FIN 430 — Finance Theory and PracticeProject Assignments
Calculating theWeighted Average Cost of Capital (WACC)
foryour Company
For use in Conjunction with the Firm Valuation Project
First ensure that you have read relevant pages in the text. Some important sections would include the following, but you may also double-check the references in the text by using the index [see: Cost of Capital and Target (optimal) Capital Structure, etc.]:
The important Chapter in the text is the one entitled "The Cost of Capital," – with a particular focus on the section entitled “The Weighted Average Cost of Capital” and the section “Four Mistakes to Avoid” at the end of the chapter.
The WACC formula discussed below does not include Preferred Stock. Should your company use PS, be sure to adjust the equation for it, and see the section in the chapter on the Cost of Preferred Stock.
The WACC formula that we use is:
WACC = wdrd(1-T) + wsrs
We need to know how to calculate:
1. rsthe cost of common equity. Use the Security Market Line (SML) – this is why you learn how to calculate a company’s beta and also why you learn how to find the appropriate risk-free rate and market-risk premium. For a review, see the section the text, The CAPM Approach.
2. The weights (wd and ws – note that: wd + ws = 1; so you only have to calculate one of them). We need to calculate the weight of debt and the weight of equity (for the cost of debt, this simply means: what proportion of the firm’s financing is by debt?). There is a lot to say here, simplified as Theory 1, Theory 2 and Practice:
a. Theory 1: Theory says that we should use the target weights along with the market values of both debt and equity (see the Four Mistakes to Avoid). But the market value of debt is typically difficult to calculate, because we need to know the YTM (which is rd) for all of the company’s debt, but we cannot calculate the YTM without having the current prices of the company’s outstanding bonds, and most company’s bonds do not trade (i.e., they will not have up-to-date or current prices – remember how to calculate the price (value) of a bond on your calculators?!). As a result, at least for the group project, we go to Theory 2.
b. Theory 2: Theory also says that we should use the TARGET weights, but this is a management decision, and as “outsiders” we do not have access to the thoughts of the CFO or CEO. So we should look instead to the historical pattern of the use of debt (mix of debt and equity), and this is one reason that you should have about 10 years of financial data.
c. Practice: Since we cannot “work” according to the strict theory of finance, we have to estimate the relevant weights. As a result, we will use the formula:
wd = Book Value of Debt / [Market Value of Equity + Book Value of Debt]
The book value of debt is calculated by adding up ALL of the debt on the balance sheet. This will typically be the sum of Notes Payable, Current Por ...
Company FacebookCalculating the Weighted Average Cost of Capi.docxdonnajames55
Company: Facebook
Calculating the Weighted Average Cost of Capital (WACC)
for your Company
For use in Conjunction with the Firm Valuation Project
First ensure that you have read relevant pages in the text. Some important sections would include the following, but you may also double-check the references in the text by using the index [see: Cost of Capital and Target (optimal) Capital Structure, etc.]:
The important Chapter in the text is the one entitled "The Cost of Capital," – with a particular focus on the section entitled “The Weighted Average Cost of Capital” and the section “Four Mistakes to Avoid” at the end of the chapter.
The WACC formula discussed below does not include Preferred Stock. Should your company use PS, be sure to adjust the equation for it, and see the section in the chapter on the Cost of Preferred Stock.
The WACC formula that we use is:
WACC = wdrd(1-T) + wsrs
We need to know how to calculate:
1. rsthe cost of common equity. Use the Security Market Line (SML) – this is why you learn how to calculate a company’s beta and also why you learn how to find the appropriate risk-free rate and market-risk premium. For a review, see the section the text, The CAPM Approach.
2. The weights (wd and ws – note that: wd + ws = 1; so you only have to calculate one of them). We need to calculate the weight of debt and the weight of equity (for the cost of debt, this simply means: what proportion of the firm’s financing is by debt?). There is a lot to say here, simplified as Theory 1, Theory 2 and Practice:
a. Theory 1: Theory says that we should use the target weights along with the market values of both debt and equity (see the Four Mistakes to Avoid). But the market value of debt is typically difficult to calculate, because we need to know the YTM (which is rd) for all of the company’s debt, but we cannot calculate the YTM without having the current prices of the company’s outstanding bonds, and most company’s bonds do not trade (i.e., they will not have up-to-date or current prices – remember how to calculate the price (value) of a bond on your calculators?!). As a result, at least for the group project, we go to Theory 2.
b. Theory 2: Theory also says that we should use the TARGET weights, but this is a management decision, and as “outsiders” we do not have access to the thoughts of the CFO or CEO. So we should look instead to the historical pattern of the use of debt (mix of debt and equity), and this is one reason that you should have about 10 years of financial data.
c. Practice: Since we cannot “work” according to the strict theory of finance, we have to estimate the relevant weights. As a result, we will use the formula:
wd = Book Value of Debt / [Market Value of Equity + Book Value of Debt]
The book value of debt is calculated by adding up ALL of the debt on the balance sheet. This will typically be the sum of Notes Payable, Current Portion of LT Debt and Long-Term Debt.
.
Assignment 1 Chapter 2 Mini Case Financial .docxtrippettjettie
Assignment 1: Chapter 2 Mini Case: “Financial Statement and Cash Flow Analysis”
In the mini case in our textbook we were given an account balance sheet for Jaeden Industries as of December 31, 2010 along with their income statement and balance sheet from the previous year. It also stated that the firm’s dividend payout ratio is 25% and the tax rate is 34%. The firm’s stock price on December 31, 2009, was $ 42.89 and on December 31, 2010, it was $ 56.82. In part A of our assignment it asks us to use the financial statements in the text to determine Jaeden’s free cash flow, liquidity, debt and profitability ratios, and market ratios for year 2010.
Part A
Jaeden’s Free Cash Flow
The measure of free cash flow (FCF) is the amount of cash flow available to investors; the providers of debt and equity capital. It represents the net amount of cash flow remaining after the firm has met all operating needs and has made all required payments on both long- term (fixed) and short- term (current) investments (Graham, Megginson, Smart pg. 34). However, in order to determine the free cash flow you have to obtain the operating cash flow (OCF), which are cash inflows and outflows directly related to the production and sale of products or services.
OCF = [Earnings before interest and taxes (EBIT) × (1 - T)] + Depreciation (T=.34%)
OCF = (42000000-26460000-1621000-800000) x (1 – T) + Depreciation
OCF = 13119000 x (1 - .34) + 800000
OCF = 9458540
Now that we have the OCF we can solve for the FCF
FCF = OCF – Capital Expenditures + Depreciation – Networking Capital
FCF = 9458540 – 2932000 – (4530181-190000-150000)
FCF = 9458540 – 2932000 – 4190181
FCF = 2336359
Jaeden’s free cash flow is 2336359
Jaeden’s Liquidity
Our textbook states that liquidity ratios measure a firm’s ability to satisfy its short-term obligations as they come due. Current ratio and quick ratio are two measures of liquidity. Current Ratio is defined as current assets divided by current liabilities and it is used to measure a firm’s ability to meet short-term obligations. Current assets include cash, marketable securities, accounts receivable, and inventory. Current liabilities include accounts payable, notes payable, and accruals. Quick ratio is somewhat similar except it excludes a certain asset that is, inventory. Inventory turnover provides a measure of how quickly a firm sells its goods (Graham, Megginson, Smart pg. 43). Inventory turnover can be converted into average age turnover simply by dividing the turnover figure by the amount of days in a year.
Current Ratio = Current Assets / Current Liabilities
Current Ratio = (3689000 + 5423000 + 1836000 + 4118000) / (3136000 + 706000 + 500000)
Current Ratio = 15066000 / 4342000
Current Ratio = 3.469829572
Quick Ratio = Current Assets – Inventory / Current Liabilities
Quick Ratio = (3689000 + 5423000 + 1836000) – 4118000 / (3136000 + 706000 + 500000)
Quick Ratio = (10948000 – 4118000) / (3136000 + 706000 + 5000 ...
IB Business and Management (Standard Level)
All material taken from the IB Business and Management Textbook:
"Business and Management", Paul Hoang, IBID Press, Victoria, 2007
Explain the various categories of ratio analysis and provide example.pdfarchanenterprises
Explain the various categories of ratio analysis and provide examples of at least two ratios in
each category. If you were an investor, which category would you be most interested in? Why?
Solution
Part-1
Ratios are used by lenders and business analysts to determine a company\'s financial stability and
standing.It\'s important to understand that financial ratios are time sensitive; they can only show
a picture of a business at a given time. There are five catagories of Financial ratios and those are
as follows :
Part-2 :
There are a large variety of ratios out there, but for an investor using financial ratios which are
broken up into four major categories: profitability ratios, liquidity ratios, solvency ratios and
valuation ratios. As an investor he should consider Profitability ratio because Profitability ratio is
a key piece of information that should be analyzed when you\'re considering investing in a
company. This is because high revenues alone don\'t necessarily translate into dividends for
investors unless a company is able to clear all of its expenses and costs. In general, the higher a
company\'s profit margin, the better, but as with most ratios, it is not enough to look at it in
isolation. It is important to compare it to the company\'s past levels, to the market average and to
its competitors.
Profitability Ratios : The profitability ratios are just what the name implies. They focus on the
firm\'s ability to generate a profit and an adequate return on assets and equity. They measure how
efficiently the firm uses its assets and how effectively it manages its operations and answers
questions like how efficiency his business and it helps to compare with other competitor.
Examples of Proftitablity ratios are Gross profit ratio, Net profit ratio, Operating profit ratio and
Return on investment ratio.
Market Value Ratios : The market value ratios can be calculated for publicly traded companies
only as they relate to stock price. There are many market value ratios, but a few of the most
commonly used are price/earnings (P/E), book value to share value and dividend yield .
