Capital

Capital
Capital Budgeting Assignment #2 Breana N. Rainge 23. Bauer Industries is an automobile
manufacturer. Management is currently evaluating a proposal to build a plan that will manufacture
lightweight trucks. Bauer plans to use a cost of capital of 12% to evaluate this project. Based on
extensive research, it has prepared the following incremental free cash flow projections (in millions
of dollars): | Year 0 | Year 1–9 | Year 10 | Revenues | | 100.0 | 100.0 | –Manufacturing expenses (other
than depreciation) | | –35.0 | –35.0 | –Marketing expenses | | –10.0 | –10.0 | –Depreciation | | –15.0 | –
15.0 | =EBIT | | 40.0 | 40.0 | –Taxes (35%) | | –14.0 | –14.0 | =Unlevered net income | | 26.0 | 26.0 |
+Depreciation | ... Show more content on Helpwriting.net ...
comparison with other available investments. In financial theory, if there is a choice between two
mutually exclusive alternatives, the one yielding the higher NPV should be selected. Break–even
analysis is a technique widely used by production management and management accountants. It is
based on categorizing production costs between those that are "variable" (costs that change when the
production output changes) and those that are "fixed" (costs not directly related to the volume of
production). Total variable and fixed costs are compared with sales revenue in order to determine
the level of sales volume, sales value or production at which the business makes neither a profit nor
a loss (the "break–even point") (www.tutor2u.net). It is important to realize that a company will not
necessarily produce a product just because it is expected to break– even. Many times, a certain level
of profitability or return on investment is desired. If this objective cannot be reached, which may
mean selling a substantial number of units above break–even; the product may not be produced.
However, the break–even is an excellent tool to help quantify the level of production needed for a
new business or a new product. Once the break–even point is met, assuming no change in selling
price, fixed and variable cost, a profit in the amount of the difference in the selling price and the
variable costs will be recognized. One important aspect of break–even analysis is that it is normally
... Get more on HelpWriting.net ...

Nike
13/3/2013
Nike, Inc.
Cost of Capital
1
Discussion Questions
What is the WACC and why is it important to estimate a firm's cost of capital? What does it
represent? Is the WACC set by investors or by managers?
Do you agree with Joanna Cohen's WACC calculation? Why or why not? If you do not agree with
Cohen's analysis, calculate your own
WACC for Nike and be prepared to justify your assumptions. What mistakes did Joanna Cohen
make in her analysis? Which method is best for calculating the cost of equity?
Calculate the costs of equity using CAPM, the dividend discount model, and the earnings
capitalization ratio. What are the advantages and disadvantages of each method?
What should Kimi Ford recommend regarding an ... Show more content on Helpwriting.net ...
2005
2006
2007
2008
2009
2010
2011
Assumptions
Revenue Growth
7.0%

6.5%
6.5%
6.5%
6.0%
6.0%
6.0%
6.0%
6.0%
6.0%
COGS (% sales)
60.0%
60.0%
59.5%
59.5%
59.0%
59.0%
58.5%
58.5%
58.0%
58.0%
S&A (% sales)
28.0%
27.5%

27.0%
26.5%
26.0%
25.5%
25.0%
25.0%
25.0%
25.0%
Operating Expenses
88.0%
87.5%
86.5%
86.0%
85.0%
84.5%
83.5%
83.5%
83.0%
83.0%
Tax Rate
38.0%
38.0%
38.0%

38.0%
38.0%
38.0%
38.0%
38.0%
38.0%
38.0%
38.0%
38.0%
38.0%
38.0%
38.0%
38.0%
38.0%
38.0%
38.0%
38.0%
11.5%
11.5%
11.5%
11.5%
11.5%
11.5%

11.5%
11.5%
11.5%
11.5%
Current Assets
(% sales)
Current Liabilities
(% sales)
WACC
10.83%
Terminal Growth Rate
3%
Cost of debt
7.17%
Cost of equity
11.54%
Outstanding Shares
271.5
11
DCF – Free Cash Flow Growth Method
Discounted Cash Flow Calculations
(In Millions)
Revenue
2002
10,153.0
2003
10,813.0

2004
11,515.8
Operating Income
1,218.4
1,351.6
1,554.6
Taxes
463.0
513.6
590.8
2005
12,264.3
2006
13,000.2
2007
13,780.2
2008
14,607.0
2009
15,483.4
2010
16,412.4
2011
17,397.2
1717
1950
2,135.9

2,410.2
2,554.8
2,790.1
2,957.5
652.5
741.0
811.7
915.9
970.8
1,060.2
1,123.9
NOPAT
755.4

mnbn
Financial Model is defined as the model that captures the future operating, investing and financing
activities that determines the future profitability, financial position and risk of a business venture
(MacMorran, 2009). It is a decision making tool regarding investment, forecasting and valuation of
a project or a company. It is an important element in all investment decisions which helps to regulate
financial activities. According to Janiszewski S. (2011) the importance of financial modeling is to
reflect/represent the forecasted financial performance of a business venture. Financial models are
mainly used generally in compiling financial projections for a company based on discounted cash
flow (DCF) approach and non–valuation financial projections. These are used for management
information or accounting purpose.
Financial modeling is practically applied in Corporate finance, Investment banking, Equity Research
and Accounting Profession. A financial model can be used in Business Valuation, Project Finance,
Mergers and Acquisition, Risk Modeling, Leverage buy out Analysis, Management Decision
Making Process, Capital Budgeting, Forecasting, Equity Research and Valuation, Option Pricing
and Financial Statement Analysis (Youtube Video).
Financial planning model tend to rely on accounting relationships and not financial relationships.
The three basic elements usually valuated include the cash flow size, risk and the timing. It does not
produce meaningful clues about what

Questions On Financial Concepts On Valuation
Financial concepts on Valuation Student Name Course Name Prof Name 12/9/2015 1. Explain the
use of strategic option in valuation. Explain how strategic options are often abused in valuation.
Firm's value maximization managers must have check on internal capabilities for external
opportunities. Managers can get real option value by doing decisions on time and flexible about
firm's opportunities and capabilities. There are four main parts in the manager's work box for
investment valuation opportunities. ¬ Net Present Values ¬ Accounting rated of return ¬ Real
Options ¬ Payback rules NPV implement require estimates of appropriate discount rate and
expected cash flows. And there's the rub. This is only of use of information at the time of
assessment. NPV method was first time developed for bonds value. Little investors in bonds can do
it for alternative the final principal paid or yield rate and coupon they receive. Business most over, is
not inactive investors: managers have flexibility invest further, sell assets, see and wait for project
completely. Accounting rate of return mean a ration of the forecasted profit average over to project
life to investment book value average. Also has to compare with limit rate is required prior to
investment goes forward. It is accurately the method in which real options transaction with risk and
flexibility which can create its value. Real option is not just to get number it is also give a useful
structure for strategic decision

Discounted Cash Flow Analysis
Concepts of business valuation – Critical review of the Discounted Cash Flow (DCF) analysis and
its applicability in today's business world
SEMINAR PAPER
Table of contents page 1.
Introduction...............................................................................................................3 1.1 1.2 2. The
importance of business valuation ..................................................................3 Key indicators covered
in this seminar paper .......................................................4
The Discounted Cash Flow Analysis .......................................................................4 2.1 2.2 2.3 2.4
Foundational principles ... Show more content on Helpwriting.net ...
While there are many stakeholders who care about the financial situation of associated companies,
like suppliers, customers, or creditors, the main addressees of business valuation are strategic
investors who want to buy a significant stake in a company, as well as companies in the same
industry that consider merging with another firm in order to push forward vertical or horizontal
integration.1 And as a matter of fact, business valuation is by far not an easy task. There are
hundreds of possible factors adding to the equation when it comes to determining the value of a
business.2 Actually, just knowing the current value3 of an entire corporation, a factory or a certain
department within an existing enterprise, usually does for itself not help much. Rather it is actually
very uncommon that the current value of a business equals the price that's paid by investors.4 The
purchase price for a company is largely dependent on influences like the economic environment in
general (boom or crisis), the demand for one single enterprise or its products5, the situation of the
current shareholders6 etc. Other factors which can result in a difference between the value of a
company and the price paid are for example the qualification of the existing management, the extent
to which the company is seen

