Valuation and Capital Budgeting for the Levered Firm I. Introduction In a strict MM world, firms can analyze real investments as if they are allequityfinanced. Under
More informationValuing 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
More informationOverview of Business Valuations
Overview of Business Valuations By CA Niketa Agarwal Last few years have not been encouraging for the global economy due to crisis and slow recovery in several large and developed countries. India experienced
More informationCHAPTER FOUR Cash Accounting, Accrual Accounting, and Discounted Cash Flow Valuation
CHAPTER FOUR Cash Accounting, Accrual Accounting, and Discounted Cash Flow Valuation Concept Questions C4.1. There are difficulties in comparing multiples of earnings and book values  the old techniques
More informationMETHODS OF VALUATION FOR MERGERS AND ACQUISITIONS
Graduate School of Business Administration University of Virginia METHODS OF VALUATION FOR MERGERS AND ACQUISITIONS This note addresses the methods used to value companies in a merger and acquisitions
More informationCHAPTER 8 INTEREST RATES AND BOND VALUATION
CHAPTER 8 INTEREST RATES AND BOND VALUATION Solutions to Questions and Problems 1. The price of a pure discount (zero coupon) bond is the present value of the par value. Remember, even though there are
More informationMGT201 Financial Management Formulas Lecture 1 to 22
MGT201 Financial Management Formulas Lecture 1 to 22 http://vustudents.ning.com 1. Fundamental Accounting Equation and Double Entry Principle. Assets +Expense = Liabilities + Shareholders Equity + Revenue
More informationUSING 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
More information( ) ( )( ) ( ) 2 ( ) 3. n n = 100 000 1+ 0.10 = 100 000 1.331 = 133100
Mariusz Próchniak Chair of Economics II Warsaw School of Economics CAPITAL BUDGETING Managerial Economics 1 2 1 Future value (FV) r annual interest rate B the amount of money held today Interest is compounded
More informationDiscounted Cash Flow Methodology. Table of Contents. Section 1 Discounted Cash Flow Overview CONFIDENTIAL. DCF Primer 5467729.doc
Table of Contents Section 1 Discounted Cash Flow Overview CONFIDENTIAL DCF Primer 5467729.doc Section 1 Discounted Cash Flow Overview The DCF approach values a business based on its future expected cash
More informationDiscounted Cash Flow Valuation: Basics
Discounted Cash Flow Valuation: Basics Aswath Damodaran Aswath Damodaran 1 Discounted Cashflow Valuation: Basis for Approach Value = t=n CF t t =1(1+r) t where CF t is the cash flow in period t, r is the
More informationHEALTHCARE FINANCE An Introduction to Accounting and Financial Management. Online Appendix A Financial Analysis Ratios
11/16/11 HEALTHCARE FINANCE An Introduction to Accounting and Financial Management Online Appendix A Financial Analysis Ratios INTRODUCTION In Chapter 17, we indicated that financial ratio analysis is
More informationComprehensive exam Feb.11
Comprehensive exam Feb.11 1 Objectives of the examination Apply the financial management concept to evaluate the company s performance. Relate the results of the analysis to make financial decisions or
More informationThings to do before the first class meeting
FINANCE 351 Corporate Finance John Graham Things to do before the first class meeting C Read the Gifford and Brealey and Myers material (see class schedule) C Read over the syllabus and class schedule.
More informationCIS September 2012 Exam Diet. Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis
CIS September 2012 Exam Diet Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis Corporate Finance (1 13) 1. Assume a firm issues N1 billion in debt
More informationDUKE 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
More informationChapter 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
More informationIESE UNIVERSITY OF NAVARRA OPTIMAL CAPITAL STRUCTURE: PROBLEMS WITH THE HARVARD AND DAMODARAN APPROACHES. Pablo Fernández*
IESE UNIVERSITY OF NAVARRA OPTIMAL CAPITAL STRUCTURE: PROBLEMS WITH THE HARVARD AND DAMODARAN APPROACHES Pablo Fernández* RESEARCH PAPER No 454 January, 2002 * Professor of Financial Management, IESE Research
More informationI 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
More informationCHAPTER 8 STOCK VALUATION
CHAPTER 8 STOCK VALUATION Answers to Concepts Review and Critical Thinking Questions 5. The common stock probably has a higher price because the dividend can grow, whereas it is fixed on the preferred.
