Lecture Series #2
Corporate Finance & Valuation Analysis
Chris Droussiotis
October 2011
Table of Contents






2
TIME-Value of Money, Risk and Return concepts
Valuation Methods for Publicly Traded Companies (Methods 1,2,3)
DCF Analysis (Method 4), CAPM
Applying DCF for Privately own companies
Debt Capacity / Equity Requirments
WACC and Equity Returns
Time Value Concepts

Time-Value of Money, Risk and Return Concepts
–
PV / NPV Concepts



–
IRR


–
Risk Free Return (1- Y)
Risky Return (Y)
Measuring Risk



3
Future Cash Flows
Discount Rate
Annuity / On-time investment
Fundamental Analysis – projection assumptions
Technical Analysis – Volatility comparison (Beta concept)
Behavioral Analysis - EMH
Valuation Methods – Method #1
• Using the Stock Price – Base Case
Calculations
Company
Symbol
Starwood Hotels &
Resorts
HOT
Starwood's EV
4
10,455,434
SP
SO
Stock Price
(as of 10/10/11)
Stocks
Outstanding
($000)
43.59
190,650
SP * SO = EQ
D
Equity Value Debt (ST&LT)
($000)
($000)
8,310,434
3,222,000
C
EQ + D - C = EV
Cash
($000)
Enterprise
Value
($000)
1,077,000
10,455,434
Valuation Methods – Method #2
• Using the EBITDA Trading Multiples – Comparative Analysis
SP
Company
Choice Hotels International
Stock Price
(as of 10/10/11)
SP * SO = EQ
D
Stocks
Outstanding Equity Value Debt (ST&LT)
($000)
($000)
($000)
C
EQ + D - C = EV
E
Cash
($000)
Enterprise
Value
($000)
EBITDA
($mm)
EV / E
EBITDA
Multiple
Beta
CHH
$
33.28
59,270
1,972,506
252,500
90,960
2,134,046
176,410
12.10x
H
$
32.75
165,130
5,408,008
769,000
1,400,000
4,777,008
386,000
12.38x
Intercontinental Hotel
IHG
$
17.05
290,000
4,944,500
858,000
55,000
5,747,500
575,000
10.00x
1.57x
Marcus Corporation
MCS
$
10.96
29,240
320,470
196,060
7,070
509,460
71,860
7.09x
1.59x
Marriott International
MAR
$
29.45
252,900
7,447,905
2,920,000
117,000
10,250,905
1,020,000
10.05x
1.60x
Morgan Hotel Group
MHGC
$
6.11
30,520
186,477
534,860
109,590
611,747
18,720
32.68x
3.01x
Orient Express Hotels Ltd
OEH
$
7.04
102,600
722,304
715,610
113,000
1,324,914
81,150
16.33x
3.00x
Wyndham Worldwide
WYN
$
30.70
163,790
5,028,353
3,750,000
298,600
8,479,753
1,010,000
8.40x
3.45x
Starwood Hotels & Resorts
HOT
43.59
190,650
8,310,434
3,222,000
1,077,000
11,532,434
887,628
12.99x
2.15x
887,628
Average
13.56x
Excl. Outlier
11.75x
(taken out the high and low)
2.13x
EBITDA * Average Multiple
Hyatt
Starwood's EV
5
Symbol
SO
10,427,503
11.75x
0.68x
Valuation Methods – Method #3
• Using the EBITDA Acquisition Multiples – Comparative Analysis
AP
SO
AP * SO = EQ
D
EQ + D = EV
E
EV / E
Acquisition
Price /Share
Shares
Outstanding
Equity Value
($mm)
Total Debt
($mm)
Enterpised
Value (EV)
EBITDA (last
reported)
EBITDA
Multiple
$ 18,544.00
$ 6,180.00
$
24,724.00
$
1,680.00
14.72x
Calculations
Date
Anouncement
7/4/2007
Target
Acquirer
Hilton Hotels
Blackstone Group $
47.50
390,400,000
11/6/2006
Four Seasons*
Kingtom Hotels
Int'l /
Gates' Cascade
$
82.00
33,078,000
$
3,300.00
$
278.68
$
3,578.68
$
112.18
31.90x
5/11/2006
Fairmont/Rafles
Kingtom Hotels Int'l $
45.00
73,333,333
$
3,300.00
$
123.50
$
3,423.50
$
187.20
18.29x
1/10/2006
Hilton International
Hilton Hotels Corp.
$
5,578.00
$
-
$
5,578.00
$
504.00
11.07x
11/14/2005
Starwood Hotels
Host Marriott
$
4,096.00
$
315.08
13.00x
10/24/2005
La-Quinta Corp
$
925.71
$
3,400.00
$
229.70
14.80x
8/16/2005
$
12.22
203
$
2,474.00
Wynham Int'l
Blackstone Group $
1.15
172,053,000
$
197.86
$ 2,681.96
$
2,879.82
$
275.18
10.47x
8/8/2005
John Q. Hammons Hotels
JQH Acquisition LLC
$
24.00
19,583
$
470.00
$
$
1,235.00
$
123.07
10.00x
07/22/2005
Societe du Louvre
Starwood Capital
$
1,028.90
$
91.05
11.30x
3/10/2005
Intercontinental Hotels
LRG
$
981.00
$
106.63
9.20x
12/10/2004
Boca Resorts
Blackstone Group $
24.00
40,284,000
$
1,184.11
$
90.07
13.15x
8/18/2004
Prime Hospitality
Blackstone Group $
12.25
44,808,000
3/8/2004
Extended Stay
Blackstone Group $
19.93
95,077,000
765.20
966.82
$
217.29
$
$
548.90
$
243.60
$
792.50
$
55.12
14.38x
$
1,894.88
$ 1,231.50
$
3,126.38
$
224.85
13.90x
Average
Adjust. Outlier
14.32x
* Four Seasons' $112.18 million represents 2007 EBITDA (2005 EBITDA was $11.4 negative)
EBITDA * Average Multiple
6
Starwood's EV
887,628
11,705,857
13.19x
13.19x
Valuation Methods – Method #4