Strategic Investment Decisions Involving Valuable Business...
Valuation Questions
Question 1:
A strategic option is a valuation approach applied by firms when making strategic investment
decisions involving valuable business opportunities. The approach is premised on the idea of
remedying the shortcomings of DCF analysis model. This approach allows firms to value
investment opportunities by ascertaining on future value benefits that a specific project would bring
to firm, rather than looking at cash flow. Strategic options enable the management to formulate
strategic decisions to inform on future opportunities that would be created through today's
investments. Possible future operations are valued using strategic options, as no cash flow is
analyzed, but rather analysis of opportunity for investing ... Show more content on Helpwriting.net
...
Thus, during valuation the firm must undertake strategic mapping on these elements to select real
investment project.
However, strategic option is subject to abuse – particularly due to absence of any formal valuation
procedures. This means that strategic option can be highly politicized by the management. In
practice, this valuation approach is myopic and may lead firms to undervaluing the future, and thus,
to under–invest by deferring viable investment projects. Also, at times managers may use strategic
options by inputting informal procedures or personal bias by deliberately championing or defending
certain investment opportunities – causing overinvestment.
Question 2:
Adjusted Present Value (APV) approach is an income–based valuation method employed as a
variant to DCF tool, but does not use any WACC calculation. By using APV method, one can
ascertain enterprise value by separating out as well as accounting for tax attributes of
debts/borrowing and inherent incremental bankruptcy risk associated with additional debt. During
valuation, the APV approach measures a firm's enterprise value (EV) as the value of a company
devoid of debt ('unlevered enterprise), plus prevent value of tax savings from company's debt.
Specifically, APV valuation estimates unleveraged cost of equity most often using CAPM approach,
expected cash flow of an

While I was an intern at Abacus Capital, a local Indonesian beverage company needed advising in
selling the company and I was fortunate to receive a close look at the inner workings of an
acquisition. The experience gave me a better understanding of the acquisition process and how a
Discounted Cash Flow analysis is done. I enjoy the idea of working for clients from a wide–range of
industries and I am confident that my experience at Abacus would supplement my Transaction
Advisory internship experience in KPMG Indonesia. Additionally, I am someone who is prepared to
work long hours. I believe that having to work long hours is an expected part of a career in one of
the Big Four accounting firms. Lastly, I would be a great cultural fit as I am

Discounted Cash Flow (Dcf) Analysis
DCF Modeling
Copyright 2008 © by Wall Street Prep, Inc.
***************************** SAMPLE PAGES FROM TUTORIAL GUIDE
*****************************
Table of contents
SECTION 1: OVERVIEW DCF in theory and in practice Unlevered vs. levered DCF SECTION 2:
MODELING THE DCF Modeling unlevered free cash flows Discounting to reflect stub year and
mid–year adjustment Terminal value using growth in perpetuity approach Terminal value using exit
multiple approach Calculating net debt Shares outstanding using the treasury stock method
Modeling the weighted average cost of capital (WACC) Sensitivity analysis using data tables
Modeling synergies
***************************** SAMPLE PAGES FROM TUTORIAL GUIDE
***************************** ... Show more content on Helpwriting.net ...
Projected income and cash flow streams are after interest expense and net of any interest income:
Net income – Increases in working capital +/– Deferred taxes + D&A
***************************** expenditures – Capital +/– Net SAMPLE PAGES FROM
TUTORIAL GUIDEborrowing Levered FCF 6 For illustrative Purposes Only
Historical
Income Statement (10–K / 10–Q / PR / Company) Use normalized EBIT Use effective tax rate CFS
/ IS / Footnotes
Projections
Analyst research Company Internal projections Use marginal tax rate Analyst research Company
Internal projections
*****************************
Modeling unlevered free cash flows
Always remember to: Footnote assumptions in detail Test your assumptions Use consistent cash
flows and costs of capital

Reference from core model
Input WACC of 10% for now. ***************************** We will calculate wacc shortly.
SAMPLE PAGES FROM TUTORIAL GUIDE For illustrative Purposes Only
*****************************
Calculation = days post–deal date / 365
7
Discounting to reflect

Tokyo Disney Case
Executive Summary
Evidence from this case suggests that the traditional Japanese corporate governance stance has
started to shift in order to include some elements of the Anglo–American way of corporate
governance. It appears that a final decision has been made to build Disney Sea Park (despite
unattractive ARR, but attractive NPV/IRR and ACFR) not only for the potential profits reaped for
the company but also due to their responsibility to keep uphold the interests of its stakeholders
(which would include its parent company, stockholders, landowners, suppliers, creditors, the local
communities and government), whose livelihoods would be directly affected by this critical
decision.
However, we also believe that the Japanese ... Show more content on Helpwriting.net ...
Japanese AAR figures. Although NPV and IRR methods directly maximizes shareholders wealth, in
understanding Japanese corporate governance, we understand that the NPV and IRR method may
not fit with the Japanese management decision making culture. Accordingly, the case mentions that
Japanese managers are often less "numbers driven" than their "western" counterparts and would
need to balance serving the interests of stakeholders (rather than shareholders only) as well looking
after the company's long term wealth.
Average Cash Flow Return
As cited in the case, The Bank of Japan (IBJ – the main bank financing OL) proved to be
instrumental in mediating between WD and OL in order for a successful outcome.
Due to their international business exposure and experience in brokering between Japanese and
overseas clients, IBJ proposed an alternative method in which compromises between AAR and
NPV/IRR in calculating the financial projections. As shown on Appendix A, the ACFR is positive at
+79.1%, considerably much better than the original AAR of –1%.
While this method utilizes the concept of cash flow and uses the initial investment as the
denominator, discounted cash flow is still not used, and we suspect this method is geared more
towards the comfort level of OL managers, while WD managers would continue to utilize the NPV
and IRR figures.
Conclusion

The case happily concludes that the OL management finally decided to go ahead with the Disney
Sea Park

Eskimo Pie (Stand Alone Value)
Stand–Alone Value
There are many valuation methods that could be used to evaluate this company. Finding a method
that valuates the stand–alone value is difficult. The stand–alone value should be dependent upon the
firmâ€™s own assets and projected future income. We decided to evaluate this company based upon
two methods: The Discounted Cash Flow Method and the Comparable Companies Method.
Discounted Cash Flow Method takes the forecast free cash flows during forecasted horizon. Then
we estimate the cost of capital (weighted average cost of capital) and estimate continuing value
(value after forecast horizon). The future value is discounted to the present value. We than add back
cash ($13 Million) and non–current assets and deduct total ... Show more content on Helpwriting.net
...
Like all acquired synergies, only time after the acquisition will provide if the synergy value was
benefit to the company (Unknown, 2002).
Who will benefit
Reynolds Metals will benefit more financially by not selling to Nestle Foods. Both estimated stand–
alone values are less then the purchase price, but Reynolds Metals will have to pay significantly
high capital gains by selling to Nestle. Capital gain taxes will take a large sum of the cash.
On the other hand, Nestle will benefit from the purchase because it will get a tax break from
borrowing money to the purchase company and as mention above, buying Eskimo Pie will lower
overhead cost by eliminating Eskimo Pie management and Nestle utilizing existing facilities and
eliminating sublicensing costs creating greater cash flows.
Based on the projections, Eskimo Pie Company is expecting sales growth estimated at 15%. It is
also undervalued compared to its industry average. Doing the IPO will create higher market value of
the company and generate enough cash to finance the IPO. In addition, the IPO will benefit senior
management, employees, and the community. If Reynolds Metals is concerned about receiving cash,
they will receive upfront of 84% of $15 Million dollars of dividends and the value of the stock
would increase because it will be valued based on the market. Wheat First will benefit as a