LEVERAGE RATIO /Capital Structure ration : The term capital structure refers to the
relationship between various long term forms of financing such as debentures (long term),
preference share capital and equity share capital including reserves and surpluses. Leverage or
capital structure ratios are calculated to test the long term financial position of a firm. Generally
capital gearing ratio is mainly calculated to analyse the leverage or capital structure of the firm.
Example of ratios are total debt ratios, the debt/equity ratio, the long-term debt ratio, the times
interest earned ratio, the fixed charge coverage ratio, and the cash coverage ratio.
Asset Efficiency or Turnover Ratios : The asset efficiency or turnover ratios measure the
efficiency with which the firm uses its assets to produce sales. As a result, it focuses on both the
income statement (sales) and the .
Part 1Halliburton company beta 1.6, Helix energy solutions beta .docxsmile790243
Part 1
Halliburton company beta 1.6, Helix energy solutions beta 1.71, Superior energy services beta 1.69 and Schlumberger limited 1.65
Beta is the extent of a company’s stock's tremor, similar to the general market. By definition, the market, for instance, has a beta of 1.0, and individual stocks are situated by the sum they veer off.
Stocks that change all the more frequently after some time have a beta above 1.0. If a stock moves not decisively the market, the stock's beta is under 1.0. High-beta stocks ought to be progressively risky; notwithstanding, give better yield potential; low-beta stocks present less danger yet also lower returns.
One course for a stock money related authority to consider an opportunity is to part it into two characterizations. The fundamental class is called efficient peril, which is the threat of the entire market declining. The money related crisis in 2008 is an instance of a productive peril event when no proportion of expanding could shield examiners from losing a motivating force in their stock portfolios. Systematic hazard is, in any case, called un-diversifiable risk.
Unsystematic or diversifiable perils are identified with an individual stock. The surprising assertion that Lumber Liquidators (LL) had been selling hardwood flooring with unsafe degrees of formaldehyde in 2015 is an instance of an unsystematic peril that was express to that association. Unsystematic hazards can be, for the most part, directed through expanding.
A beta of 1.0 shows that its worth activity is immovably connected to the industry. A stock that has a beta of 1.0 indicates a valid risk. In any case, the beta estimation can't perceive any unsystematic hazard.
A beta estimation of under 1.0 suggests that the security is theoretically less eccentric than the market, which implies the portfolio is less risky with the stock included than without it. For example, utility stocks consistently have low betas since they will, by and large, move more continuously than grandstand midpoints.
Another factor that is incorporated would be the capital structure of each firm. Firms that have assorted capital structures will have different betas. For example, an association with less commitment financing will have a lower beta than an association with higher commitment financing.
Section 2: Capital Budgeting
IRR and NPV are both used in the evaluation methodology for capital utilization. Net present worth (NPV) limits the flood of expected wages identified with a proposed dare to their present value, which presents a cash surplus or deficiency for the undertaking. Internal rate of return (IRR) figures the evaluated speed of return at which those proportional earnings will achieve a net present estimation of zero. The two capital arranging systems have some similarities and differences listed: Result. The NPV system realizes dollar regard that an errand will convey, while IRR produces the rate return that the endeavor is required to make.
Reason. The.
Company FacebookCalculating the Weighted Average Cost of Capi.docxdonnajames55
Company: Facebook
Calculating the Weighted Average Cost of Capital (WACC)
for your Company
For use in Conjunction with the Firm Valuation Project
First ensure that you have read relevant pages in the text. Some important sections would include the following, but you may also double-check the references in the text by using the index [see: Cost of Capital and Target (optimal) Capital Structure, etc.]:
The important Chapter in the text is the one entitled "The Cost of Capital," – with a particular focus on the section entitled “The Weighted Average Cost of Capital” and the section “Four Mistakes to Avoid” at the end of the chapter.
The WACC formula discussed below does not include Preferred Stock. Should your company use PS, be sure to adjust the equation for it, and see the section in the chapter on the Cost of Preferred Stock.
The WACC formula that we use is:
WACC = wdrd(1-T) + wsrs
We need to know how to calculate:
1. rsthe cost of common equity. Use the Security Market Line (SML) – this is why you learn how to calculate a company’s beta and also why you learn how to find the appropriate risk-free rate and market-risk premium. For a review, see the section the text, The CAPM Approach.
2. The weights (wd and ws – note that: wd + ws = 1; so you only have to calculate one of them). We need to calculate the weight of debt and the weight of equity (for the cost of debt, this simply means: what proportion of the firm’s financing is by debt?). There is a lot to say here, simplified as Theory 1, Theory 2 and Practice:
a. Theory 1: Theory says that we should use the target weights along with the market values of both debt and equity (see the Four Mistakes to Avoid). But the market value of debt is typically difficult to calculate, because we need to know the YTM (which is rd) for all of the company’s debt, but we cannot calculate the YTM without having the current prices of the company’s outstanding bonds, and most company’s bonds do not trade (i.e., they will not have up-to-date or current prices – remember how to calculate the price (value) of a bond on your calculators?!). As a result, at least for the group project, we go to Theory 2.
b. Theory 2: Theory also says that we should use the TARGET weights, but this is a management decision, and as “outsiders” we do not have access to the thoughts of the CFO or CEO. So we should look instead to the historical pattern of the use of debt (mix of debt and equity), and this is one reason that you should have about 10 years of financial data.
c. Practice: Since we cannot “work” according to the strict theory of finance, we have to estimate the relevant weights. As a result, we will use the formula:
wd = Book Value of Debt / [Market Value of Equity + Book Value of Debt]
The book value of debt is calculated by adding up ALL of the debt on the balance sheet. This will typically be the sum of Notes Payable, Current Portion of LT Debt and Long-Term Debt.
.
Assignment 1 Chapter 2 Mini Case Financial .docxtrippettjettie
Assignment 1: Chapter 2 Mini Case: “Financial Statement and Cash Flow Analysis”
In the mini case in our textbook we were given an account balance sheet for Jaeden Industries as of December 31, 2010 along with their income statement and balance sheet from the previous year. It also stated that the firm’s dividend payout ratio is 25% and the tax rate is 34%. The firm’s stock price on December 31, 2009, was $ 42.89 and on December 31, 2010, it was $ 56.82. In part A of our assignment it asks us to use the financial statements in the text to determine Jaeden’s free cash flow, liquidity, debt and profitability ratios, and market ratios for year 2010.
Part A
Jaeden’s Free Cash Flow
The measure of free cash flow (FCF) is the amount of cash flow available to investors; the providers of debt and equity capital. It represents the net amount of cash flow remaining after the firm has met all operating needs and has made all required payments on both long- term (fixed) and short- term (current) investments (Graham, Megginson, Smart pg. 34). However, in order to determine the free cash flow you have to obtain the operating cash flow (OCF), which are cash inflows and outflows directly related to the production and sale of products or services.
OCF = [Earnings before interest and taxes (EBIT) × (1 - T)] + Depreciation (T=.34%)
OCF = (42000000-26460000-1621000-800000) x (1 – T) + Depreciation
OCF = 13119000 x (1 - .34) + 800000
OCF = 9458540
Now that we have the OCF we can solve for the FCF
FCF = OCF – Capital Expenditures + Depreciation – Networking Capital
FCF = 9458540 – 2932000 – (4530181-190000-150000)
FCF = 9458540 – 2932000 – 4190181
FCF = 2336359
Jaeden’s free cash flow is 2336359
Jaeden’s Liquidity
Our textbook states that liquidity ratios measure a firm’s ability to satisfy its short-term obligations as they come due. Current ratio and quick ratio are two measures of liquidity. Current Ratio is defined as current assets divided by current liabilities and it is used to measure a firm’s ability to meet short-term obligations. Current assets include cash, marketable securities, accounts receivable, and inventory. Current liabilities include accounts payable, notes payable, and accruals. Quick ratio is somewhat similar except it excludes a certain asset that is, inventory. Inventory turnover provides a measure of how quickly a firm sells its goods (Graham, Megginson, Smart pg. 43). Inventory turnover can be converted into average age turnover simply by dividing the turnover figure by the amount of days in a year.
Current Ratio = Current Assets / Current Liabilities
Current Ratio = (3689000 + 5423000 + 1836000 + 4118000) / (3136000 + 706000 + 500000)
Current Ratio = 15066000 / 4342000
Current Ratio = 3.469829572
Quick Ratio = Current Assets – Inventory / Current Liabilities
Quick Ratio = (3689000 + 5423000 + 1836000) – 4118000 / (3136000 + 706000 + 500000)
Quick Ratio = (10948000 – 4118000) / (3136000 + 706000 + 5000 ...
IB Business and Management (Standard Level)
All material taken from the IB Business and Management Textbook:
"Business and Management", Paul Hoang, IBID Press, Victoria, 2007
Explain the various categories of ratio analysis and provide example.pdfarchanenterprises
Explain the various categories of ratio analysis and provide examples of at least two ratios in
each category. If you were an investor, which category would you be most interested in? Why?
Solution
Part-1
Ratios are used by lenders and business analysts to determine a company\'s financial stability and
standing.It\'s important to understand that financial ratios are time sensitive; they can only show
a picture of a business at a given time. There are five catagories of Financial ratios and those are
as follows :
Part-2 :
There are a large variety of ratios out there, but for an investor using financial ratios which are
broken up into four major categories: profitability ratios, liquidity ratios, solvency ratios and
valuation ratios. As an investor he should consider Profitability ratio because Profitability ratio is
a key piece of information that should be analyzed when you\'re considering investing in a
company. This is because high revenues alone don\'t necessarily translate into dividends for
investors unless a company is able to clear all of its expenses and costs. In general, the higher a
company\'s profit margin, the better, but as with most ratios, it is not enough to look at it in
isolation. It is important to compare it to the company\'s past levels, to the market average and to
its competitors.
