Valuation
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•
•
•
•
•
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Creation of value
Valuation of a stock listed company
Valuation of a non listed company
Net Asset
Price-earning Ratio
Present Value of Dividends
Present Value of Free Cash flow
Vietnam Master in Management – HCMC 2003
Valuation
Creation of value
• The goal of any company : to create value



This means : increase the value of the company for the
shareholders
With full respect for the legal framework
• social, fiscal, environmental regulations
And for all the other stakeholders
•
•
•
•
employees
customers
suppliers
neighbors
Vietnam Master in Management – HCMC 2003
Valuation
Creation of value
• How can the value be increased ?

by buying assets at a price lower than their economic value
• real estate : buying during a depression (crisis)

by selling assets at a price higher than their economic value
• real estate : selling during a boom
Vietnam Master in Management – HCMC 2003
Valuation
Creation of value
• The best way to create value : Innovation

introducing new products
• Microsoft
• Cellular phones

introducing new production processes
• Car manufacturers



improving the productivity of labor
improving the quality of products
etc.
Vietnam Master in Management – HCMC 2003
Valuation
Market capitalization of
a stock listed company
• For listed companies the share price is known daily



the value of the company is equal to the price share multiplied
by the number of shares
V = pshare.nshares
V = Market capitalization (“market cap”)
• If the market is efficient the Market Cap is always the
true value of the company

Efficient market means that at any time all the market has all
the information on the company
Vietnam Master in Management – HCMC 2003
Valuation
Fair value of a stock listed
company
• There is often a difference between the share price and
the true value

unequal distribution of the information
• good or bad news for the future not known by the market




from inside information …
to ... inside trading
booming or bubble effect (psychology)
misinterpretation of the facts by the market
Vietnam Master in Management – HCMC 2003
Valuation
Fair value of
a stock listed company
• Even for a stock listed company it is useful to calculate a
“fair value” based on :


All the information available on the company
Comparison of the share price and of the financial ratios with
similar listed companies
• It is interesting to buy

When the share price is lower than the fair value
• It is interesting to sell

When the share price is higher than the fair value
Vietnam Master in Management – HCMC 2003
Valuation
Valuation of a non listed
company
• A valuation of a non listed company can only be known
when :


Shares of the company are sold
The sale price is known
• But it is possible to estimate the value of a non-listed
company by using different methods



Based on the book value
Based on comparison with similar listed companies
Based on the present value of the future financial flows of
the company
Vietnam Master in Management – HCMC 2003
Valuation
Net Asset
• Is the book-value of the equity a correct valuation of a
company ?

No : difference between book-value and market price of the
assets & liabilities
• It is possible to replace in the Balance Sheet all the
book-values by the market prices
• and to calculate a revised value of the equity

Net Asset = Assets (at market prices) - Liabilities (at market
prices)
• The Net Asset is a valuation of the company
Vietnam Master in Management – HCMC 2003
Valuation
Saigon Hotel - Net Asset
(000 US$)
ASSETS
LIABILITIES
Fixed assets
Inventories
Receivables
Cash
10.391
22
251
55
TOTAL
10.717
Equity
Provision
Long term debt
ST oper debt
ST fin debt
Other debt
Vietnam Master in Management – HCMC 2003
4.998
91
4.091
409
1.128
0
10.717
Valuation
Saigon Hotel - Net Asset
• Additional information

The company owns the hotel building
• The book-value is 6.045 and the market price estimation 9.055

The director is an art collector and the company owns art pieces
• The book value is 125 and the market price 850



There are bad receivables for a book-value of 45
In the cash placement the company owns Microsoft shares
bought in 1992 for 10 and whose present stock price is 100
The tax rate on all profits is 40%
• What is the Net Asset of the Saigon Hotel ?
Vietnam Master in Management – HCMC 2003
Valuation
Price-earning Ratio
• A second valuation method for a company is the PriceEarning Ratio (PER)
• The Price-earning Ratio is equal to the value of the
company divided by the net result