Rocky Mountain Advanced Genome Essay
Case Study 2: Rocky Mountain Advanced Genome This paper provides an objective valuation of
Rocky Mountain Advanced Genome (RMAG) to be adopted by Big Sur regarding the purchase of a
90% equity stake for $46 million. Forecast Horizon: The forecast horizon was lengthened to 15
years, as RMAG is a young, "highly promising, high risk" firm, only established 15 months prior, it
should reach maturity in 2010 as sales, expenses and free cash flows stabilise (Fig.1). RMAG
exhibits characteristics of a high growth firm with no dividends, high risk, high CAPEX
expenditures and no leverage. Furthermore, it would be inadequate to adopt the forecast horizon
dictated by RMAG and Big Sur of 10 years as cash flows only breakeven in Year 8 (Fig.2). ... Show
more content on Helpwriting.net ...
Secondly, no descriptive information was given regarding Other Diagnostics but from the cash flow
forecasts provided, appears the only profitable product category from 1995. Hence, Other
Diagnostics was estimated as a similar growth model to Cancer Diagnostics yet will mature faster,
with 5% in 2006, whilst the growth rate falls by 0.5% thereafter. Agricultural sales were forecasted
to grow at 4% in 2006–07 then 3.5% in 2008–10. This consistency in figures is because disease–
resistant corn and commodity plants reflect a staple societal need yet there is foreseeable
competitiveness in this segment due to strategic alliances and significant interest by producers.
Human Therapeutics as "the most economically attractive segment" is also the riskiest due to the
prolonged FDA process, uncertainty in R&D stages and external competitiveness with "most of the
activity in this segment funded by major pharmaceutical companies under joint ventures". Hence, it
is expected that explosive sales of 7% in 2006 fall sharply by 1% until the forecast horizon. COGS,
R&D and SG&A were all modeled as percentage of sales figures and it was assumed that these
accounts stabilized as sales plateau and efficiencies in production are realised. Hence COGS, R&D
and SG&A were predicted at 30%, 8% and 22% respectively. Due to the consistent nature of
Contract Revenue at $3.5

Valuation Is The Price Of Everything, But The Value Of...
According to Oscar Wilde, " a cynic is one who knows the price of everything, but the value of
nothing".
Valuation is at the heart of any investment decision, whether that decision is buy, sell or hold.
Every assets have to be valued in order to take an investment decision, and their sources have to
been understood as well. Various methods of valuation can be used, and a certain degree of
uncertainty exists.A valuation is uncertain. A good valuation does not provide a precise estimate of
value.Nevertheless, a valuation enables to get a large overview in order to take an investment
decision.For that reason valuation is a strategic aspect in many areas of finance. In corporate
finance, the firm's value aims to be as high as possible and will have an effect on corporate
decisions, including projects to develop and where to find funds, and on the dividend policy.
In such a way to study the topic, we will discuss first the Net Asset Value and its advantages and
disadvantages, then the Discounted cash flow method and to finish the dividend discount model.
The net asset value (NAV) method measures the value of a fund's assets. It enables investors to
analyse a fund's performance market and industry standards such as Moody's.
The NAV is the book value of equity, in other words the total value of a company's assets less its
liabilities total value.
The first advantage to the Net Asset Value is the availableness of the data it performs.
It also allows adjustments. Then, it is

Valuation of Startup Companies
The valuation of a business is a critical element that depending on the accuracy of the valuation can
be the difference between large positive returns or devastating losses for investors. The importance
of valuation is why differing methods are always being debated and analyzed. The valuation of
traditional companies with historical data and comparative industry examples can be a bit confusing
for the average person but with practice they really are not overly complicated. The discounted cash
flow method, or DCF, is a widely academically accepted method that uses the concept of the time
value of money to discount future expected cash flows. While often these DCF calculations can be
fairly straightforward, there are instances where ... Show more content on Helpwriting.net ...
The valuator needs understand the size of the markets being served, the probability of successfully
entering those markets, and the time needed to achieve the projected market share. Additional
aspects to be considered are the costs of product development, bringing the product to the market,
and the ability to make subsequent improvements to the product or service (Goldman 2008). The
valuation of a startup companies management team is a very important determination of the
potential growth associated with a startup company. "Estimates of the company's growth potential
are often based on the valuator's assessment of the competence of the management team and their
ability to successfully exploit their opportunities" (Goldman 2008). A critical evaluation of the
management team is a great place to start when valuing a company with little to no sales history.
There are some critical aspects of a successful management team that an investor must consider
when evaluating the management structure of a startup company. Some of these critical aspects
include:
– Strong focus and attention to cash flow
– Willingness to admit mistakes and adjust
– Adherence to a clearly defined action plan with timetables and performance benchmarks
– Clearly defined responsibility and authority
– Understanding of and reliance on risk analysis
– Relevant experience and contacts. A network of advisors, potential customers,

Discounted Cash Flow Techniques
ANALYSIS FOR FINANCIAL MANAGEMENT 10TH Edition Robert C. Higgins Additional
Problems Chapter 7 – Discounted Cash Flow Techniques page 247 A brief tutorial on Excel
financial functions (problems to follow) You may find the following Excel, built–in financial
functions helpful when analyzing the problems below. (To access these functions, select Insert,
Functions, and choose Financial.) =PV(rate, nper, pmt, fv, type) returns the present value of a series
of cash flows. =FV(rate, nper, pmt, pv, type) returns the future value of a series of cash flows.
=PMT(rate, nper, pv, fv, type) calculates the periodic payment for a loan based on constant
payments and a constant interest rate. ... Show more content on Helpwriting.net ...
He presents this as obvious proof of "gouging on the part of the money changers". Do you agree?
Why, why not? 5) In 1984, the city council of the town of Patterson agreed that their community
badly in need of a modern hotel that would cost approximately $25 million. To finance construction
members of the council organized the Patterson Hotel Corporation. Through strenuous promotion
they raised $15 million by selling 15,000 shares of stock at $1,000 per share. They secured the other
$10 million necessary to build the hotel as a loan provided by a local bank on a 10 year, 14 percent
mortgage that called for uniform annual payments sufficient to pay interest and to extinguish the
debt at the end of 10 years. Upon completion, the Patterson Hotel Corporation leased the hotel to a
national company that operated a chain of hotels. The lease ran for 30 years and contained a clause
permitting the lessee to purchase the hotel for $10 million at the end of the 30–year period. The
lessee agreed to furnish the hotel and pay all taxes (including income taxes) and operating expenses,
and was to meet the interest and repayment obligations on the mortgage during the first 10 years of
the lease. During the last 20 years of the lease, the operating company agreed to make payments
sufficient to permit annual dividends of $400 per share. No payments at all were to be made to the
stockholders during the first 10 years. This was the most favorable operating

TUTORIAL 7 – Discounted Cash Flow Valuation I
TUTORIAL 7 – Discounted Cash Flow Valuation I
{Ross chapter 5: Critical thinking 1; Questions 4, 5, 7}
Critical Thinking
Question 5.1 – Annuity Period
As you increase the length of time involved, what happen to the present value of an annuity? What
happens to the future value?
–duration increase, present value decrease (indirect relationship)
–duration increase future value increase (direct relationship)
–Assuming positive cash flow and a positive interest rate, both the present and the future value will
rise.
Questions and Problems
Question 4 – Calculating Annuity Present Values
An investment offers $8,500 per year for 15 years, with the first payment occurring 1 year from
now. If the required return is 9 per cent, what is ... Show more content on Helpwriting.net ...
Question 16 – Calculating Future Values
What is the future value of $1,560 in 13 year assuming an interest rate of 9percent compounded
semi–annually?
For this problem, it simply needs to find the FV of a lump sum using the equation:
FV= PV (1+r) t
It is important to note that the compounding occurs semi–annually. To account for this, it will divide
the interest rate by two (the number of compounding periods in a year), and multiply the number of
periods by two. Doing so, it may get:
FV= PV {[1+ (k/m)] nm} = $1560 {[1+ (0.09/2)] 13x2} =$4899.46
TUTORIAL 9 – Bond Valuation and the Structure of Interest Rates
{Parrino Chapter 8: Critical thinking: 6 & 9 (E–reading);
Question & problems: 6, 14 & 16 (E–reading)}
Critical Thinking
Question 8.6
Explain why bond prices and interest rates are negatively related? What is the role of the coupon
rate and the term to maturity in this relation?
Bond prices are included market interest rate, coupon rate, and term to maturity.
(i) The market interest rate is a compound varies always. On the other hand, the coupon for the bond
remains fixing until maturity. Therefore, any change in market interest rate does not affect the
coupon, but it affects the price of the bond. When the market interests go up, bonds go down and

vice versa.
(ii) When the coupon rate is lower. The bond will have a higher price volatility compared to a bond
which has a higher coupon. This is primarily because when