DCF Analysis
–
FIRST STEP:

Building Projections – determining the Equity Cash Flows
–
–
–
SECOND STEP:

–
Terminal Value – use two methods
FOURTH STEP

7
Determine Exit Year
THIRD STEP:

–
Top Line
Bottom Line (unleveled)
Discount Rate (Weighted Average Cost of Capital (WACC)
DCF Analysis – Building up the Projections
Projections
Income Statement
LTM
PERIOD ENDING
Total Revenue
Cost of Revenue
Gross Profit
Total Operating Expenses
EBIT
Interest Expense
EBT
Income Tax Expense
Net Income
Income Statement Assumptions
Revenue Growth
Gross Margin
Operating Exp as % of Revenue
Tax as % of EBT
Other Assumptions % of Revenue
Depreciation
Capex
Depreciation
Capital Expenditures
Debt Schedule
Short Term Debt
Long Term Debt
8
Total Debt Outstanding
Increase/Decease
Interest Payment
31-Dec-07
31-Dec-08 31-Dec-09
31-Dec-10
30-Jun-11
4-year
Average
Operating
Assumpt.
Input
31-Dec-11
30-Dec-12
30-Dec-13 30-Dec-14 31-Dec-15
6,153,000
5,907,000
4,696,000
5,071,000
5,316,000
5,547,674
5,825,058
6,116,311
6,422,126
6,743,232
2,235,664
2,184,936
1,737,000
1,800,000
1,885,000
1,997,163
2,097,021
2,201,872
2,311,965
2,427,564
3,431,000
3,550,511
3,728,037
3,914,439
4,110,161
4,315,669
2,756,000
2,884,790
3,029,030
3,180,482
3,339,506
3,506,481
3,917,336
3,059,336
858,000
3,722,064
3,103,064
2,933,000
2,671,000
675,000
665,721
699,007
733,957
770,655
809,188
210,000
227,000
236,000
221,000
227,000
215,650
204,300
192,950
181,600
690,000
409,000
(201,000)
364,000
454,000
438,721
483,357
529,657
577,705
627,588
189,000
76,000
(293,000)
27,000
-
175,488
193,343
211,863
231,082
251,035
501,000
333,000
92,000
337,000
454,000
263,233
290,014
317,794
346,623
376,553
27%
26,000
3,271,000
168,000
63.67%
619,000
2,959,000
600,000
-4.00%
-20.50%
7.99%
4.83%
-2.92%
9.40%
5.00%
5.00%
5.00%
5.00%
63.01%
63.01%
64.50%
64.54%
63.77%
64.00%
64.00%
64.00%
64.00%
64.00%
64.00%
52.53%
62.46%
52.67%
51.84%
54.88%
52.00%
52.00%
52.00%
52.00%
146%
7%
0.00%
42.94%
52.00%
40.00%
52.00%
19%
40.00%
40.00%
40.00%
40.00%
40.00%
229,000
245,000
245,000
217,000
201,000
221,907
233,002
244,652
256,885
269,729
384,000
476,000
196,000
227,000
298,000
332,860
349,503
366,979
385,328
404,594
3.72%
4.15%
4.61%
4.08%
3.78%
4.15%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
6.24%
8.06%
4.17%
4.48%
5.61%
5.58%
6.00%
6.00%
6.00%
6.00%
6.00%
6.00%
733,000
2,489,000
3,222,000
7.05%
3,060,900
2,899,800
2,738,700
2,577,600