Profitability Ratios : The profitability ratios are just what the name implies. They focus on the
firm\'s ability to generate a profit and an adequate return on assets and equity. They measure how
efficiently the firm uses its assets and how effectively it manages its operations and answers
questions like how efficiency his business and it helps to compare with other competitor.
Examples of Proftitablity ratios are Gross profit ratio, Net profit ratio, Operating profit ratio and
Return on investment ratio.
Market Value Ratios : The market value ratios can be calculated for publicly traded companies
only as they relate to stock price. There are many market value ratios, but a few of the most
commonly used are price/earnings (P/E), book value to share value and dividend yield .
LEVERAGE RATIO /Capital Structure ration : The term capital structure refers to the
relationship between various long term forms of financing such as debentures (long term),
preference share capital and equity share capital including reserves and surpluses. Leverage or
capital structure ratios are calculated to test the long term financial position of a firm. Generally
capital gearing ratio is mainly calculated to analyse the leverage or capital structure of the firm.
Example of ratios are total debt ratios, the debt/equity ratio, the long-term debt ratio, the times
interest earned ratio, the fixed charge coverage ratio, and the cash coverage ratio.
Asset Efficiency or Turnover Ratios : The asset efficiency or turnover ratios measure the
efficiency with which the firm uses its assets to produce sales. As a result, it focuses on both the
income statement (sales) and the .
Part 1Halliburton company beta 1.6, Helix energy solutions beta .docxsmile790243
Part 1
Halliburton company beta 1.6, Helix energy solutions beta 1.71, Superior energy services beta 1.69 and Schlumberger limited 1.65
Beta is the extent of a company’s stock's tremor, similar to the general market. By definition, the market, for instance, has a beta of 1.0, and individual stocks are situated by the sum they veer off.
Stocks that change all the more frequently after some time have a beta above 1.0. If a stock moves not decisively the market, the stock's beta is under 1.0. High-beta stocks ought to be progressively risky; notwithstanding, give better yield potential; low-beta stocks present less danger yet also lower returns.
One course for a stock money related authority to consider an opportunity is to part it into two characterizations. The fundamental class is called efficient peril, which is the threat of the entire market declining. The money related crisis in 2008 is an instance of a productive peril event when no proportion of expanding could shield examiners from losing a motivating force in their stock portfolios. Systematic hazard is, in any case, called un-diversifiable risk.
Unsystematic or diversifiable perils are identified with an individual stock. The surprising assertion that Lumber Liquidators (LL) had been selling hardwood flooring with unsafe degrees of formaldehyde in 2015 is an instance of an unsystematic peril that was express to that association. Unsystematic hazards can be, for the most part, directed through expanding.
A beta of 1.0 shows that its worth activity is immovably connected to the industry. A stock that has a beta of 1.0 indicates a valid risk. In any case, the beta estimation can't perceive any unsystematic hazard.
A beta estimation of under 1.0 suggests that the security is theoretically less eccentric than the market, which implies the portfolio is less risky with the stock included than without it. For example, utility stocks consistently have low betas since they will, by and large, move more continuously than grandstand midpoints.
Another factor that is incorporated would be the capital structure of each firm. Firms that have assorted capital structures will have different betas. For example, an association with less commitment financing will have a lower beta than an association with higher commitment financing.
Section 2: Capital Budgeting
IRR and NPV are both used in the evaluation methodology for capital utilization. Net present worth (NPV) limits the flood of expected wages identified with a proposed dare to their present value, which presents a cash surplus or deficiency for the undertaking. Internal rate of return (IRR) figures the evaluated speed of return at which those proportional earnings will achieve a net present estimation of zero. The two capital arranging systems have some similarities and differences listed: Result. The NPV system realizes dollar regard that an errand will convey, while IRR produces the rate return that the endeavor is required to make.
Reason. The.
The main ideology behind the conception of ERM is to help companie.docxoreo10
The main ideology behind the conception of ERM is to help companies proactively identify, analyze and manage risks and events that have the capability of impacting the business. Developing a collaborative response is crucial is possible when early identification of risk is achieved. Changes in the business environment require sound judgment in anticipating both the consequences of the particular event and the potential likelihood.
The research conducted illustrates that the difficulty is intensified because the company should be innovative and adaptive, a feature that lacks in many corporations. Following the implementation in different companies, the primary challenge posed is locating the respective area in the company where its potentiality is more enhanced. The transition has been implemented from the traditional leadership function to the various levels of operation.
One of the crucial insights obtained from the interaction with companies adopting the ERM system indicates that the change is effective especially if used in a suitable context. The funds in implementing the system may pose a challenge, however, in such a situation, a counter project can be carried out in regards to the nature of the company. So, upon implementation, the ERM program progresses from its initial establishment to a sophisticated program with prolonged use.
ERM is regarded as a complete approach and as a result, leaders can trust the program as a comprehensive approach to risk management. The plan is meant to scratch through a broad range of operational threats in the internal and external environment of the company that could impact its short term and long-term success. In conclusion, the general conclusion is right; it is true to say that ERM has enabled the provision that is crucial in fulfilling and excelling in leadership mandate.
Companies:
1- Oula fuel marketing co
2- Kuwait resort company
http://www.boursakuwait.com.kw/Stock/Financials.aspx?Stk=651&S=INC
ACT553 – FINANCIAL ACOUNTING II
FALL 2016
1. Revenue Recognition
Revenue is the largest item on the income statement and we must assess it on a quantitative and qualitative basis.
_Use horizontal analysis to identify any time trends
_Compare the horizontal analyses of the companies.
_Consider the current economic environment and the company`s competitive landscape. Given that they operate in the same industry, you may expect similar revenue trends.
_Read the management’s discussion and analysis (MD&A) section of the annual reports to learn how the companies’ senior managers explain revenue levels and changes.
2. R&D Activities
Do the companies engage in substantial R&D activities?
_Determine the amount of the expense on the income statement. You may need to look in the footnotes or the MD&A for this information. Is the common-sized amount changing over time? What pattern is detected?
_Read the footnotes and assess the company’s R&D pipeline. What are the major outcomes ...
The following is Investopedia's Financial Ratios Tutorial (Eng), made into a PPTx for easy use where internet services are limited. The information only covers the formulas presented, but not the whole process of usage, nor the file the site provides.
Also, it comes with a translated (Spa) chart of the most common financial ratios used in Mexican accounting.
This content is property of the original authors and I claim no ownership over it. Hopefully, it will serve as a tool for promoting knowledge and internationalization.
All accounting instructionsWeek 2SEC 10K Assignment The Bal.docxnettletondevon
All accounting instructions
Week 2/SEC 10K Assignment The Balance Sheet and Credit Risk Analysis
Credit risk encompasses a company’s ability to meet its obligations as they arise as well as a long-run ability to pay its debt. A company may be profitable but yet face bankruptcy if it is unable to pay its liabilities on time. Companies with large amounts of debt have greater credit risk because of an increased vulnerability to increases in interest rates and declines in profitability.
In this assignment, you will answer questions about your company’s classified balance sheet and conduct a ratio analysis to evaluate the company’s liquidity and solvency. A financial ratio expresses the relationship of one amount to another and enables analysts to quickly assess a company’s financial strength, profitability, or other aspects of its financial activities.
Requirements
In the first section, define liabilities and describe how liabilities are classified as current and long-term (give examples). Also define liquidity and solvency as it relates to the company’s debt-paying ability. What does your company call its ‘Balance Sheet’?
In the second section, define working capital, the current ratio, and the debt ratio, three frequently used ratios to assess credit risk (described in LEO’s online text or any principles of accounting text). Identify which are a measure of liquidity and which are a measure of solvency. Indicate how the ratio is interpreted. Is an increasing or decreasing ratio a favorable trend? Conduct online research to provide a ratio level (or range) that is considered acceptable for the current and debt ratio (technically, working capital is not a ratio so an average isn’t meaningful). If you can find information on acceptable ranges for the current ratio and debt ratio for your company’s industry, include that in your discussion. Numbers and ratios are more meaningful when considered relative to a benchmark. Benchmarks can be the company’s past performance, a similar company’s performance, an industry average, or a rule-of- thumb. For instance, for decades, a current ratio of 2 to 1 was considered satisfactory.
In the third section, prepare a table giving the dollar amount of current and long-term liabilities for the most recent year and the previous year. Either in the same table or a new table report the results of a ratio analysis. Calculate working capital, current ratio, and the debt ratio for the current year and the past year (show your calculations). Indicate whether the ratios are improving or deteriorating. If you find a relevant benchmark (industry average or rule-of-thumb), comment on your company’s performance relative to the benchmark.
Finally, in the fourth section briefly summarize results of any or all of the following: 1) an internet search for articles on recent events that may affect your company’s debt paying ability, 2) an internet search for financial analysts’ assessment of the company’s credit risk and or.
Module 2 - BackgroundPrinciples of AccountingConsider that acc.docxroushhsiu
Module 2 - Background
Principles of Accounting
Consider that accounting terms are not always obvious in their meanings. If you are learning terminology or need to clarify a vocabulary item, a good reference for accounting terms is:
New York Society of Certified Public Accountants (2017) Accounting Terminology Guide - Over 1,000 Accounting and Finance Terms. Retrieved from: http://www.nysscpa.org/professional-resources/accounting-terminology-guide#sthash.UMS3kGjf.dpbs
For a glossary of general business terms:
Berry, T. (n.d.) Business terms glossary. BPlans. Retrieved from http://articles.bplans.com/business-term-glossary/
The Annual Report
The annual report is the way a firm summarizes its performance over the past year and where it sets a vision for the future. Publicly held companies (traded on the stock exchange) must prepare annual reports, and annual reports are usually public documents. Investors and the general public use annual reports as sources of information about the financial health of a company. We will be learning about reading annual reports to learn general accounting principles in the context of learning about a company and the industry in which it operates. Although we will not discuss all sections of an annual report, we will touch on the sections that have the most relevance to providing the HRM professional with the most helpful insights into the operations of the firm.