Fina 5133 Exam 2 Review Notes Essay
Chapter 9 Cost of Capital 1. What is the WACC? a. Weighted Average Cost of Capital– most firms
employ different types of capital, and because of their differences in risk, the difference securities
have different required rates of return. Typically=debt, preferred stock and common equity. 2. What
precautions must we take when measuring the WACC to use for capital budgeting decisions (future
investment)? b. The company's current and recent past book and market value structures. As well as
rates of returns. 3. What do we mean by "target capital structure"? (this is in the Web appendix to
Ch. 11) 4. What is the "marginal cost of capital"? 5. Know how to calculate the cost of debt, before
and after taxes, ... Show more content on Helpwriting.net ...
discounted payback– discounts the cash flows at the projects cost of capital. c. net present value
(NPV)– Sum of all PV of all cash flows i. NPV=PV inflows –Cost ii. The project should be
accepted if the NPV is positive because such a project increases shareholder value. d. internal rate of
return (IRR) the discount rate that forces a project's NPV to equal zero. The project should be
accepted if the IRR is greater than the cost of capital. e. modified internal rate of return (MIRR)
discount rate which causes the PV of a project's terminal value (TV) to equal PV of costs. f.
profitability index (PI) is the present value of future cash flows divided by the initial cost. It's
reciprocal to the cost–benefit ratio. It measures "bang for buck" g. The replacement chain approach–
projects with unequal lives. So with this approach, we analyze both projects over an equal life. We
repeat project one to equal the life of project B to have a full comparison. h. equivalent annual
annuity (EAA) converting annual cash flows under alternative investments into a constant cash flow
stream whole NPV was equal to the NPV of the initial stream. i. net present value profile– to make
this profile, we find the project's NPV at a number of different discount rates and then plot thos
values to create a graph 2. Explain what is meant by "capital rationing." j. Only occurs when a
company chooses not to fund

Herbert Kohler Case Summary
Group Assignment on"Kohler (A) M&A Valuation"Submitted toINSTRUCTOR:
___________________In partial fulfillment for requirements of the courseMergers and Acquisitions
(2012–2013)ByGroup K On19 November 2012 |
Contents EXECUTIVE SUMMARY 3 Why does Herbert Kohler wants to do the recap 4
Calculation of Enterprise value 4 Using Discounted cash flow method 4 Dividend Growth Model 7
Comparable Companies Analysis 8 Valuation Summary 9 Justifying the share price of $ 55,400 10
Defending $270,000 as share value 10 Final advice to Herbert Kohler 10
EXECUTIVE SUMMARY
In May 1998, Kohler Co. offered a recapitalization plan to buy–out minority shareholders and hence
become a 100% family owned business. But the offered price of $55,400 ... Show more content on
Helpwriting.net ...
Asset Beta=Equity Beta×Equity ValueAsset Value +Debt Beta×Debt ValueAsset Value
Of these 6 comparable companies, 3 of them are kitchen and bath companies and the rest 3 deals
with engines and generators. Hence an average of the asset beta has been taken for these two sub
groups which represent different business segments. Finally to arrive at the asset beta which would
reflect the riskiness/volatility of Kohler, weighted average of these two betas has been taken as
provided in the calculations below:
The Equity Beta of Kohler has been derived based on the following equation.
Asset Beta=Equity Beta×Equity ValueAsset Value +Debt Beta×Debt ValueAsset Value
Given that we now have the values of Debt Beta (Assumed to be 0.25), Asset Beta (0.80), Equity
Value, Debt Value and Asset Value, the value of equity beta has been calculated to be 0.98 based on
the above equation.
Cost of Equity
Cost of Equity of Kohler has been calculated based of Capital Asset Pricing Model (CAPM) which
is depicted as follows:
Cost of Equity=Riskfree Rate+Market Premium ×Beta
Risk Free Rate: 5.61% (US Govt 5 yr bond yield as on Apr 98)
Market Premium: 5% (Assumed)
Beta: 0.98 (As Calculated above)
Cost of Equity=5.61%+5% ×0.98
Cost of Equity=10.51%

Cost of Debt:
Cost of Debt has been calculated by dividing Interest Expense for the Year 1997 with the average
balance of Long Term Debt + Current Maturity of Long Term Debt during

Going Public Offers Companies A Plethora Of Opportunities
Going public offers companies a plethora of opportunities that the company would not have if it
were to remain as a private company. One obvious advantage companies have when they go public
is the immense influx of cash that they receive from the original purchasing shareholders. This large
sum of cash allows the company to grow and expand their footprint through more capital projects,
hiring new talent and the like. With this equity financing, the company will not have to repay the
money that it receives through its IPO. This provides the firm with a tremendous advantage that it
would not have if it were to obtain capital through debt financing. Not having to repay the principal
or interest on a loan allows the company to receive cash ... Show more content on Helpwriting.net ...
Finally, the public display of the company's previously sensitive financial information could make
the company lose the advantage of secrecy that it once had. There are several methods of valuation
that can be brought forward for JetBlue Airlines to consider. The first method to consider is the book
value method, which determines the value of a firm by looking solely at the book value of the firm's
assets. This method would virtually use accounting numbers to value the equity of a firm. The book
value method is normally only appropriate for firms with commodity–type assets that are valuated at
market with no intangible assets. This is not always a beneficial method to use because it ignores
future cash flows for the firm and inflation effects. It is also more common for product–based
businesses, which would not be viable for JetBlue Airlines because it is a service–based company.
Next is the liquidation value method where the value of a firm is based on when the firm is no
longer basing its value on its increase in future cash earnings and cash flow potential, and a higher
yield would be determined by liquidating the assets within the company. The liquidation value
method considers the sale of assets at any point in time. This is a good

Warren Buffet Case Solution
Case 1 | Warren Buffet | Group 7 | According to the case, there are stock price changes for Berkshire
Hathaway and Scottish Power plc on the day of the acquisition announcement. Also, the bid price
for PacifiCorp is $9.4 billion. After knowing this announcement, Berkshire Hathaway's Class A
shares price went up and make them gained in market value $2.17 billion. In Berkshire and other
investors' point of view, After Berkshire takeover PacifiCorp, it might have a good development and
future so that the stock price went up. Berkshire believed that PacifiCorp can have good earning
returns in the future. The intrinsic value is more valuable than its cost so they are willing to pay $9.4
billion to acquire. Moreover, based on the ... Show more content on Helpwriting.net ...
It is importance because it can be measure the ability to earn returns in excess of the cost of capital,
rather than the accounting profit, which can know the attractiveness of a business. Furthermore, the
gain in intrinsic value could be modeled as the value added by a business above and beyond the
charge for the use of capital in that business. On the other hand, the alternatives to intrinsic value are
accounting profit, performance, firm size, etc. But, Buffett reject accounting profit as a measurement
mainly because the accounting reality was conservative, backward looking, governed by GAAP,
ignore the market value of a business and the performance of a business, also ignore the intangible
assets for a business such as patents, trademarks, expertise, reputation, etc. He believed that
investment decision should be based on economy reality, which included many items that
accounting profit had ignored. Now, it is time to judge the eight principles that Buffett's investment
philosophy says. At first, Mr. Warren E. Buffett said that their operating and capital–allocation
process would not be affected by accounting numbers such as financial statement and any
consolidated numbers. The book also says the accounting reality is restricted by the generally
accepted accounting principles, GAAP, so that some intangible assets

The Practical Application of Discounted Cash-Flow Based...
Title: THE PRACTICAL APPLICATION OF DISCOUNTED CASH–FLOW BASED
VALUATION METHODS Publication: Studia Universitatis Babes Bolyai – Oeconomica, LII,
2/2007 Author Name: Takács, András; Language: English Subject: Economy Issue: 2/2007 Page
Range: 13–28 Summary: Valuation methods based on Discounted Cash–Flow (DCF) play a major
role in the field of company valuation. The current literature contains a reasonably deep and detailed
theoretical basis for DCFbased valuation, although, when starting to apply the techniques to
evaluate a real company, some practical problems may appear. This study summarizes the most
important practical difficulties which may hinder the valuation process and proposes different ways
of solving these. Beyond the ... Show more content on Helpwriting.net ...
The calculation of FCF can be done according to the formula shown by Figure 1 (based on
[Copeland, Murrin and Koller, 2000], [Fernandez, 2002] and [Agar, 2005]). Initially, we need to
determine Earnings Before Interest and Tax (EBIT), which represents hypothetical earnings before
tax which ignores the effect of interests paid on debt. It can be calculated as the reported earnings
before tax plus the interest expense stated in the income statement [Bodie, Kane and Marcus, 2004].
The EBIT should then be reduced by the hypothetical tax (computed as EBIT * tax rate) in order to
obtain Earnings After Tax without the effect of debt financing. This number shows the accounting
profit which would have been realized had the firm used no debt to finance its operation. 1
According to [Fernandez, 2002], the most important types of cash–flow are the Free cashflow
(cash–flow available to satisfy both the shareholders' and creditors' return requirements), the Equity
Cash–flow (cash–flow available for shareholders) and the Debt Cash–flow (cash–flow available for
creditors). 14 Earnings Before Interest and Tax (EBIT) – Tax on EBIT (EBIT * Tax rate)
Accounting earnings = Earnings After Tax without debt + Depreciation expense – Increase in gross
fixed assets – Increase in Working Capital Adjusting items = FREE CASH FLOW (FCF)