More informationIncome Measurement and Profitability Analysis
PROFITABILITY ANALYSIS The following financial statements for Spencer Company will be used to demonstrate the calculation of the various ratios in profitability analysis. Spencer Company Comparative Balance
More informationChapter 7 Fundamentals of Capital Budgeting
Chapter 7 Fundamentals of Capital Budgeting Copyright 2011 Pearson Prentice Hall. All rights reserved. Chapter Outline 7.1 Forecasting Earnings 7.2 Determining Free Cash Flow and NPV 7.3 Choosing Among
More informationRevisiting 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:
More informationUnderstanding Cash Flow Statements
Understanding Cash Flow Statements 2014 Level I Financial Reporting and Analysis IFT Notes for the CFA exam Contents 1. Introduction... 3 2. Components and Format of the Cash Flow Statement... 3 3. The
More informationFundamentals Level Skills Module, Paper F9
Answers Fundamentals Level Skills Module, Paper F9 Financial Management December 2008 Answers 1 (a) Rights issue price = 2 5 x 0 8 = $2 00 per share Theoretical ex rights price = ((2 50 x 4) + (1 x 2 00)/5=$2
More informationHHIF Lecture Series: Discounted Cash Flow Model
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
More informationKey Concepts and Skills. Standardized Financial. Chapter Outline. Ratio Analysis. Categories of Financial Ratios 11. Chapter 3
Key Concepts and Skills Chapter 3 Working With Financial Statements Know how to standardize financial statements for comparison purposes Know how to compute and interpret important financial ratios Know
More informationThe Value of Synergy. Aswath Damodaran 1
The Value of Synergy 1 Valuing Synergy The key to the existence of synergy is that the target firm controls a specialized resource that becomes more valuable if combined with the bidding firm's resources.
More informationChapter 4 Common Stocks
Chapter 4 Common Stocks Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates. FixedIncome securities. Stocks. Real asset (capital budgeting). Part C Determination
More informationCompany Financial Plan
Financial Modeling Templates http://spreadsheetml.com/finance/companyfinancialplan.shtml Copyright (c) 20092014, ConnectCode All Rights Reserved. ConnectCode accepts no responsibility for any adverse
More informationEstimating Cash Flows
Estimating Cash Flows DCF Valuation 1 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  i.e. net income
More informationValuation 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
More informationPrimary Market  Place where the sale of new stock first occurs. Initial Public Offering (IPO)  First offering of stock to the general public.
Stock Valuation Primary Market  Place where the sale of new stock first occurs. Initial Public Offering (IPO)  First offering of stock to the general public. Seasoned Issue  Sale of new shares by a
More informationSOLUTIONS. Practice questions. Multiple Choice
Practice questions Multiple Choice 1. XYZ has $25,000 of debt outstanding and a book value of equity of $25,000. The company has 10,000 shares outstanding and a stock price of $10. If the unlevered beta
More informationVALUATION JC PENNEY (NYSE:JCP)
VALUATION JC PENNEY (NYSE:JCP) Prepared for Dr. K.C. Chen California State University, Fresno Prepared by Sicilia Sendjaja Finance 129Student Investment Funds December 15 th, 2009 California State University,
More informationBank 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
More informationValuation multiples A reading prepared by Pamela Peterson Drake James Madison University
Valuation multiples A reading prepared by Pamela Peterson rake James Madison University Table of Contents Introduction... 1 Understanding the use of multiples... 1 Identifying the comparables... 1 Choosing
More informationChapter 9. Year Revenue COGS Depreciation S&A Taxable Income Aftertax Operating Income 1 $20.60 $12.36 $1.00 $2.06 $5.18 $3.11
Chapter 9 91 We assume that revenues and selling & administrative expenses will increase at the rate of inflation. Year Revenue COGS Depreciation S&A Taxable Income Aftertax Operating Income 1 $20.60
More informationCHAPTER 7. Fundamentals of Capital Budgeting. Chapter Synopsis
CHAPTER 7 Fundamentals of Capital Budgeting Chapter Synopsis 7.1 Forecasting Earnings A firm s capital budget lists all of the projects that a firm plans to undertake during the next period. The selection
More informationFinancial Control System of the Volkswagen Group
ƒ Financial Control System of the Volkswagen Group Financial Control System of the Volkswagen Group Third Edition Publisher VOLKSWAGEN AG Group Controlling Letter box 1846 D38436 Wolfsburg, Germany 3rd
More informationSolutions to Chapter 3. Accounting and Finance
Solutions to Chapter 3 Accounting and Finance 1. Sophie s Sofas Liabilities & Assets Shareholders Equity Cash $ 10,000 Accounts payable $ 17,000 Accounts receivable 22,000 Longterm debt 170,000 Inventory
More informationACCOUNTING 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
More information