08-10-01
• Exam DATE ??
• Last session
• this lecture
• next
– who presents ?
– Mid stage report: 1A4
“Valuation depends mainly on understanding the business, its industry, and the general economic environment, and then doing a prudent job of forecasting. Correct methodology is only a small, but necessary, part of the valuation process” p.292
Institut for Regnskab, IC Pontoppidan
• Models
– DCF enterprice
– Economic Profit (EP)
– APV (changing cap.structure)
– DCF equity (fin.institutions)
• add on’s
– options
– nominal vs. real
– pre-post tax
– formulae instead of explicit forecast
Institut for Regnskab, IC Pontoppidan
DCF enterpricemodel
• value of operations based on forecast
• less value of debt
• discounted back with riskadjusted rate
• regulated for non-operating assets/liabilities
The discount rate reflects the opportunity cost of all capital (WACC, tax shield))
Forecast for 100 years OR utilize a formula for the last 90 years - giving the continuing value, whose formula is composed of NOPLAT, growth,
ROIC - and WACC p.136
Institut for Regnskab, IC Pontoppidan
Emne
1

08-10-01
Growth rate = RO new IC # investment rate
Key drivers of value are ROIC (relative to
WACC) and growth p.140
ECONOMIC PROFIT MODEL
V = capital invested + PVvalue created in the future
• economic profit = invested capital#(ROIC-
WACC) or NOPLAT-(inv.cap.#WACC)
Institut for Regnskab, IC Pontoppidan
ADJUSTED PV MODEL (APV)
• values based only on cost of equity and then adds value of tax benefit of debt
DCFequity MODEL
• values the equity DIRECTLY based on cost of equity
• BUT get the leverage right !
5 STEP “how to do” in ch.9-13
Institut for Regnskab, IC Pontoppidan
(ch.9) Analyzing Historical
Performance
• Focus on key value drivers i.e. ROIC and growth
• break them down into their component drivers i.e. ROIC into cap.turnover and profit margin
• how is the liquidity balance (Donaldson)
• destinguish operating from non-operating
• ending with consistency between NOPLAT and operating invested capital
Institut for Regnskab, IC Pontoppidan
Emne
2

08-10-01
Analyzing Historical Performance
• Convert tax to cash basis as tax expensed on operating profit
• add quasi-equity (reserves,provisions, deferred income tax)
• exclude extraordinary items and add goodwill amortizations
• capitalize expensed investments
(R&D,marketing)
• FCF = NOPLAT - Net investments
• check the investment rate
• FX translation effects are treated as nonoperating cash flow
• look for trends and compare with industry
Institut for Regnskab, IC Pontoppidan
Emne
Analyzing Historical Performance
• Do not correct for inflation effect unless in a high inflation environment
• IF lumpy investments - spread it out or utilyze CFROI Valuation
Institut for Regnskab, IC Pontoppidan
(ch.10)
WACC
• market weights
• target capital structure
• only systematic risk
• look out for changes in inflation, systematic risk, capital structure, and market weights
• FX is valued with FX interest rates and converted at spot rate
• market risk premium 2 -5 % US
• check your beta ! And leverage it correct
p.309
Institut for Regnskab, IC Pontoppidan
3

08-10-01
(ch.11)
How the company may develop
• length and level of detail
– steady state
– full cycle
– perhaps two periods
• what about terminal period (see ch. 12)
• have a strategy model e.g.strategic
perspective considering the industry
(Ghemawat) and competitive position (e.g.
2#Porter)
• what drives the forecast (demand, technology, ?)
• alternative scenarios
• check for consistency
Institut for Regnskab, IC Pontoppidan
Emne
(ch.12)
• PV of cash flow after the explicit forecast period
• simplified assumptions makes formulas do the impossible job
• different formulas for different approaches
• for DCF enterprise
the value-driver formula =
NOPLAT t+1
(1-g/ROIC)/ WACC-g
• also non-cash flow based approaches in special situations (PtB, PtE, liquidation value, replacement cost)
• p.277 Where is value created !
Institut for Regnskab, IC Pontoppidan
(ch.13)
• Discount FCF using WACC
• discount continuing value using WACC
• add value of nonoperating assets
• subtract value of debt
• check for consistence with forecast
• compare with present market value
• evaluate debt-equity forecast
• compare the scenarios and assess the likelihood
• define your margin of error/ test sensitivity
Institut for Regnskab, IC Pontoppidan
4

Justifying strategic investments
Has the manufacturing setup an impact on value ?
• Different types of man.systems -fig.16-1
• optimality of man.setup -fig.16-2
• Exit NPV assesses the risk of loss due to uncertain events
Institut for Regnskab, IC Pontoppidan
Emne
08-10-01 5