Victoria Chemicals Essay
Case #22 Victoria Chemicals Synopsis and Objectives go/no–go decision 1. The identification of
relevant cash flows; in particular, the treatment of: a. sunk costs b. cash flows obtained by
cannibalizing another activity within the firm c. exploitation of excess transportation capacity d.
corporate overhead allocations e. cash flows of unrelated projects f. inflation. 2. The critical
assessment of a capital–investment evaluation system. 3. The treatment of conflicts of interest and
other ethical dilemmas that may arise in investment decisions. Suggested Questions 1. What
changes, if any, should Lucy Morris ask Frank Greystock to make ... Show more content on
Helpwriting.net ...
The investment requested is £12 million. Strategic and operating benefits were summarized in our
previous memo to you. We have made, however, some changes to our investment analyses, which
appear below. Two discounted cash flow analyses accompany this memo. Part A contains an
adjustment for possible business erosion at Rotterdam, while part B does not make that adjustment.
* The results are: Erosion No Erosion NPV £8.8 m £17.1 m IRR 22.3% 31.0% * The costs of the
engineering study and corporate overhead allocation have been excluded from the analysis, per
discussions with John Camperdown. * Tank–car expenditure occurs earlier in time, and changes in
depreciation tax shields are reflected herein. * The discount rate used is 10%, and the cash flows
used are nominal, rather than real cash flows. We would be happy to respond to any remaining
questions you or the board may have. Executive Summary Being a major competitor in the
worldwide chemicals industry Victoria Chemicals is trying to keep up with modern productions. Top
managers of Victoria Chemicals are indecisive in

Jetblue Case Study
What is an IPO and why is it such a big deal? Is this a good idea for JetBlue? Explain.
When a privately held company makes its stock available to the general public for the first time on a
securities exchange, this is known as the company's Initial Public Offering (IPO). The IPO can
consist of an initial issue of either debt or equity. The IPO process is also referred to as a private
company "going public". There are numerous benefits associated with going public. IPO benefits
include enlarging and diversifying a company's equity base, allowing cheaper access to capital,
improving public image, attracting better management and employees through stock options,
enabling transfer of company ownership through mergers/acquisitions, and ... Show more content on
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This document excludes the offer price and the effective date, because they have not yet been
determined.
Go on a "road show" (with the underwriter) to present and market the information about the IPO to
key institutional investors and attempt to create interest.
Decide on the IPO price based on the degree of success of the road show and the current market
conditions.
Complete the final step of the IPO process and publicly issue securities in the stock market and
collect the capital from investors.
IPO Valuation
The process of determining the IPO share price as an indicator of value is extremely significant for a
company. Determining the share price target range depends on a number of factors, including the
success of the "road show," demand from investors, and comparison with other IPO valuations from
similar companies. The final IPO share price will be somewhere within the target range and the
market response to the IPO is a measure of whether the share price was correctly valuated.
JetBlue: Private to Public
JetBlue opened for business in December 1999 as "New Air". New Air, soon to be JetBlue, was
founded by David Neeleman. Mr. Neeleman wanted JetBlue to be a low cost, great customer
experience airline, modeled a little after Southwest Airlines. In 2000 JetBlue lost approximately
$21.3 million, but 2001 they saw a profit of $38.5 million. Although in 2001

Using Discounted Cash Flow
Introduction
This assignment is to analyse and discuss the use of Discounted Cash Flow "DCF" to value Henkel
AG.
Discounted Cash Flow Valuation is based upon the notion that the value of an asset is the present
value of the expected cash flows on that asset, discounted at a rate that reflects the riskiness of those
cash flows. Specify whether the following statements about discounted cash flow valuation are true
or false, assuming that all variables are constant except for the variable discussed (Rubinstein,
2003). As described by Emhjellen and Alaouze (2003), the discounted net cash flow is one of the
most popular tool used for finance valuation.
The assignment will specifically discuss three key areas to DCF; Cost of Equity, ... Show more
content on Helpwriting.net ...
The usual method of selling equity in a company is to sell shares of stocks. Selling equity provides
the advantage that dividends will result on profitability. However, there 's huge advantage that
shareholders will expect a continuous return on their investment and if any stock fail it will be sold
off which in return will devaluate the company (Brigham and Ehrhardt, 2009).
Risk Free Rate
The risk free rate is defined as the return on a portfolio or security that has no covariance with the
market. This is a highly used method for estimating the cost of equity capital. To estimate the risk
free rate it's important to consider government default–risk free bonds since government bonds
come in many maturities. The risk free rate reflects three components; the rental rate, inflation, and
maturity risk or investment rate risk which are all economic factors that are found in the yield to
maturity for any given maturity length.
For Henkel AG risk free rate we will use a 10 year bond because it has the least risk. A longer bond
give the company a bigger picture of the future, for example 3 to 6 years are not long enough, on the
other hand 18 years are too long.
We will pick 3.38 because inflation needs time to be more established.
Calculation of Treasury Rate: (4.52 + 4.74) / 2 = 4.63

The above results is made by taking in account the rating of Hankel AG, while its rating A which is
rated

Intrinsic Value Of The Cvs Health Corporation
Introduction
For this project analysis I will attempt to calculate the intrinsic value of the CVS Health Corporation
by conducting a two–stage DCF company–level valuation analysis, I will compare my results to the
current market capitalization of the company as shown on the Yahoo Finance web page. Finally, I
will perform a sensitivity analysis using variables such as free cash flow, terminal growth rate and
WACC.
Calculate intrinsic Value of your Company: Discount cash flow method This is an important
valuation method used to estimate the desirability of an investment opportunity. Discounted cash
flow (DCF) analysis uses future free cash flow projections and discounts them (using the weighted
average cost of capital) to arrive at a present value. The calculated present value is then used to
evaluate the potential for investment. For this project, the DCF analysis will be used to evaluate the
intrinsic value of the CVS health corporation ("DCF," n.d.).
Intrinsic Value of CVS Health Corporation:
The intrinsic value of a company is what the company is actually worth. As mentioned above, to
calculate the Intrinsic Value of CVS Health Corporation, I will use the two–stage company–level
Discounted Cash Flow (DCF) valuation model.
The intrinsic value for CVS Health (minus debt) is calculated as 78,750,096,600 dollars (78.75
Billion dollars). The intrinsic value was calculated using free cash flow, WACC for CVS, growth
rate and all other pertinent valuation measures (yahoo

Cost of Capital Using Discounted Cash Flow Approach
In finance, the discounted cash flow (DCF) analysis is a method of valuing a project, company or
asset using the concepts of time value of money (Wikipedia, 2004). Three inputs are required to use
the DCF, also called dividend–yield–plus–growth–rate approach, include: the current stock price,
the current dividend, and the marginal investor's expected dividend growth rate. The stock price and
the dividend are east to obtain, but the expected growth rate is difficult to estimate (Ehrhardt &
Brigham, 2011). The advantages and disadvantages of using DCF approach will be explained along
with the further clarification on the cost of capital using DCF approach. The cost of capital is a term
used in the field of financial investment to refer ... Show more content on Helpwriting.net ...
The DCF approach is focused on cash flow generation and is less affect by accounting practices and
assumptions. A disadvantage of the DCF is that the accuracy of the valuation is highly dependent on
the quality of the assumptions regarding marginal investor's expected dividend growth rate. The
DCF model is only as good as its input assumptions, like any other valuation. DCF also works best
when there is a high degree of confidence about future cash flows. The model is also not suited for
short term investing (McClure, B. 2011). In summary, the discounted cash flow (DCF), or dividend–
yield–plus–growth–rate, is a process used to estimate the cost of equity an investor expects to
receive. It takes the dividend yield plus a capital gain for a total expected return. Current stock price,
current dividend and the marginal investor's expected dividend growth rate are three inputs required
to use the DCF approach. The stock price and current dividend are easy to obtain, however the
expected growth rate is difficult to estimate. Three techniques used to estimate growth rate include:
historical growth rate, retention growth model and analysts' forecast. DCF analysis can help
investors identify where the company's value is coming from and whether or not its current share
price is justified. It is also the closest thing to a company's intrinsic value. Another advantage of
using DCF is that the current stock price is used instead of