Front matter
This is largely text material that sets the stage for the quantitative data that follows.
The Opening letter to the Shareholders
The opening letter is generally the first section of the annual report and is a statement by the chairman of the board. The letter sets the stage for how the firm’s management wants you to view the report and the previous year’s performance, and so in this sense sets the “strategic intent” of the report. A careful reading of the letter can give context to the numbers that follow by giving you clues of what to look for in terms of goals met – or problems that prevented goal attainment. The firm may be on the verge of explosive growth, or a meltdown.
Sales and Marketing
This section covers the company’s product/service line. Typically, it also contains descriptions of key departments or groups and the work they do. By reading this section, you can deduce what products or services are most important to the firm and which divisions are seen as most critical to its success. This section can also give you clues as to what the future may hold.
The Auditor’s Letter
You might be tempted to skip this section, because it probably seems superfluous (like the terms and conditions acknowledgment on software updates. You know you don’t read those!). However, you should know that by law, a publicly traded firm needs to be independently audited every year. This is to protect the investor, and the auditors will state whether or not the data the company presents is accurate and if they have sufficient controls in place to prevent frau ...
The following pairs of co-morbid disorders and a write 700 words .docxssuser454af01
The following pairs of co-morbid disorders and a write 700 words
based on your research:
Depression and substance abuse
Address
the following:
Discuss the general concept of co-morbidity.
Format
your paper consistent with APA guidelines.
.
The following is an access verification technique, listing several f.docxssuser454af01
The following is an access verification technique, listing several files and the access allowed for a single use.
Identify the control technique used here and for each,
explain the type of access allowed
.
a. File_1 R-E-
b. File_12 RWE
c. File_13 RW--
d. File_14 --E-
2.
. The following is an access verification technique, listing several users and the access allowed for File_13.
Identify the control technique used here and for each and
explain the type of access allowed.
Finally, describe who is included in the WORLD category.
a. User_10 --E-
b. User_14 RWED
c. User_17 RWE-
d. WORLD R---
.
The following discussion board post has to have a response. Please r.docxssuser454af01
The following discussion board post has to have a response. Please read the post and respond back according to the instructions attached below. Make sure to respond as instructed. Check attachment for response instruction and respond accordingly.
The instructions for the response to post is attached and highlighted.
The due date is Tuesday 5/10/2021 by 11:59 a.m. NO LATE WORK WILL BE ACCEPTED!
.
The following information has been taken from the ledger accounts of.docxssuser454af01
The following information has been taken from the ledger accounts of Isaac Stern Corporation
Total Income since incorporation$317,000
Total Cash Dividends pai d60,000
Total value of stock dividends distributed30,000
Gains on treasury stock transactions18,000
Unamortized discount of bonds payable32,000
Directions: Determine the current balance of retained earnings
.
The following attach files are my History Homewrok and Lecture Power.docxssuser454af01
The following attach files are my History Homewrok and Lecture Power Point. Please answer those questions by your own words and read the instructions carefully beofer you start writing.
Course Information:
In this course we will survey the history of technological developments from the Renaissance to the current day. We will focus on a series of technological objects—machines, tools, and systems—considering them in their broader historical (social, cultural, and political) contexts. Organized chronologically we will trace this history beginning with Leonardo Da Vinci and ending with the International Space Station. This is not, however, a teleological assessment, which assumes a progressive improvement of technology—each age has merits in its own rights.
.
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The main ideology behind the conception of ERM is to help companie.docxoreo10
The main ideology behind the conception of ERM is to help companies proactively identify, analyze and manage risks and events that have the capability of impacting the business. Developing a collaborative response is crucial is possible when early identification of risk is achieved. Changes in the business environment require sound judgment in anticipating both the consequences of the particular event and the potential likelihood.
The research conducted illustrates that the difficulty is intensified because the company should be innovative and adaptive, a feature that lacks in many corporations. Following the implementation in different companies, the primary challenge posed is locating the respective area in the company where its potentiality is more enhanced. The transition has been implemented from the traditional leadership function to the various levels of operation.
One of the crucial insights obtained from the interaction with companies adopting the ERM system indicates that the change is effective especially if used in a suitable context. The funds in implementing the system may pose a challenge, however, in such a situation, a counter project can be carried out in regards to the nature of the company. So, upon implementation, the ERM program progresses from its initial establishment to a sophisticated program with prolonged use.
ERM is regarded as a complete approach and as a result, leaders can trust the program as a comprehensive approach to risk management. The plan is meant to scratch through a broad range of operational threats in the internal and external environment of the company that could impact its short term and long-term success. In conclusion, the general conclusion is right; it is true to say that ERM has enabled the provision that is crucial in fulfilling and excelling in leadership mandate.
Companies:
1- Oula fuel marketing co
2- Kuwait resort company
http://www.boursakuwait.com.kw/Stock/Financials.aspx?Stk=651&S=INC
ACT553 – FINANCIAL ACOUNTING II
FALL 2016
1. Revenue Recognition
Revenue is the largest item on the income statement and we must assess it on a quantitative and qualitative basis.
_Use horizontal analysis to identify any time trends
_Compare the horizontal analyses of the companies.
_Consider the current economic environment and the company`s competitive landscape. Given that they operate in the same industry, you may expect similar revenue trends.
_Read the management’s discussion and analysis (MD&A) section of the annual reports to learn how the companies’ senior managers explain revenue levels and changes.
2. R&D Activities
Do the companies engage in substantial R&D activities?
_Determine the amount of the expense on the income statement. You may need to look in the footnotes or the MD&A for this information. Is the common-sized amount changing over time? What pattern is detected?
_Read the footnotes and assess the company’s R&D pipeline. What are the major outcomes ...
The following is Investopedia's Financial Ratios Tutorial (Eng), made into a PPTx for easy use where internet services are limited. The information only covers the formulas presented, but not the whole process of usage, nor the file the site provides.
Also, it comes with a translated (Spa) chart of the most common financial ratios used in Mexican accounting.
This content is property of the original authors and I claim no ownership over it. Hopefully, it will serve as a tool for promoting knowledge and internationalization.
All accounting instructionsWeek 2SEC 10K Assignment The Bal.docxnettletondevon
All accounting instructions
Week 2/SEC 10K Assignment The Balance Sheet and Credit Risk Analysis
Credit risk encompasses a company’s ability to meet its obligations as they arise as well as a long-run ability to pay its debt. A company may be profitable but yet face bankruptcy if it is unable to pay its liabilities on time. Companies with large amounts of debt have greater credit risk because of an increased vulnerability to increases in interest rates and declines in profitability.
In this assignment, you will answer questions about your company’s classified balance sheet and conduct a ratio analysis to evaluate the company’s liquidity and solvency. A financial ratio expresses the relationship of one amount to another and enables analysts to quickly assess a company’s financial strength, profitability, or other aspects of its financial activities.
Requirements
In the first section, define liabilities and describe how liabilities are classified as current and long-term (give examples). Also define liquidity and solvency as it relates to the company’s debt-paying ability. What does your company call its ‘Balance Sheet’?
In the second section, define working capital, the current ratio, and the debt ratio, three frequently used ratios to assess credit risk (described in LEO’s online text or any principles of accounting text). Identify which are a measure of liquidity and which are a measure of solvency. Indicate how the ratio is interpreted. Is an increasing or decreasing ratio a favorable trend? Conduct online research to provide a ratio level (or range) that is considered acceptable for the current and debt ratio (technically, working capital is not a ratio so an average isn’t meaningful). If you can find information on acceptable ranges for the current ratio and debt ratio for your company’s industry, include that in your discussion. Numbers and ratios are more meaningful when considered relative to a benchmark. Benchmarks can be the company’s past performance, a similar company’s performance, an industry average, or a rule-of- thumb. For instance, for decades, a current ratio of 2 to 1 was considered satisfactory.
In the third section, prepare a table giving the dollar amount of current and long-term liabilities for the most recent year and the previous year. Either in the same table or a new table report the results of a ratio analysis. Calculate working capital, current ratio, and the debt ratio for the current year and the past year (show your calculations). Indicate whether the ratios are improving or deteriorating. If you find a relevant benchmark (industry average or rule-of-thumb), comment on your company’s performance relative to the benchmark.
Finally, in the fourth section briefly summarize results of any or all of the following: 1) an internet search for articles on recent events that may affect your company’s debt paying ability, 2) an internet search for financial analysts’ assessment of the company’s credit risk and or.
Module 2 - BackgroundPrinciples of AccountingConsider that acc.docxroushhsiu
Module 2 - Background
Principles of Accounting
Consider that accounting terms are not always obvious in their meanings. If you are learning terminology or need to clarify a vocabulary item, a good reference for accounting terms is:
New York Society of Certified Public Accountants (2017) Accounting Terminology Guide - Over 1,000 Accounting and Finance Terms. Retrieved from: http://www.nysscpa.org/professional-resources/accounting-terminology-guide#sthash.UMS3kGjf.dpbs
For a glossary of general business terms:
Berry, T. (n.d.) Business terms glossary. BPlans. Retrieved from http://articles.bplans.com/business-term-glossary/
The Annual Report
The annual report is the way a firm summarizes its performance over the past year and where it sets a vision for the future. Publicly held companies (traded on the stock exchange) must prepare annual reports, and annual reports are usually public documents. Investors and the general public use annual reports as sources of information about the financial health of a company. We will be learning about reading annual reports to learn general accounting principles in the context of learning about a company and the industry in which it operates. Although we will not discuss all sections of an annual report, we will touch on the sections that have the most relevance to providing the HRM professional with the most helpful insights into the operations of the firm.