2,416,500
5.00%
(161,100)
(161,100)
(161,100)
(161,100)
(161,100)
7.05%
227,000
215,650
204,300
192,950
181,600
Valuation Analysis - Method #4 (DCF)
year (n) =
Discout Cash Flow Valuation Analysis
Projected
Assumptions
Revenues
Revenue Growth Assumptions
Input Actual
30-Jun-11
5,316,000
1
31-Dec-11
5,547,674
3
4
30-Dec-12
5,825,058
30-Dec-13
6,116,311
5.0%
30-Dec-14
6,422,126
6
30-Dec-16
7,080,394
5.0%
5.0%
5.0%
5.0%
36.0%
(1,885,000)
(1,997,163)
(2,097,021) (2,201,872)
(2,311,965)
(2,427,564)
(2,548,942)
Operating Expenses
EBIT
Less Taxes / % of EBIT
Plus Depreciation
Less Capex
Cash Flow
52.0%
(2,756,000)
675,000
(270,000)
201,000
(298,000)
308,000
(2,884,790)
665,721
(266,288)
221,907
(332,860)
288,479
(3,029,030) (3,180,482)
699,007
733,957
(279,603)
(293,583)
233,002
244,652
(349,503)
(366,979)
302,903
318,048
(3,339,506)
770,655
(308,262)
256,885
(385,328)
333,951
(3,506,481)
809,188
(323,675)
269,729
(404,594)
350,648
(3,681,805)
849,647
(339,859)
283,216
(424,824)
368,180
1,027,540
1,078,917
1,132,863
40.0%
4.0%
6.0%
4.4%
5
EXIT YEAR
31-Dec-15
6,743,232
Cost of Revenues (CoGS)
EBITDA
887,628
Terminal Value
EBITDA Multiple Method
Perpetuity Method
Average
Less Debt Outstanding (at Exit)
Plus Cash (at Exit)
Equity Value at Terminal
Assumptions
11.75x
10.00%
Equity Cash Flows
PV Table or ( 1 / [ ( 1 + i ) ^ n ]
887,628
PV
PV
PV
PV
PV
Starwood's EV
(1) =
(2) =
(3) =
(4) =
(5) =
PV=
932,009
978,610
(EBITDA x EBITDA Multiple)
(Next Year's Cash Flow / (Discount Rate - Growth)
288,479
x
0.9090909
=
9
2
302,903
x
0.8264463
=
318,048
x
0.7513148
=
12,674,695
7,363,610
10,019,152
(2,416,500)
7,602,652
333,951
x
0.6830135
=
7,953,300
x
0.6209213
=
$262,254
$250,333
$238,954
$228,093
$4,938,374
$9,196,681 at Discount Rate using Average of Purchase Multiple and Perpetuity Method
Enteprise Value = PV of Equity + PV of Debt
PV of Equity =
$9,196,681
+ PV of Debt (2010) =
3,222,000
12,418,681
(75% of orginal Debt)
Valuation Analysis - Comparison
STARWOOD HOTELS & RESORTS
Method #1 - Current Market Price
EV
10,455,434
Debt
3,222,000
Cash
1,077,000
Eq Value
8,310,434
Shares Outs
190,650
Method #2
Method #3
Method #4
10,427,503
11,705,857
12,418,681
3,222,000
3,222,000
3,222,000
1,077,000
1,077,000
1,077,000
8,282,503
9,560,857
10,273,681
190,650
190,650
190,650
11,251,869
3,222,000
1,077,000
9,106,869
Average of other methods
10
Stock Price
$
43.59
$
$
$
43.44
50.15
53.89
$
47.77