Jetblue Ipo Essay
JetBlue Airlines, a low–fare commercial airline, has planned to go public towards the end of 2001.
During the process the firm had restructured their initial price from $22– 24 per share to $26 – 28
per share. Advantages / Disadvantages of the IPO Decision There are considerable advantages with
obtaining equity through the IPO process. There are, however, some drawbacks that also need to be
taken into consideration. Some of the advantages and disadvantages are: Advantages |
Disadvantages | * Equity value is established for the firm * Current shareholders can diversify
personal portfolios | * SEC requires public disclosure of financial information (transparency) * IPO
expenses | * Liquidity of stock increases | * ... Show more content on Helpwriting.net ...
Advantages and Disadvantages of Going Public through the IPO Process Advantages * The partners
can obtain a true value of the shares they possess in the company * Partners can remove their
signatures from the lines of credit and thus, are no longer personally liable to the creditors * The
overall financial condition of a company is improved as it brings in non–refundable money * A
broader capital base gives the company more access to credit which gives the company an option to
venture into new business opportunities * Capital raised in an IPO can be used to pay off debt and
thus reduce the interest costs and enhance the company's debt to equity ratio * The value of the
stock may see an upward trend thus increasing the initial investor's financial wealth * When a
company goes public, it attracts the attention of the media and financial community thus providing
free publicity and helps in creating a better corporate image * By going public and listing on a stock
exchange it can directly foster public reputation in general Disadvantages * The market is extremely
unpredictable and an unsuccessful IPO can result in a great loss of time as well as money for the
company * The ownership of the partners is dissolved and they become mere employees who are
responsible to the shareholders and Board of Directors * Continuous dealing with shareholders

Valuation of Kia Motors
Düsseldorf Business School at the Heinrich–Heine–University
5b
Value Management & Cost Management
Prof. Dr. Klaus–Peter Franz
Valuation of a company KIA MOTORS
By: Youngsook Kwon, Date: Jan 30, 2013
Table of Contents
1. Introduction 1 2. Valuation Methodology 2 2.1. Discounted Cash Flow 2 2.2. Terminal Value 3
2.3. Weighted Average Cost of Capital 3 2.3.1 Cost of Equity 4 2.3.2 Cost of Debt 4 2.4. Free Cash
Flow 4 3. Calculation of WACC for Kia motors 5 4. Calculation of Free Cash Flow for Kia motors 5
5. Estimation of the value for Kia motors at the end of 2011 6 6. Conclusion 6 References 7
Appendix –1 8 ... Show more content on Helpwriting.net ...
In particular, small changes in inputs can result in large changes in the value of a company, given the
need to project cash–flow to infinity. James Montier argues that, "while the algebra of DCF is
simple, neat and compelling, the implementation becomes a minefield of problems". He cites, in
particular, problems with estimating cash flows and estimating discount rates. Despite the issues,
DCF analysis is very widely used and is perhaps the primary valuation tool amongst the financial
analyst community.
2.2. Terminal Value
Terminal Value, in simple term, is the value of a company with an infinite row of constant future
cash flows.
To arrive at a total company value, or enterprise value, we simply have to take the present value of
the cash flows and the Terminal value, divide them by the discount rate and, finally, add up the
results. If we are discounting free cash flow of the firm at the weighted average cost of capital, this
would give the value of the firm, so it would be necessary to deduct net debt in order to arrive at the
equity value. In this report, simply use FCF in the year of 2011 to compare the value of the firm to
the stock price in the year end of 2011.
2.3. Weighted Average Cost of Capital

The Weighted Average Cost of Capital (WACC) is the discount rate used in a Discounted Cash Flow
(DCF) analysis to present value projected free cash flows and terminal value.

Thug Life
Corporate Finance (Berk/DeMarzo) Chapter 9 – Valuing Stocks
9.1 Stock Prices, Returns, and the Investment Horizon 1) Which of the following statements is
false? A) There are two potential sources of cash flows from owning a stock. B) An investor will be
willing to pay a price today for a share of stock up to the point that this transaction has a zero NPV.
C) An investor might generate cash by choosing to sell the shares at some future date. D) Because
the cash flows from stock are known with certainty, we can discount them using the risk–free
interest rate. Answer: D Explanation: A) B) C) D) Because these cash flows are risky, we cannot
discount them using the risk–free interest rate.
Diff: 1 Topic: 9.1 Stock Prices, Returns, and the ... Show more content on Helpwriting.net ...
You expect Von Bora 's stock price to be $25.00 at the end of two years. Von Bora 's equity cost of
capital is 10% 9) The price you would be willing to pay today for a share of Von Bora stock, if you
plan to hold the stock for two years is closest to: A) $23.15 B) $20.65 C) $21.95 D) $21.90 Answer:
A Div1 Div2  P2 Explanation: A) 1.50  25.00 1.40 P0 = + = + = $23.17 1  rE 1  .10 (1  rE
)2 (1  .10)2 B) C) D)
Diff: 1 Topic: 9.1 Stock Prices, Returns, and the Investment Horizon S k i l l : A n a l y t i c a l
10) Suppose you plan to hold Von Bora stock for one year. The price would would expect to be
able to sell a share of Von Bora stock in one year is closest to: A) $26.50 B) $22.70 C) $23.15 D)
$24.
Suppose you plan to hold Von Bora stock for only one year. Your capital gain from holding Von
Bora stock for the first year is closest to: A) $0.95 B) $1.40 C) A) Capital Gain = P1 – P0 = 24.10 –
23.17 = $0.93 B) C) D)
Diff: 2 Topic: 9.1 Stock Prices, Returns, and the Investment Horizon Skill: Analytical
12) Suppose you plan to hold Von Bora stock for only one year. Your capital gain rate from
holding Von Bora stock for the first year is closest to: A) 3.5% B) 4.0% C) 6.0% D) 4.5% Answer: B
Explanation: A) Div2  P2 1.50  25.00 B) P1 = = = $24.10 1 (1  .10) (1  rE ) P0 =
Div1 Div2  P2 1.50  25.00 1.40 + = + = $23.17 2 1  rE 1  .10 (1  rE ) (1  .10)2
Capital Gain = P1 – P0 = 24.10 – 23.17 = $0.93 Capital Gain rate = capital gain/ P0 =

Capital Asset Pricing Model (Capm) Versus the Discounted...
Capital Asset Pricing Model (CAPM) Versus the Discounted Cash Flows Method
Managerial Analysis/BUSN 602
Capital asset pricing model or CAPM is a financial model that measures the risk premium inherent
in equity investments like common stocks while Discounted Cash Flow or DCF compares the cost
of an investment with the present value of future cash flows generated by the investment with the
mindset being that if the cash flow is positive, then the investment is good. Generally speaking,
CAPM is a model that describes the relationship between risk and expected return and DCF is a
valuation method used to estimate the attractiveness of an investment opportunity. So what are the
differences, advantages and disadvantages of each one? How ... Show more content on
Helpwriting.net ...
It is focused on cash flow rather than accounting practices and allows for different components of a
company to be valued separately. Conversely, the biggest challenge of the DCF method is that the
determined value is only as accurate as the information it is given, that being the FCF, TV and
discount rates. In other words, if the information given to determine the DCF isn't accurate then the
fair value for the investment won't be accurate and the model won't be helpful when assessing stock
prices due to the inaccuracies. Furthermore, DCF is only good for long term values not short term
investing. "The bottom line is that DCF is a rigorous valuation approach that can focus your mind
on the right issues, help you see the risk and help you separate winning stocks from losers and help
reduce uncertainty." (McClure, 2011) So, now that we've looked at CAPM and DCF, what can we
conclude?
The CAPM is a single factor model because it based on the hypothesis that required rate of return
can be predicted using one factor that being systematic risk. It looks at risk and rates of returns,
compares then to the stock market providing a usable measure of risk to help investors determine
what return they will get for risking their money in an investment. There are a lot of assumptions
and drawbacks of CAPM that lead to the conclusion that those investors utilizing this