Front matter
This is largely text material that sets the stage for the quantitative data that follows.
The Opening letter to the Shareholders
The opening letter is generally the first section of the annual report and is a statement by the chairman of the board. The letter sets the stage for how the firm’s management wants you to view the report and the previous year’s performance, and so in this sense sets the “strategic intent” of the report. A careful reading of the letter can give context to the numbers that follow by giving you clues of what to look for in terms of goals met – or problems that prevented goal attainment. The firm may be on the verge of explosive growth, or a meltdown.
Sales and Marketing
This section covers the company’s product/service line. Typically, it also contains descriptions of key departments or groups and the work they do. By reading this section, you can deduce what products or services are most important to the firm and which divisions are seen as most critical to its success. This section can also give you clues as to what the future may hold.
The Auditor’s Letter
You might be tempted to skip this section, because it probably seems superfluous (like the terms and conditions acknowledgment on software updates. You know you don’t read those!). However, you should know that by law, a publicly traded firm needs to be independently audited every year. This is to protect the investor, and the auditors will state whether or not the data the company presents is accurate and if they have sufficient controls in place to prevent frau ...
The following pairs of co-morbid disorders and a write 700 words .docxssuser454af01
The following pairs of co-morbid disorders and a write 700 words
based on your research:
Depression and substance abuse
Address
the following:
Discuss the general concept of co-morbidity.
Format
your paper consistent with APA guidelines.
.
The following is an access verification technique, listing several f.docxssuser454af01
The following is an access verification technique, listing several files and the access allowed for a single use.
Identify the control technique used here and for each,
explain the type of access allowed
.
a. File_1 R-E-
b. File_12 RWE
c. File_13 RW--
d. File_14 --E-
2.
. The following is an access verification technique, listing several users and the access allowed for File_13.
Identify the control technique used here and for each and
explain the type of access allowed.
Finally, describe who is included in the WORLD category.
a. User_10 --E-
b. User_14 RWED
c. User_17 RWE-
d. WORLD R---
.
The following discussion board post has to have a response. Please r.docxssuser454af01
The following discussion board post has to have a response. Please read the post and respond back according to the instructions attached below. Make sure to respond as instructed. Check attachment for response instruction and respond accordingly.
The instructions for the response to post is attached and highlighted.
The due date is Tuesday 5/10/2021 by 11:59 a.m. NO LATE WORK WILL BE ACCEPTED!
.
The following information has been taken from the ledger accounts of.docxssuser454af01
The following information has been taken from the ledger accounts of Isaac Stern Corporation
Total Income since incorporation$317,000
Total Cash Dividends pai d60,000
Total value of stock dividends distributed30,000
Gains on treasury stock transactions18,000
Unamortized discount of bonds payable32,000
Directions: Determine the current balance of retained earnings
.
The following attach files are my History Homewrok and Lecture Power.docxssuser454af01
The following attach files are my History Homewrok and Lecture Power Point. Please answer those questions by your own words and read the instructions carefully beofer you start writing.
Course Information:
In this course we will survey the history of technological developments from the Renaissance to the current day. We will focus on a series of technological objects—machines, tools, and systems—considering them in their broader historical (social, cultural, and political) contexts. Organized chronologically we will trace this history beginning with Leonardo Da Vinci and ending with the International Space Station. This is not, however, a teleological assessment, which assumes a progressive improvement of technology—each age has merits in its own rights.
.
The following is adapted from the work of Paul Martin Lester.In .docxssuser454af01
The following is adapted from the work of Paul Martin Lester.
In order to find meaning from a visual message, you need to learn a systematic way for studying images.
1.
Make an inventory list of every element in the image,
2.
Note the lighting used in the image,
3.
Note any eye contact by subjects in the image,
4.
Note the visual cues of color, form, depth, and movement,
5.
Note how the gestalt laws apply toward the composition of picture,
6.
Note any semiotic signs that are a part of the image's content, and
When you've gone through the six steps noted above, it's time to apply the six perspectives for visual analysis to the piece. Each perspective is noted below.
Personal Perspective - Gut Reaction
Rick Williams' Omniphasism (all in balance) or Personal Impact Analysis
1.
What is the picture's story?
2.
List primary words.
3.
List associative words.
4.
Select most significant associative words.
5.
Pair up primary & most significant associative words.
6.
Relate word pairs with your own feelings.
7.
Relate any inner symbolism.
8.
Write a brief story concerning personal insights.
Historical Perspective - The image's place in history
When do you think the image was made?
Is there a specific style that the image imitates?
Technical Perspective - Consider the process decisions
How was the image produced?
What techniques were employed?
Is the image of good quality?
Ethical Perspective - Moral Responsibility
Was the image maker socially responsible?
Has any person's rights been violated?
Are the needs of viewers met?
Is the picture aesthetically appealing?
Do the picture choices reflect moderation?
Is the image maker empathetic with the subject?
Can all the image choices be justified?
Does the visual message cause unjustified harm?
Cultural Perspective - Societal Impact
What is the story and the symbolism involved with the elements in the visual message?
What do they say about current cultural values?
Critical Perspective - Reasoned Opinion
What do I think of this image now that I've spent so much time looking and studying it?
Project Overview:
This week, you were introduced to six analytical perspectives for analyzing media. These perspectives form the foundation for your Media Analysis Project (MAP). Over the next three weeks, you will analyze a visual work from any media (print, film, television, Internet), of your own choosing.
Due Date:
June 5
Time Line:
·
Topic Assignment (Listed under Paper Topic)
·
June 5 Thesis and Outline (Listed in appropriate headings below)
·
June 5 Final Paper
NOTE: Thesis and Outline, and Final Paper are two separate documents.
Requirements:
Your analysis must encompass all six perspectives. This will be a detailed analysis consisting of 6-8 written pages. You must also use four credible academic sources in addition to the media itself. All sources must be cited in-text as well as on a reference page using standard APA format. Information on using .
The following article is related to deterring employee fraud within .docxssuser454af01
The following article is related to deterring employee fraud within organizations and answers some related questions. After reading the case, answer the following questions:
Read the article the following article:
Wells, J. T. (2004, December). Small business, big losses.
Journal of Accountancy,
198
(6), 42-47. Retrieved from Business Source Complete database.
Section:FRAUD
Audits and hotlines stack up as the bestcrime busters in a new ACFE study.
Occupational fraud has become--at least so far--the crime of the 21st century. It is a widespread phenomenon that affects practically every organization. The frauds in the 2004 Report to the Nation on Occupational Fraud and Abuse, from the Association of Certified Fraud Examiners, caused over $761 million in total losses, with a disproportionate percentage committed against small businesses--almost half of the frauds in the study took place in businesses with fewer than 100 employees. Not surprisingly such businesses are less likely to be audited or employ antifraud measures than the larger ones.
Several broad conclusions can be drawn from the 2004 report. First, though the losses have been stable over the years, the fact that in one year alone they are approaching $660 billion is cause for concern. Dishonest executives and employees are plying essentially the same schemes with the same results. Second, although large financial statement frauds receive the most attention, they are relatively uncommon compared to asset misappropriations and corruption. Third, small businesses remain the most vulnerable to occupational fraud because of three factors: They are the least likely to have an audit, a hotline or adequate internal controls. Fourth, audits--both internal and external--although excellent prevention devices are not the most effective means of detecting frauds. Fifth, hotlines and other reporting mechanisms are a vital part of any organization's prevention efforts but should go beyond employees to vendors and customers, too. Finally, occupational fraud cannot be eliminated but organizations that use both hotlines and auditors can greatly reduce these costly crimes.
Occupational fraud schemes can be as simple as pilferage of company supplies or as complex as sophisticated financial statement frauds. This article summarizes some of the key findings of certified fraud examiners (CFEs) in cases they investigated. Internal and external auditors and CPAs advising small business clients will learn of the most effective antifraud measures.
MEASURING THE COST OF FRAUD
Determining the true cost of occupational fraud is an impossible task. Because fraud is a crime based on concealment, organizations often do not know when they are being victimized. Many frauds never are detected or are caught only after they have gone on for several years. Many of those are never reported or prosecuted. In fact, there is no agency or organization that is specifically charged with gathering comprehensive fraud-relat.
The Five stages of ChangeBy Thursday, June 25, 2015, respond to .docxssuser454af01
The Five stages of Change
By Thursday, June 25, 2015, respond to the discussion.
Discussion Question
Anthony is a 27 year old heterosexual Caucasian male. He was arrested 2 weeks ago for his second DWI and is facing a license suspension. He works as a delivery driver for a local store and after disclosing the arrest to his employer, as well as the consequences including loss of his license, he was terminated.
Anthony lives with his girlfriend of 3 years and their 2 year old son. Anthony’s drinking behavior has increased to consumption of a case of beer on Saturday and Sunday evenings each week. He consumes several beers after work during the week “to maintain.” He has also been using methamphetamines, specifically “crystal meth” several times weekly. Anthony’s girlfriend ended their relationship as a result of his increasing substance use and ongoing difficulties. Anthony feels depressed and anxious about his current life situation, especially now that he realizes that he has no job and may be homeless because of his substance use. He is also feeling down about the loss of his relationship. He researched a few outpatient treatment programs to help him stop using both alcohol and methamphetamines, but is ambivalent about entering treatment. Anthony has considered the need to stop using substances to improve his life and relationships with significant others, though fears that he will lose his friends and miss partying with them if he stops. He also fears what life will be like without the comfort of getting high.