PER  V / EAT
• For listed companies it can be calculated directly by
dividing the share price by the net result per share


eps = EAT / nshares
PER = pshare / eps
Vietnam Master in Management – HCMC 2003
Valuation
Price-earning Ratio
• The PER is higher for a company

with higher growth prospects for the earnings
• the risks being equal

with lower risks
• the growth prospects being equal
• The PER is published daily


in the financial papers
on the financial Websites (cfr bourses)
Vietnam Master in Management – HCMC 2003
Valuation
Price-earning ratios
Examples (Oct 30, 2001)
Company
Vodafone (GBP)
Telecom Ita Mob
British Telecom
France Telecom
Volkswagen
Renault
LVMH
pshare
157,8
5,9
3,4
40,0
41,7
32,8
38,2
Vietnam Master in Management – HCMC 2003
eps
PER
3,48
0,29
0,13
?
5,87
4,49
?
45,3
?
?
28,3
7,1
?
25,7
Valuation
Price-earning ratios
Examples (Oct 30, 2001)
Company
Vodafone (GBP)
Telecom Ita Mob
British Telecom
France Telecom
Volkswagen
Renault
LVMH
pshare
157,8
5,9
3,4
40,0
41,7
32,8
38,2
Vietnam Master in Management – HCMC 2003
eps
PER
3,48
0,29
0,13
1,41
5,87
4,49
1,49
45,3
20,5
26,2
28,3
7,1
7,3
25,7
Valuation
Price-earning ratios
Historic (Nov 2, 2000)
Company
Vodafone (GBP)
Telecom Ita Mob
British Telecom
France Telecom
Volkswagen
Renault
LVMH
pshare
35,3
10,1
7,6
121,9
59,3
56,5
85,4
Vietnam Master in Management – HCMC 2003
eps
PER
1,73
0,23
0,32
2,71
2,93
2,23
7,17
20,4
43,3
24,1
45,0
20,2
25,3
11,9
Valuation
Price-earning ratios - exercises
• What is the value of the Saigon Hotel in 2002


EAT = 432.000 $
PER = 15
• High level due to excellent location and future prospects
• Explain the difference between the PER


Coca-cola & Pepsico
Compaq & IBM
• Which industry should have the higher PER


electricity or telecom
classical telecom or cellular companies
Vietnam Master in Management – HCMC 2003
Valuation
Present Value of Dividends
• Let us start from a very simple approach
• Suppose that we know



that the expected value of the share of a company one year
from now is v1
that a dividend div1 will be paid at that time
that the Cost of the Capital for this company is r
• Then we can write the equation for the Present Value of
the share
v0 = (div1 + v1) / (1+r)
Vietnam Master in Management – HCMC 2003
Valuation
Present Value of Dividends
• We can repeat this calculation by writing the value of the
share at time 1 based upon the value and dividend at
time 2

v1 = (div2 + v2) / (1+r)
• and so on . . .

v2 = (div3 + v3) / (1+r)
• We can then write


v0 = (div1 + (div2 + v2) / (1+r))/(1+r)
v0 = div1/(1+r) + div2/(1+r)2 +…+ pT/(1+r)T
Vietnam Master in Management – HCMC 2003
Valuation
Present Value of Dividends
• If we consider that the company lives in perpetuity we
can write


v0 = div1/(1+r) + div2/(1+r)2 +…+ divt/(1+r)t + …
V0= DIV1/(1+r) + DIV2/(1+r)2 +…+ DIVt/(1+r)t + …
• Or


v0 = t=1 divt/(1+r)t
V0 = t=1 DIVt/(1+r)t
Vietnam Master in Management – HCMC 2003
Valuation
Present Value of Dividends
• If we consider that :


the company will live in perpetuity
the growth rate of the dividend is constant and equal to g
• Then

divt = div1.(1+g)t-1
• Gordon & Shapiro proved mathematically that



v0 = div1 / (r-g)
V0 = DIV1 / (r-g)
of course one must have r>g
• The lower the Cost of Capital the higher the value
• The higher the growth rate the higher the value
Vietnam Master in Management – HCMC 2003
Valuation
PV of Dividends - Examples
• What is the Present Value of the Quiz Company ?



the next dividend will be 12.000.000 $
the Cost of Capital is 14%
the growth rate of dividend (perpetual) is 2%
• What is the Cost of capital of company B ?



the next dividend will be 100.000 $
the present value is 1.000.000 $
the growth rate of dividend (perpetual) is 4%
Vietnam Master in Management – HCMC 2003
Valuation
DCF model
Present Value of Free Cash Flow
• An improved approach is to use the prospected Cash
Flows from the Business Plan to estimate the value
• The Total Entreprise Value is equal to the PV of all FCF