FIN202 chap 4 Essay
COURSE IMPLEMENTATION PLAN
DA NANG
(Under Decision No: 203/QĐ ĐHFPT . Date: 09/04/2012 )
Course name:
Corporate Finance
Course code:
FIN202
Level:
Implementation period:
from 25/06/2012 14/07/2012
Group leader /lecturer:
Phạm Tô Hoài
E–mail:
Hoaipt@fsb.edu.vn
1) Main objectives and goals of the course
Upon completion of this course, students should:
1.Understand the key issues of financial management in company
2.Gain an understanding of financial markets and processes
3.Learn techniques for determining the intrinsic value of securities
4.Understand the tools in corporate finance and apply them to solve the key issues in corporate
finance
5.Discover the complex interaction between the economy and ... Show more content on
Helpwriting.net ...
Ratio
Analysis

Chapter 4 :
Analyzing
Financial
Statement
(continuing)
3. The
DuPont
System,
ROA, ROE
4.
Benchmarks
5. Limitations of Ratio
Analysis
Chapter 4 :
Analyzing
Financial
Statements
1. Financial
Statement
Analysis
Individual
Assignment guidelines Quiz 1:
Chapter
1,2,3
Chapter 4 :
Analyzing
Financial
Statement
(continuing)
2. Ratio
Analysis
Chapter 4 :
Analyzing
Financial
Statement
(continuing)
3. The
DuPont
System,
ROA, ROE
4.
Benchmarks
5. Limitations of Ratio
Analysis
3

Do exercises, Book, self Powerpoint, review, case study assignment, teaching
Additional
notes, reading solution following chapter
Lecture
Additional
Lecture
Additional
Lecture
Additional
/15
Group
Assignment
guidelines
Chapter 5:
The Time
Value of
Money
1. Time
Value of
Money
28/6
7
28/6
Chapter 6: Discounted Cash Flows and Valuation
8
29/6

9
29/6
04.02e–BM/DH/HDCV/FU 1/2

A Brief Note On Cash Flow
2.1.2 Discounted Cash Flow:
Discounted cash flow methods are other popular types of capital budgeting besides the Net present
value (NPV). Discounted cash flow (DCF) is a common valuation method to evaluate investment
opportunities and includes two basic tecnhiques: internal rate of return (IRR) and Profitability index
(PI)or benefit–cost ratio (Shapiro, 2005). Since this research focuses Profitability index for
evaluating the investment opportunity, the following section would highlight on PI.
2.1.2.1 Profitability Index:
The Profitability index (PI) also commonly refered to as benefit–cost ration is the ratio of
discounted profits over the discounted costs. It is generally the estimation of profitability of an
investment and could be ... Show more content on Helpwriting.net ...
Although both NPV and PI yields came decision, they at times disagree in the ranking orders of the
acceptable projects (Shapiro, 2005).
Over the time, many researchers have criticised Distcounted cash flow analysis for till now every
DCF analysis treats a project's expected cash flows as given at the beginning. This leads to
undertake that all operating decisions are set in advance. However, in reality, the opportunity to
make decisions based on information to become readily available in the future is an essential
features of many investment choices and decisions. Several research have been conducted related to
use of NPV in various fields of study and business. Wikner (1994), had undertaken some study of
applying the NPV to a systems dynamics model of a production and inventory control system.
Likewise, in 2004, Naim et al, had presented that the standard NPV is not a sufficient criterion for
analysing the dynamic behaviour of a closed–loop form of system and established a need to extend
the NPV criterion to expand costs associated with the variances that occur in the system variables
(Naim, 2006).
Likewise in the paper "Reasoning the 'net–present–value' way: Some biases and how to use
psychology for falsifying decision models", the author stresses that eventhough the Net Present
Value methodology,is widely acceptable tool for investment decisions in economics, it exhibits

The Issue Bonds Generally Go Through A Series Of Steps
1. Organizations that decide to issue bonds generally go through a series of steps. Discuss the six
steps. There are organizations that decide to issue bonds in most cases go through a series of six
steps: 1. The health care physician attempts to get its medical office in order. 2. The health care
agency get evaluated by a credit rating agency. 3. The bond is rated by a bond rating agency. 4. The
health care physician provides a note or lease to the legislative authority via a trustee. 5. The
Legislative authority delivers the bonds to more than one investment banking firms. 6. The
investment banking firm sell the bonds to stakeholders at the community contribution charge, and
the trustee provides the health care physician with the next proceeds. The bonds can be issues with
fixed interest or variable rate interest, each of which has its advantages and there disadvantages. 2.
An alternative to traditional equity and debt financing is leasing. Leasing is undertaken primarily for
what purposes? The Leasing is convey out four reasoning's which are: To be able to obtain better
maintain services, to refrain to the administrative delays of the capital budget petition, to
acknowledge for availability, to refrain technological extinction. A financial other than traditional
debt financing of capital investments. Leasing offers the use that is usually the option to obtain
capital benefit. For other cooperatives, certain changes in the economy might give strength to

Case Mw Petroleum
3. Differences between APV and option valuation
Valuing MW Acquisition by using APV method assumes in practice that exploiting of all MW's
reserves is certain and happens right after the acquisition. In other words, the APV method excludes
the flexibility in future decision making. In this case, Apache has both an option to defer the
exploiting of reserves into future and Apache may also choose not to exploit the MW reserves at all.
As some of MW's reserves are actually real options, the APV valuation method actually
underestimates the real value of MW acquisition. If Apache defers the exploiting of the reserves,
there exists a possibility for the future cash flows becoming even more valuable. For example,
Apache could have more precise ... Show more content on Helpwriting.net ...
However, it is important to remember that the APV valuation and the option valuation calculations
in Exhibit 1 and 3 aren't straight forward comparable, since APV assumes financing the acquisition
with new $300 million debt and real option valuation is calculated assuming total equity financing.
If the tax rate remains constant, the real option valuation could be performed by taking the present
value of the tax shields into account. In this case the values obtained by real option valuation would
be even higher than the ones presented in the table.
As discounted cash flow method assumes all equity financed acquisition, it presents more
comparable value for the real option values shown. The value of Apache's possibility to decide
whether to exploit the reserves equals the difference between DCF value and the real option value.
4. Option valuation method
The future cash flows of MW's reserves contain a great amount of risk and have many possible
future outcomes. The real option valuation method takes into account the flexibility rising from this
uncertainty. Real options often are valued using financial–option pricing techniques. However, there
are several things to be considered when treating reserves as options by using more specific Black
& Scholes model.
Firstly, there are some simplifications to be done to get all the necessary inputs for the Black &
Scholes model. One approximation to be made is the estimation of the

Commercial Fixtures Case
Commercial Fixtures Inc. + Business valuation overview Suggested questions for the Commercial
Fixtures Inc. case are given below. 1. What would you as an outside third party bid under the same
conditions (with the same information) for the entire company (both halves)? Why? 2. What do you
expect Albert Evans to bid for Gordon's half interest? Why? 3. What should Gordon Whitlock bid
for Albert's half interest? Why? 4. How would you structure the purchase of the business? Question
#1 is a business valuation question. There are a number of ways to estimate the value of a business.
You have probably covered one or more of these ways in a previous class. The next two pages
review a few of the various ways ... Show more content on Helpwriting.net ...
(A five year horizon is common, but this can vary.) Typically you will use the WACC as your
discount rate. Depending on the circumstances, the estimated cash flows may be available for fewer
than five years, or more than five years. b. Estimate the PV of the terminal value. One estimate for
the terminal value involves assuming perpetual cash flows after the initial time horizon, e.g.: i. If the
cash flow after 5 years is expected to grow at a rate g for the foreseeable future: Terminal Value5
(TV5) = FCF6 /(k – g) = FCF5 (1+ g) / (k – g)., where k is the required rate of return. You must
discount the TV to time 0, and then add this to the PV of the FCFs during the projection horizon. ii.
If the cash flow at the end of 5 years is not expected to grow, i.e., g=0, then the general formula
collapses to the PV of a no–growth perpetuity: Terminal Value5 = FCF6 / (k–g) = FCF5 (1+ g)/(k –
g) = FCF5 / k c. Use the Value of the Firm equation above, i.e. sum PV of free cash flows + PV of
terminal value . The Value of the firm's Equity = Value of the Firm – Debt Currently Outstanding. 3.
(ii.) Adjusted Present Value approach – we will only briefly discuss this approach; a topic for a
future finance course. 4. Comments on Valuing the Firm using DCF (or WACC) and APV valuation
approaches a. Watch the free cash flows (not reported earnings)! In particular, as in the capital
budgeting decision process: ––Depreciation