Consider and discuss the 5 stages of change. Based upon the information provided discuss what stage Anthony is in, and provide a rationale for your decision. Next, discuss the other stages of change and what indicators we might see as Anthony progresses on through these stages. Your posting must be a minimum of 500 words.
.
The first step in understanding the behaviors that are associated wi.docxssuser454af01
The first step in understanding the behaviors that are associated with mental disorders is to be able to differentiate the potential symptoms of a mental disorder from the everyday fluctuations or behaviors that we observe. Read the following brief case histories.
Case Study 1:
Bob is a very intelligent, 25-year-old member of a religious organization based on Buddhism. Bob’s working for this organization has caused considerable conflict between him and his parents, who are devout Baptists. Recently, Bob has experienced acute spells of nausea and fatigue that have prevented him from working and have forced him to return home to live with his parents. Various medical tests are being conducted, but as yet, no physical causes for his problems have been found.
Case Study 2:
Mary is a 30-year-old musician who is very dedicated and successful in her work as a teacher in a local high school and as a part-time member of local musical groups. Since her marriage five years ago, which ended in divorce after six months, she has dated very few men. She often worries about her time running out for establishing a good relationship with a man, getting married, and raising a family. Her friends tell her she gets way too anxious around men, and, in general, she needs to relax a little.
Case Study 3:
Jim was vice-president of the freshmen class at a local college and played on the school’s football team. Later that year, he dropped out of these activities and gradually became more and more withdrawn from friends and family. Neglecting to shave and shower, he began to look dirty and unhealthy. He spent most of his time alone in his room and sometimes complained to his parents that he heard voices in the curtains and in the closet. In his sophomore year, he dropped out of school entirely. With increasing anxiety and agitation, he began to worry that the Nazis were plotting to kill his family and kidnap him.
Case Study 4:
Larry, a 37-year-old gay man, has lived for three years with his partner, whom he met in graduate school. Larry works as a psychologist in a large hospital. Although competent in his work, he often feels strained by the pressures of his demanding position. An added source of tension on the job is his not being out with his co-workers, and, thus, he is not able to confide in anyone or talk about his private life. Most of his leisure activities are with good friends who are also part of the local gay community.
For each case, identify the individual's behaviors that seem to be problematic for the patient.
For each case study, explain from the biological, psychological, or socio-cultural perspective your decision-making process for identifying the behaviors that may or may not have been associated with the symptoms of a mental disorder.
Based on your course and text readings, provide an explanation why you would consider some of these cases to exhibit behaviors that may be associated with problems that occur in everyday life, while others could be as.
The first one is due Sep 24 at 1100AMthe French-born Mexican jo.docxssuser454af01
The first one is due Sep 24 at 11:00AM
the French-born Mexican journalist and author, Elena Poniatowska, will give a
public lecture
on the topic "
We Can All Be Writers" at
ASU
.
To receive the extra credit, you need to
attend the entire event and submits a short rhetorical analysis
(250 words):
identify one thing the speaker did well, and one thing she did not do well, in anticipating and reaching her target audience
https://ihr.asu.edu/news-events/events/we-can-all-be-writers-lecture-elena-poniatowska
___________________________________________________________________________
The second one is due Sept 25 at 11:00AM
the fiction writer and poet, Matt Bell, will
read from and discuss his work
at ASU
.
Anybody who
attends the entire event and submits a short report
(250 words)
and a personal reflection
(what did you learn? what was surprising? was there something you could relate to your
personal experience or writing?
- 500 words)
http://english.clas.asu.edu/mfareadingseries
.
The first part is a direct quote, copied word for word. Includ.docxssuser454af01
The
first part
is a
direct quote, copied word for word. Include the author's last name and the page number of the quote in parantheses. MLA format.
The
second part
of the journal entry, is
one paragraph that explains why you found the passage to be important
.
.
The final research paper should be no less than 15 pages and in APA .docxssuser454af01
The final research paper should be no less than 15 pages and in APA format. The 15 pages does not include the references/bibliography pages. You should also include visuals such as charts, pictures, or other media visuals to support and compliment your study. All papers will be submitted through eCourse and a link will be provided for submission
.
The first one Description Pick a physical activity. Somethi.docxssuser454af01
The first one
Description: Pick a
physical activity
. Something you do all the time, or something you’ve never done before: bike riding, running, swimming, hiking, golf, playing twister, roller skating, soccer, basketball, etc. Now go and spend at least twenty minutes participating in this activity. Really do it. Engage. Explore and experience it. Pay attention to every part of your body and mind as you play/do the activity. Even if you’ve done it all your life, engage with every nuance of the activity. What do your muscles do and feel like when doing the activity? What is challenging? What is smooth and easy? What sounds to you experience? smells? Tastes? Sights? Sensations? What about your mind? Where do your thoughts go as you perform the activity? Really pay attention and discover the experience of the activity. Perform it for at least twenty minutes, mindfully paying attention to every part of the experience. Experience and notice the details. Now go home. And write about what you experienced. Detail it. Tell me about what was hard, easy, unusual, fun, new? What did you feel, taste, smell, hear, see? Take me through it beat by beat, moment by moment, nuance by nuance.
The second one
Description: Go to a busy café or diner, or some other eatery, where you can sit near TWO other people, engaged in a conversation, a dynamic interesting conversation with tenstion… where something is happening between the two people… EAVES DROP on conversations – without being obvious. Find one that has something interesting going on. Anticipate spending at least 20-30 minutes listening in to this conversation.
From this conversation, listen carefully, pay attention to what is being said, what conflict is arising, what is expressed and revealed through the language. NOW, also pay attention to the people involved. What do they look like? What is their body language? Pay attention to all the details. Do not write anything at the busy café or diner. Just listen to what is said. Watch. Pay attention to all the details.
At a later time (when you get back home)
write a letter as if you are one of the people you observed in the café. Write the letter addressing the person that they were at the café with. This can be a love letter, a complaint, an email, an apology, an explanation, etc… For this exercise to work, you must have 1) chosen a conversation to listen to where something was HAPPENING and 2) you must really have spent the time, listening in on a conversation and paying attention to the dramatic tension… something between the two people must have been witnessed, heard, experienced, by YOU the writer. If not this letter will be flat, uninteresting, and lacking conflict. Write about something you heard or observed happening between the two people, but write about it as if you are one of the people in the conversation to the other. Write about some inherent need, conflict, obstacles. The letter can be a complaint, an apology, a .
The first column suggests traditional familyschool relationships an.docxssuser454af01
The first column suggests traditional family/school relationships and the second identifies a more collaborative approach. Provide an example of a situation (attendance, behavior problems, academic difficulties) that could arise at school and suggest how this issue may be resolved with a collaborative approach. Respond to at least two of your classmates’ postings.
.
The first president that I actually remembered was Jimmy Carter. .docxssuser454af01
The first president that I actually remembered was Jimmy Carter. I do remember as a child Ford being mentioned, but I was certainly not engaged in his presidency. However, I remember Reagan quite well. He came to office after a major financial down turn and his policies did seem to improve things immediately. Some have said that his actions of borrowing money were a hindrance to the future. Do you feel that Reganomics was beneficial to future generations or did he just borrow from the future in order to benefit his present circumstance? Did this set precedence for future presidents to take the nation into debt in order to help their political careers? I look forward to your thoughts?
.
The final project for this course is the creation of a conceptual mo.docxssuser454af01
The final project for this course is the creation of a conceptual model for an integrated afterschool childhood prevention, education, or intervention program (Boys and Girls Club, for example). The program serves a wide range of age groups (ages 4 through 17) and demographic backgrounds. Students should design a program that can appropriately address the needs of the various learners. This final project should include a program foundation, program description, research proposal, and self-reflection.
The final product represents an authentic demonstration of competency because it requires students to apply classic theory in order to compose an original program based on advanced developmental principles. The project is divided into
four milestones
, which will be submitted at various points throughout the course to scaffold learning and ensure quality final submissions. These milestones will be submitted in
Modules Three, Five, Seven, and Ten.
Main Elements
1.
Program Foundation:
a narrative/essay format that will describe the main concept of the program (prevention, education, intervention) and if the program will focus on a specific topic (math, English, drugs, bullying, coping skills for stress or anxiety, peer pressure, or your choice). This foundational narrative will provide citations that link the program concept to at least two of the classical theories presented in this course (Montessori, Piaget, Vygotsky, Bandura, Bronfenbrenner). (approximately 3–4 pages)
·
What type of program will be the focus of this project? Will it be a prevention program to stop kids from using alcohol and drugs? To try and prevent bullying? Will the program be an educational model, for example, a program focused on improving educational outcomes like math, critical thinking, problem solving, science, language skills, or other? Will the program be an intervention model or a program that targets kids for problematic behaviors like truancy, acting out in class, running away, vandalism, minor theft, or underage possession of alcohol or substances?
·
Consider the critical tasks of development as laid out by the chosen theory that may help organize the approaches utilized for each age group.
2.
Program Description
: This section will provide specific descriptions of the elements (tasks, materials, activities) for the each developmental level spanning the age ranges from 4 through 17. These levels should be consistent with at least one of the two classical theories proposed in your program foundation narrative. (approximately 3–4 pages)
·
In what setting will this program be offered, for example, school setting, community center, treatment center, or a faith-based organization?
·
How will your topic differ across each developmental level?
·
How will you describe the activities, materials, and tasks that will take place in the program for each age range?
·
Are the age ranges consistent with at least one of the classic theories employed to guide this.
