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valuationtechniques1..
valuationtechniques1..
valuationtechniques1..
valuationtechniques1..
valuationtechniques1..
valuationtechniques1..
valuationtechniques1..
valuationtechniques1..
valuationtechniques1..
valuationtechniques1..
valuationtechniques1..
valuationtechniques1..
valuationtechniques1..
valuationtechniques1..
valuationtechniques1..
valuationtechniques1..
valuationtechniques1..
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  • 1. Investment Management Club Meeting 4 How to Value A Firm October 21, 1999
  • 2. Valuation
    • Very subjective! It’s all judgement .
    • The question is whether the stock is appropriately priced. To determine what you would pay for the future earnings stream analysts use a variety of methods including:
      • Discounted Cash Flow Analysis
      • Comparable Multiples
      • Cash Flow Analysis
      • Price/Book Value, etc
  • 3. Valuation Tools
    • Annual Report and Quarterly Reports
    • Income Statement
    • Balance Sheet
      • changes in net working capital, inventory level
    • Statement of Cash Flow
    • Financial Notes
  • 4. Financial Analysis: DuPont Analysis: Return on Equity Net Income Sales Sales Assets Assets Equity = X X Operational Productivity Asset Turnover/ Efficiency Leverage
  • 5. Valuation Techniques
    • Discounted Cash Flow
      • Weighted Avg. Cost of Capital (WACC)
    • Cash Flow Analysis
    • Comparable Multiples
      • P/E (trailing or future)
      • Price to EBITDA
      • Price to Cash Flow
      • Price to Book Value
      • Enterprise Value/EBITDA
  • 6. Discounted Cash Flow Steps Analyze historical performance Forecast performance Estimate cost of capital Estimate continuing value Calculate value and interpret results
    • Calculate historical margins and ratios
    • Determine value drivers
    • Analyze financial health
  • 7. Discounted Cash Flow Steps
    • Understand strategic position of firm
    • Select forecast horizon (competitive advantage window)
    • Forecast individual line items
    • Develop scenarios (best, worst, likely cases)
    • Check overall forecast for reasonableness
    Analyze historical performance Forecast performance Estimate cost of capital Estimate continuing value Calculate value and interpret results
  • 8. Discounted Cash Flow Steps
    • Estimate cost of non-equity financing
    • Estimate cost of equity financing
    • Determine target market weights [or iterate] for WACC
    • Calculate discount rate
    Analyze historical performance Forecast performance Estimate cost of capital Estimate continuing value Calculate value and interpret results
  • 9. Discounted Cash Flow Steps
    • Select appropriate technique
      • Multiples (e.g., EBITDA, free cash flow, net income)
      • Perpetuity/growing perpetuity
    • Estimate the parameters
    Analyze historical performance Forecast performance Estimate cost of capital Estimate continuing value Calculate value and interpret results
  • 10. Discounted Cash Flow Steps
    • Choose methodology
      • WACC
      • APV
    • Calculate free cash flows
    • Discount free cash flow and continuing value to present
    • Interpret results
    Analyze historical performance Forecast performance Estimate cost of capital Estimate continuing value Calculate value and interpret results
  • 11. DCF Model: WACC Approach . . . Free cash flow Historical Projected 1997 1998 1999 2000 …. . . . FCF WACC Risk-free rate Mkt risk premium Capital structure Cost of debt Beta Tax rate PV of free cash flows PV of continuing value + Net debt = - Equity value Discounting Terminal value
  • 12. WACC Approach
    • WACC incorporates the value of tax shields associated with debt financing into the discount rate
    • WACC = (D/V)*r d *(1-  ) + (E/V)*r el
    • where V = D+E
    • r el = r f +  l *(r m - r f )
    •  = corporate tax rate
    • The WACC formulation assumes that the debt to total capital will remain constant in all future periods
    • Value of the firm =  (FCF t )/(1 + WACC) t
  • 13. Free Cash Flow Analysis
    • Can the company pay for it’s operations?
    • Free Cash Flow (FCF) measures how much cash is available for the company’s discretionary use.
    • FCF = Net Income + depreciation + amortization + deferred taxes - dividends - debt repayments - capital spending - changes in inventories - change in net receivables.
    • If the company has a significant amount of FCF they should be able to invest it to gain higher returns in future. Else, if it does not have FCF then it’s interest payments will have to increase as a result of needing to borrow additional funds.
  • 14. Calculation of Free Cash Flow Method 1 Net sales - Cost of goods sold (COGS) - Selling, general & admin (SG&A) EBIT - Adjusted taxes NOPLAT +Depreciation - Capital expenditures - Working capital needs Free Cash Flow Method 2 Net income +Depreciation +After-tax net interest expense - Capital expenditures - Working capital needs Free Cash Flow
  • 15. Comparable Company Multiples
    • Step 1: Find similar companies
    • Step 2: Identify key valuation ratios for each
    • Step 3: Take the average or median of the ratios
    • Step 4: Apply the average or median ratios to the business to be valued
  • 16. Enterprise Value Analysis
    • Equity Value:
      • Market Value - cash - hidden assets + Debt
    • EBITDA (Earnings Before Income Tax, Depreciation, and Amortization)
      • Trailing 4 quarters EBIT + D + A
    • EV/EBITDA multiple inverted is essentially the pretax cash flow return on assets of the corporation
  • 17. Comparable Company Multiples
    • Other common measures:
      • Enterprise Value/EBITDA
      • P/E to 5 Year Estimated EPS Growth Rate
      • Market Value of Equity/Book Value of Equity

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