Arundel Partners: the Sequel Project
Arundel Partners: The Sequel Project
The maximum per–film price for the sequel rights that Arundel Partners should pay is $5.12M.
If Arundel Partners were to use the traditional DCF methods to find the value of the sequel rights,
the NPV would be –$8.42M loss per–film (see Appendix 1).
Calculation Details
We assume that Arundel Partners will purchase a portfolio of films similar to one used in the
analysis. The average hypothetical net inflow of the sequel ($21.57M) is used to figure out the value
of the state variable for the real options model. The state variable is the average hypothetical net
inflow of the sequel, discounted using a WACC of 12.36% back to 1989. Discounting back to 1989
is important because this is ... Show more content on Helpwriting.net ...
Building the Binomial Tree for Asset Values
The binomial model is used to see how the state variable evolves over time, specifically over a time
period of 12 months (see Exhibit 1). The maturity or expiration date of the sequel rights option is set
for 12 months. Within the first year, Arundel Partners will know whether it will want to exercise the
sequel rights. We build the binomial tree for the net inflow values using the Cox–Ingersoll–Ross
model. This approach approximates a lognormal distribution for the asset values (net inflow values).
We assume that continuously compounded returns on the asset are normally distributed and
volatility remains constant. We use the expiration date as one year from the purchase of the sequel
rights and the time interval of 1/12 (1 month). We use the standard deviation on the one year return
of the portfolio as an estimate

An empirical study of the discounted cash flow model Martin Edsinger1, Christian Stenberg2 June
2008 Master's thesis in Accounting and Financial Management Stockholm School of Economics
Abstract The purpose of this thesis is to compare the practical use of the DCF model with the
theoretical recommendations. The empirical study is based on eight different DCF models
performed by American, European and Nordic investment banks on the Swedish retail company
Hennes & Mauritz (H&M). These models are currently being used internally by the corresponding
equity research departments to determine the fair value of the H&M stock. The aspects that are
studied are regarded as the basic theoretical requirements of the DCF model. The discrepancies ...
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Empirical findings ..................................................................................................................................
14 4.1 Historical information
..................................................................................................................... 14 4.2 Forecasting
procedure ..................................................................................................................... 15 4.3 Discount
rate .................................................................................................................................... 17 4.4
Steady state assumption .................................................................................................................. 18
4.5 Other valuation aspects...................................................................................................................
20 4.6 Implied target prices and stock performance ..............................................................................
21 5. Discussion of empirical
results............................................................................................................. 22 5.1 Historical
information ..................................................................................................................... 22 5.2
Forecasting procedure ..................................................................................................................... 23
5.3 Discount rate

Arundel Partners: the Sequel Project 1
Case 1. Arundel Partners: The Sequel Project 1. Why do the principals of Arundel Partners think
they can make money buying movie sequel rights? Why do the partners want to buy a portfolio of
rights in advance rather than negotiating movie–by–movie to buy them?
The principals at Arundel Partners believe that there is value that is not captured in a discounted
cash flow when analyzing the launching of a film. They believe that by launching a new film, there
is immediately an option to launch a sequel that can generate future cash flows not accounted in the
discounted cash flow. Since creating a sequel of an original film is not an obligation, the studio can
wait and see if the original film had a positive net present value and decide ... Show more content on
Helpwriting.net ...
3. What are the primary advantages and disadvantages of the prior approaches, DCF and Black–
Scholes, that you took in valuing the rights? Please be specific about their assumptions. What further
assistance or data would you require to refine your estimate of the right's value?
Advantages of the Discounted Cash Flows
The discounted cash flows seems like a simpler approach, with a less complex method to compute
the value of the sequels and easier to understand, both for Arundel Partners and for the studios. It
requires only a few variables (inflows and costs in this example) and gives the intrinsic value of the
project that is being analyzed, not a comparison against similar projects.
Disadvantages of the Discounted Cash Flows
The DCF does not consider right away the option to turn down a movie if it generates a negative
NPV; we had to come up with a way to include that in our model. Also, changes in the future
inflows or costs will generate volatility. Finally, we need to remember that the DCF method
generates more volatility when the cash flows are uncertain in the future. Since in this example we
have inflows 4 years in the future and costs 3 years in the future, we have some variability there that
can change the output of the valuation when time comes true.
Advantages of Black–Scholes
A project that generates a negative NPV may be

Discounted Cash Flow
discounted cash flow (DCF
In finance, discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset
using the concepts of the time value of money. All future cash flows are estimated and discounted to
give their present values (PVs) – the sum of all future cash flows, both incoming and outgoing, is
the net present value (NPV), which is taken as the value or price of the cash flows in question.
Using DCF analysis to compute the NPV takes as input cash flows and a discount rate and gives as
output a price; the opposite process – taking cash flows and a price and inferring a discount rate, is
called the yield.
Discounted cash flow analysis is widely used in investment finance, real estate development, and
corporate ... Show more content on Helpwriting.net ...
Using the DPV formula above (FV=$150,000, i=0.05, n=3), that means that the value of $150,000
received in three years actually has a present value of $129,576 (rounded off). In other words we
would need to invest $129,576 in a T–Bond now to get $150,000 in 3 years almost risk free. This is
a quantitative way of showing that money in the future is not as valuable as money in the present
($150,000 in 3 years isn't worth the same as $150,000 now; it is worth $129,576 now).
Subtracting the purchase price of the house ($100,000) from the present value results in the net
present value of the whole transaction, which would be $29,576 or a little more than 29% of the
purchase price.
Another way of looking at the deal as the excess return achieved (over the risk–free rate) is (14.5%–
5.0%)/(100%+5%) or approximately 9.0% (still very respectable).
But what about risk?
We assume that the $150,000 is John's best estimate of the sale price that he will be able to achieve
in 3 years time (after deducting all expenses, of course). There is of course a lot of uncertainty about
house prices, and the outcome may end up higher or lower than this estimate.
(The house John is buying is in a "good neighborhood," but market values have been rising quite a
lot lately and the real estate market analysts in the media are talking about a slow–down and higher
interest rates. There is a probability that John might not be able to get the full

Nabr
Group Assignment:
NABR Publishing Ltd. Valuation Case
Submitted by:
XXX
MBA 680–Corporate Financial Theory
October 22, 2014
Valuation Methodology
The valuation of NABR Publishing Ltd encompassed an extensive amount of exercise, and the
valuation required taking into consideration various factors. The Discounted Cash Flow (DCF)
method was used to value the NABR Firm. The DCF Method utilizes the net present value of future
free cash flow projections and discounts the cash flow at a discount rate which was calculated using
two of three options. In turn, this was done using the Weighted Average Cost of Capital (WACC).
The motive for using WACC to get the discount rate is to ... Show more content on Helpwriting.net
...
Debt and Equity Valuation
This valuation of NABR was based on equity and debt resulting in the financial value of the firm,
and connects with the value of the firm's asset. By using the DCF method, the total fair market value
of the business entity is calculated by discounting future projected cash flows back to the date of
valuation. At the end of the projection period, a residual or terminal value is calculated and
discounted to its present value at the date of the valuation. The theory behind the discounted cash
flow method is that an entity's value is equal to its present value of its expected future cash flow.
This method is considered the most detailed analysis because it is thorough in nature and aids the
owner to get a true picture of the firm value. This consists of certain steps which involve developing
a method to be used to project future earnings of cash flow, a risk adjusted discount rate, discounting
the projected cash flow to the date of the valuation, and capitalizing the terminal year's projection
into a residual value using the discount rate less the growth rate. In this case, we estimated the
growth rate of 2.3%, and the summation of the present values of the discounted cash flows and

terminal value.
This method is the most precise method in comparison to the Venture Capitalist method despite the
notion that there is an uncertainty of cash flow projections. Using WACC to calculate the discount
rate assisted in the calculation of the

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