The finance department of a large corporation has evaluated a possib.docxssuser454af01
The finance department of a large corporation has evaluated a possible capital project using the NPV method, the Payback Method, and the IRR method. The analysts are puzzled, since the NPV indicated rejection, but the IRR and Payback methods both indicated acceptance. Explain why this conflicting situation might occur and what conclusions the analyst should accept, indicating the shortcomings and the advantages of each method. Assuming the data is correct, which method will most likely provide the most accurate decisions and why?
.
The Final Paper must have depth of scholarship, originality, theoret.docxssuser454af01
The Final Paper must have depth of scholarship, originality, theoretical and conceptual framework, clarity and logic in its presentation and adhere to grammar guidelines. You will select a topic for your Final Paper related to the Future of Managed Health Care Delivery Systems, which will be submitted to your instructor for approval during Week Two. The 10-15 page paper (excluding title and reference pages) must follow APA guidelines for written assignments and contain eight to ten scholarly and/ or peer-reviewed sources, excluding the course textbook.
Your paper must address the following bolded topics, which should be titled appropriately in your paper:
Include an
Abstract
which is a synopsis of the overall paper.
Managed Health Care Quality
should address such factors as whether or not patient health care needs and even preferences are being met; the care is right for the illness, care is timely, and unnecessary test and procedures are not ordered.
Provider Contracting
is when doctors and health care practitioners have a contract agreement through a third party payer to accept a specified payment for services provided to patients.
Cost Containment
deals with managing the costs of doing business within a specified budget while restraining expenditures to meet a specified financial target.
Effects on Medicare and Medicaid
in managed health care appear to be moving in a direction where both types of recipients will be enrolled in some type of managed health care plan in the near future.
The Future Role of Government Regulations
, to include ERISA and HIPAA health care policies.
Include
Three Recommendations
each, related to quality and change in Medicare and Medicaid managed health care plans.
Writing the Final Paper
Must be ten- to fifteen double-spaced pages in length and formatted according to APA style as outlined in the Ashford Writing Center.
Must have a cover page that includes:
Title of paper
Student’s name
Course name and number
Instructor’s name
Date submitted
Must include an introductory paragraph with a succinct thesis statement.
Must address the topic of the paper with critical thought.
Must end with a conclusion that reaffirms your thesis.
Must use at least eight scholarly and /or peer-reviewed sources, published within the last five years, including a minimum of three from the Ashford University Online Library.
Must document all sources in APA style, as outlined in the Ashford Writing Center.
Must include a separate reference page, formatted according to APA style as outlined in the Ashford Writing Center.
.
The Final exam primarily covers the areas of the hydrosphere, the bi.docxssuser454af01
The Final exam primarily covers the areas of the hydrosphere, the biosphere and the lithosphere. As in the Midterm, special attention should be paid to the lecture notes and the PowerPoint files, as well as the Discussion Boards. These sections are dependent on the text and the laboratory exercises, but the discussions and the lecture notes are more conducive to explanation and understanding with a essay-driven format. Additionally, the animated PowerPoints are good at achieving an understanding of processes that are in motion, especially when looking at the lithosphere, giving them more of a 3-dimensional quality.
For this final essay exam you are required to answer all five (5) of the questions. Although there is no set word limit for these essay questions, you will be graded on your knowledge of the material and the detail with which you write your answers. You should take care to cite your sources in APA format and provide full references in a Works Cited list.
Describe the paths of water through the hydrologic cycle. Explain the processes and the energy gains and losses involved in the changes of water between its 3 states. Operationally, we often most concerned with water does when it reaches the solid earth, both on the surface and in the sub-surface. Explain the relationship between the saturated zone, the water table, a ground water well and the cone of depression, all within the sub-surface.
The food chain is a valuable concept in biogeography. Give an example of a specific food chain, labeling the various levels of the food chain. After looking at characteristics of food chains, explain how a geographer’s approach to the study of organisms might be different than biologist’s study of organisms; what would each try to emphasize more than the other? What exactly is a biome? Compare/contrast the concept of the biome with that of the zoogeographic region. Compare/contrast the floral characteristics of 2 of the following biomes: Desert, Tundra, Midlatitude Grassland and Boreal Forest.
Theorize the difference in soil development in adjoining soils developed on forested, sloped area versus a grassed flat area. What are the soil-forming factors? Explain the importance of the nature of the parent material to soil formation and type. Then, cite at least 2 examples in which the influence of parent materials might be outweighed by other soil-forming factors. Explain the “struggle” between the internal and external processes in shaping the Earth’s surface. What are the different ways that the surface of the Earth is changed over time?
Describe the general sequence of events in continental drift since the time of 5 separate continents 450 million years ago. What is the difference between the older continental drift theory by Wegener and the more recent plate tectonic theory? Plate tectonics theory explains many seemingly unrelated phenomena. Explain how the patterns of volcanoes and earthquakes related to plate tectonics..
The Final Paper must be 8 pages (not including title and reference p.docxssuser454af01
The Final Paper must be 8 pages (not including title and reference pages) and should demonstrate an understanding of the reading assignments, class discussions, your own research, and the application of new knowledge. It must include citations and references for six to eight sources; one may be the text.
Micozzi, M. S. (2010). Fundamentals of complementary and alternative medicine. (4th ed.). St. Louis, MO: Saunders Elsevier.
At least four must be from the ProQuest, EBSCOhost, or PubMed Central databases in the University Library, and the remaining sources must be from other scholarly or professional Internet resources.
For the Final Paper,
Complementary and alternative medicines >> (
Natural Products)
Provide a brief discussion of the protocols, and provide details of historical events that shaped the practice.
Chronic Pain
Describe the disease or condition from the CAM perspective
Include potential cultural challenges faced by the afflicted patient population as well as the practitioner.
Describe how the CAM (Natural Products) practitioner diagnoses and treats the condition.
Identify potential questions or skepticisms other health care providers and potential clientele may have regarding the CAM selected, and address the questions, supporting your responses with a minimum of two sources of research for the health condition and system chosen.
Identify and substantively describe a minimum of two other CAM practice interventions that could be suggested to assist in minimizing the impact of the illness/condition. Justify implementation of the two interventions you are recommending.
Must begin with an introductory paragraph that has a succinct thesis statement.
Must address the topic of the paper with critical thought.
Must end with a restatement of the thesis and a conclusion paragraph.
Must utilize six to eight sources; one may be the text, at least four must be from the ProQuest, EBSCOhost, or PubMed Central databases, and the remaining sources must be from other scholarly or professional Internet resources.
Must document all sources in APA style.
Must include a separate reference page that is formatted according to APA style.
.
Read| The latest issue of The Challenger is here! We are thrilled to announce that our school paper has qualified for the NATIONAL SCHOOLS PRESS CONFERENCE (NSPC) 2024. Thank you for your unwavering support and trust. Dive into the stories that made us stand out!
Palestine last event orientationfvgnh .pptxRaedMohamed3
An EFL lesson about the current events in Palestine. It is intended to be for intermediate students who wish to increase their listening skills through a short lesson in power point.
The Indian economy is classified into different sectors to simplify the analysis and understanding of economic activities. For Class 10, it's essential to grasp the sectors of the Indian economy, understand their characteristics, and recognize their importance. This guide will provide detailed notes on the Sectors of the Indian Economy Class 10, using specific long-tail keywords to enhance comprehension.
For more information, visit-www.vavaclasses.com
Instructions for Submissions thorugh G- Classroom.pptxJheel Barad
This presentation provides a briefing on how to upload submissions and documents in Google Classroom. It was prepared as part of an orientation for new Sainik School in-service teacher trainees. As a training officer, my goal is to ensure that you are comfortable and proficient with this essential tool for managing assignments and fostering student engagement.
Welcome to TechSoup New Member Orientation and Q&A (May 2024).pdfTechSoup
In this webinar you will learn how your organization can access TechSoup's wide variety of product discount and donation programs. From hardware to software, we'll give you a tour of the tools available to help your nonprofit with productivity, collaboration, financial management, donor tracking, security, and more.
This is a presentation by Dada Robert in a Your Skill Boost masterclass organised by the Excellence Foundation for South Sudan (EFSS) on Saturday, the 25th and Sunday, the 26th of May 2024.
He discussed the concept of quality improvement, emphasizing its applicability to various aspects of life, including personal, project, and program improvements. He defined quality as doing the right thing at the right time in the right way to achieve the best possible results and discussed the concept of the "gap" between what we know and what we do, and how this gap represents the areas we need to improve. He explained the scientific approach to quality improvement, which involves systematic performance analysis, testing and learning, and implementing change ideas. He also highlighted the importance of client focus and a team approach to quality improvement.
The Art Pastor's Guide to Sabbath | Steve ThomasonSteve Thomason
What is the purpose of the Sabbath Law in the Torah. It is interesting to compare how the context of the law shifts from Exodus to Deuteronomy. Who gets to rest, and why?
Cambridge International AS A Level Biology Coursebook - EBook (MaryFosbery J...
FIN 430 — Finance Theory and PracticeProject AssignmentsCalculat.docx
1. FIN 430 — Finance Theory and PracticeProject Assignments
Calculating theWeighted Average Cost of Capital (WACC)
foryour Company
For use in Conjunction with the Firm Valuation Project
First ensure that you have read relevant pages in the text. Some
important sections would include the following, but you may
also double-check the references in the text by using the index
[see: Cost of Capital and Target (optimal) Capital Structure,
etc.]:
The important Chapter in the text is the one entitled "The Cost
of Capital," – with a particular focus on the section entitled
“The Weighted Average Cost of Capital” and the section “Four
Mistakes to Avoid” at the end of the chapter.
The WACC formula discussed below does not include Preferred
Stock. Should your company use PS, be sure to adjust the
equation for it, and see the section in the chapter on the Cost of
Preferred Stock.
