Corporate Valuation 2001-4
Agenda
•
•
•
•
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
Corporate Valuation 2001-4
CMK 8 Framework for valuation
• Models
–
–
–
–
DCF enterprice
Economic Profit (EP)
APV (changing cap.structure)
DCF equity (fin.institutions)
–
–
–
–
options
nominal vs. real
pre-post tax
formulae instead of explicit forecast
• add on’s
Institut for Regnskab, IC Pontoppidan
Corporate Valuation 2001-4
Framework for valuation
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
Corporate Valuation 2001-4
Framework for valuation
Growth rate = ROnewIC # 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#(ROICWACC) or NOPLAT-(inv.cap.#WACC)
Institut for Regnskab, IC Pontoppidan
Corporate Valuation 2001-4
Framework for valuation
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
Corporate Valuation 2001-4
Step 1 (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
Corporate Valuation 2001-4
•
•
•
•
•
•
•
•
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
Corporate Valuation 2001-4
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
Corporate Valuation 2001-4
Step 2 (ch.10) Cost of Capital
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
Corporate Valuation 2001-4
Step 3 (ch.11) Forecast performance
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
Corporate Valuation 2001-4
Step 4 (ch.12) Continuing Value
• PV of cash flow after the explicit forecast
period
• simplified assumptions makes formulas do
the impossible job
• different formulas for different approaches
• for DCFenterprise 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
Corporate Valuation 2001-4
Step 5 (ch.13) Calculating and
interpreting the results
•
•
•
•
•
•
•
•
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
Corporate Valuation 2001-4
Aggarwal 16 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