Entreprise Value = Equity + Financial Debt
Free Cash Flow before Interest
• FCF = Net Operating Earning After Tax + Depreciation
• Net Operating Earning After Tax (NOPAT) = EBIT.(1 - Tc)
EV0 = t=1 FCFt/(1+r)t
The Enterprise Value is equal to the PV of all Free Cash Flows
« Discounted Cash Flow Model »
Vietnam Master in Management – HCMC 2003
Valuation
DCF Model
How to use it ?
• Using the Business Plan one can calculate the EV

Calculating the NOPAT and the FCF
• Problem : The Business Plan is made for a limited period
of time

5, 10 or 20 years
• We need to estimate the value of the Cash Flows after
the Business Plan period
Vietnam Master in Management – HCMC 2003
Valuation
DCF Model
Terminal Value
The Terminal Value represents the EV for the
perpetuity after the end of the Business Plan period
• Based on the Gordon-Shapiro formula


VT = DIVT+1 / (r-g) or
EVT = FCFT+1 / (r-g)
• T = last year of the Financial Plan

« Normalized » FCF for the perpetuity FCFT+1 = NOPATT+1
• Future capex = Future depreciation (keep the production capacity)

g = perpetual growth rate
• To be estimated cautiously (2% to 4%)
• Total Enterprise Value is then
EV0 = t=1T FCFt/(1+r)t + (NOPATT+1/(r-g))/(1+r)T
Vietnam Master in Management – HCMC 2003
Valuation
DCF model
Equity Value
• The Value of the Equity is equal to

The Enterprise Value (EV)
Less

The Financial Debt (Dfin)
• All interest bearing debts
–
–
–
–
Long term
Short term
Eventually others (if bearing interest)
Less Financial placement
V0 = EV0 - Dfin,0
Vietnam Master in Management – HCMC 2003
Valuation
DCF - The Quiz Company
Year
1
2
3
4
5
6
7
8
9
10
FCF (MUS$)
11
15
16
19
15
15
15
15
15
15
Vietnam Master in Management – HCMC 2003
Valuation
DCF - The Quiz Company
• Calculate the best estimation of the present value of
company C


if the Cost of capital is 14%
if the Cost of capital is 12%
Vietnam Master in Management – HCMC 2003
Valuation
Saigon Hotel – DCF valuation
• We will apply the DCF model to the Base Case
• Using a set of assumptions

Cost of Capital (r)
• From 8% to 12%

Perpetual growth
• From2% to 4%
• Example : The Base Case
BPcons.xls - VALO!A2
Vietnam Master in Management – HCMC 2003
Valuation
Saigon Hotel – Valuation
Sensibilities Studies
Assumptions
Base Case
Extension
r = 8%
g = 2%
5.499
8.330
10.624
r = 9%
g = 2%
4.576
7.028
8.967
r = 9%
g = 3%
5.189
7.912
10.114
r = 9%
g = 4%
r = 10%
g = 3%
r = 11%
g = 3%
6.048
9.150
11.720
4.308
6.670
8.532
3.633
5.724
7.333
Vietnam Master in Management – HCMC 2003
Chain
Valuation
DCF – Decision tool
• In order to choose the best scenario
• Maximize the value
Vietnam Master in Management – HCMC 2003
Valuation
Summary
The Values of Saigon Hotel
Method
Assumptions
Value ($)
Net asset
PER
PER = 15
PV of dividend
PV of FCF
Base Case
Extension Case
Chain Case
6.480
n.a.
r=9% g=3%
Vietnam Master in Management – HCMC 2003
5.189
7.912
10.114
Valuation
Conclusions of the lesson
• Creation of value is the goal of any company
• For a stock listed company the market value can be
observed through the stock price

the fair value can differ from the market value
• For non listed companies there are different methods to
estimate the value




Net Asset
PER
PV of Dividends
DCF Model (PV of FCF)
• The different methods can give different values
Vietnam Master in Management – HCMC 2003
Valuation
Synthesis of the course
• Begin with the strategy
• Build a Business Plan based on the strategy


With different strategic scenarios
… and sensibilities studies
• The Financial Plan must be balanced

Measure and improve the financial structure
• Optimize the investments decisions

Net Present Value maximization
• In order to create value


Valuation methods
Optimize your Business Plan
Vietnam Master in Management – HCMC 2003
Valuation