The WACC formula that we use is:
WACC = wdrd(1-T) + wsrs
We need to know how to calculate:
1. rsthe cost of common equity. Use the Security Market
Line (SML) – this is why you learn how to calculate a
company’s beta and also why you learn how to find the
appropriate risk-free rate and market-risk premium. For a
2. review, see the section the text, The CAPM Approach.
2. The weights (wd and ws – note that: wd + ws = 1; so you
only have to calculate one of them). We need to calculate the
weight of debt and the weight of equity (for the cost of debt,
this simply means: what proportion of the firm’s financing is by
debt?). There is a lot to say here, simplified as Theory 1,
Theory 2 and Practice:
a. Theory 1: Theory says that we should use the target
weights along with the market values of both debt and equity
(see the Four Mistakes to Avoid). But the market value of debt
is typically difficult to calculate, because we need to know the
YTM (which is rd) for all of the company’s debt, but we cannot
calculate the YTM without having the current prices of the
company’s outstanding bonds, and most company’s bonds do
not trade (i.e., they will not have up-to-date or current prices –
remember how to calculate the price (value) of a bond on your
calculators?!). As a result, at least for the group project, we go
to Theory 2.
b. Theory 2: Theory also says that we should use the
TARGET weights, but this is a management decision, and as
“outsiders” we do not have access to the thoughts of the CFO or
CEO. So we should look instead to the historical pattern of the
use of debt (mix of debt and equity), and this is one reason that
you should have about 10 years of financial data.
c. Practice: Since we cannot “work” according to the strict
theory of finance, we have to estimate the relevant weights. As
a result, we will use the formula:
wd = Book Value of Debt / [Market Value of Equity + Book
Value of Debt]
The book value of debt is calculated by adding up ALL of the
3. debt on the balance sheet. This will typically be the sum of
Notes Payable, Current Portion of LT Debt and Long-Term
Debt.
The market value of equity is the “Market Cap,” and equals the
number of (common) shares outstanding multiplied by the
price/share. Note that the “timing” of this value should
coincide with the book value of debt. For example, if you
calculate the book value of debt as of 12/31/17, then the market
cap should also be calculated for that date. Be very careful
about using the reported Market Cap on Yahoo.finance – it may
not have the same “timing.”
3. r d; the cost of debt. There may be more than one
acceptable approach to calculate or estimate a company’s cost
of debt (be sure to read the text!). One relatively
straightforward method is to discover the company’s debt rating
(e.g., by Moodys). This can usually be found on the company’s
10K (see the link on my homepage) and doing a word search for
‘rating’ or ‘debt rating.’ For a discussion of bond ratings, see
the text (look in the index). If you can find the debt rating for
your company then you can carry out the following steps (if you
cannot find a bond rating for your company, you might try to
estimate/guess what it is by considering your company’s beta
and comparing the bond ratings for companies with similar
betas). If you are not able to find a bond rating readily, you can
register (forfree) at Standard & Poor's and at Moody's to find
company ratings. You may also find other interesting and
useful information there. For a general discussion of what the
ratings mean, see the information from these rating agencies on
my homepage at the Bond Rating link.
Once you have the actual bond rating or an estimate you can
then find or estimate your company’s cost of debt by going to
Yahoo.finance and clicking on the Bonds/Rates
link(http://bonds.yahoo.com/rates.html). Look at the yields for
4. the 20 year Corporate Bonds by rating. If your company’s bond
rating is listed, you’re in luck. If it is not listed then you can
estimate the cost of debt. For example, if the AAA yield is
6.50%, the AA yield is 6.75% and the A yield is 7.00%, you can
see a pattern (equation). For every increase in risk (from AAA
to AA), there is a 0.25% increase in the yield. If your company
has a BB rating, then it is two steps “below” the A rating, so
you should add approximately 0.50% more to the 7.00% for the
A rating, giving you a cost of debt for your company of about
7.50%. Note that this approach assumes a linear equation for
the cost of debt (which may not be strictly true).
Another simple way is to look at the average cost of debt for
the firm: Pre-tax cost of debt = annual interest payment / total
interest-bearing debt. Please use the average cost for last three
years.
4. The corporate tax rate ( T ). Be sure to read the section in
the text on Corporate Income Taxes (Chapter 2). The correct
tax rate for a company is the marginal tax rate for the future! If
you expect your company to be very profitable for a long time
into the future, then the tax rate ( T ) for your company should
probably be the highest marginal tax rate applicable for
corporations. But there are times when companies can obtain
long-term tax breaks so that their tax rates may be lower than
the stated (regulated) tax rate. Consequently you may want to
calculate several/manyhistorical effectivetax rates for you
company. The effective tax rate is the actual taxes paid divided
by earnings before taxes (on the income statement). You can
calculate/consider these rates for the past 5-10 years and then
compare this effective tax rate to the legally mandated highest
marginal corporate tax rate. If the past historical effective rate
is lower than the marginal tax rate, there may be a good reason
for using that lower rate in your pro formas.
5. 5. r cs; the cost of common stock
You can use CAPM model to predict the cost of common stock.
The equation runs as followings:
ri = rRF + (RPM) bi
In order to use this model, first you should estimate the beta of
your stock. Please refer to the guidelines of beta calculationfor
more information. Please use the average 10 year Treasury bond
rates as the proxy of risk-free rates.
.
The Validity of Company Valuation
Using Discounted Cash Flow Methods
Florian Steiger
1
6. Seminar Paper
Fall 2008
Abstract
This paper closely examines theoretical and practical aspects of
the widely used discounted
cash flows (DCF) valuation method. It assesses its potentials as
well as several weaknesses. A
special emphasize is being put on the valuation of companies
using the DCF method. The
paper finds that the discounted cash flow method is a powerful
tool to analyze even complex
situations. However, the DCF method is subject to massive
assumption bias and even slight
changes in the underlying assumptions of an analysis can
drastically alter the valuation
results. A practical example of these implications is given using
a scenario analysis.
____________
1
Author: Florian Steiger, European Business School, e-mail:
[email protected]
7. Table of Contents
List of abbreviations
..................................................................................... ..........
............ i
List of figures and tables
...............................................................................................
.... ii
1 Introduction
...............................................................................................
................... 1
1.1 Problem Definition and Objective
...................................................................... 1
1.2 Course of the Investigation
................................................................................. 2
2 Company valuation
...............................................................................................
........ 2
2.1 General Goal and Use of Company Valuation
................................................... 2
2.2 Other Valuation Methods
................................................................................... 3
3 The Discounted Cash Flow Valuation Method
8. ............................................................ 4
3.1 Approach of the Discounted Cash Flow Valuation
............................................ 4
3.2 Calculation of the Free Cash Flow
..................................................................... 5
3.2.1 Cash Flow to Firm and Cash Flow to
Equity.................................................. 5
3.2.2 Building Future Scenarios
.............................................................................. 6
3.3 The Weighted Average Cost of Capital
............................................................. 6
3.3.1 Cost of Equity
...............................................................................................
.. 7
3.3.2 Cost of Debt
...............................................................................................
..... 8
3.3.3 Summary
...............................................................................................
.......... 9
3.4 Calculation of the Terminal Value
................................................................... 10
3.5 Determination of Company Value
................................................................... 11
4 Validity of the Discounted Cash Flow Valuation Approach
9. ...................................... 11
4.1 Case Study: BASF
............................................................................................
11
4.2 Sensitivity Analysis
.......................................................................................... 12
5 Conclusion
..................................................................................... ..........
................... 14
Reference List
...............................................................................................
.................. 16
Appendix
............................................................................. ..................
.......................... 18
Discounted Cash Flow Valuation i
List of abbreviations
APV Adjusted Present Value
bp Base Point (equal to 0.01%)
Capex Capital Expenditure
10. CAGR Compounded Annual Growth Rate
CAPM Capital Asset Pricing Model
COD Cost of Debt
COE Cost of Equity
D&A Depreciation and Amortization
DCF Discounted Cash Flow
EBIT Earnings Before Interests and Taxes
EBITDA Earnings Before Interests, Taxes, Depreciation and
Amortization
EURm Millions of Euro
EV Enterprise Value
Eq. V. Equity Value
FCF Free Cash Flow
FCFE Free Cash Flow to Equity
FCFF Free Cash Flow to Firm
IPO Initial Public Offering
LBO Leveraged Buyout
LIBOR London Interbank Offer Rate
11. M&A Mergers and Acquisitions
NI Net Income
NOPAT Net Operating Profit After Taxes
NPV Net Present Value
P / E Price Earnings Ratio
r Discount Rate
ROA Return on Assets
ROE Return on Equity
SIC Standard Industry Classification
t or T Tax Rate
T-Bill US Treasury Bill
T-Bond US Treasury Bond
TV Terminal Value
Discounted Cash Flow Valuation ii
List of figures and tables
Table 1. Long term credit rating scales: Source: adapted from
12. HSBC handbook, 2008
Table 2. Trading comparables analysis
Table 3. Transaction multiple analysis
Table 4. Case Study: Calculation of the enterprise value
Table 5. Case Study: Sensitivity Analysis WACC, perpetual
growth rate
Table 6. Case Study: Sensitivity analysis perpetual growth rate,
sales CAGR
Table 7. Case Study: Income statement estimates
Table 8. Case Study: Liabilities structure
Table 9. Case Study: WACC calculation
Table 10. Case Study: Terminal Value calculation
Table 11. Case Study: DCF valuation
Figure 1. LIBOR credit spread (in bp): Source: Bloomberg
Professional Database, 2008
Discounted Cash Flow Valuation 1
13. 1 Introduction
The goal of this paper is to introduce the reader to the method
of company valuation
using discounted cash flows, often referred to as “DCF”. The
DCF method is a standard
procedure in modern finance and it is therefore very important
to thoroughly understand
how the method works and what its limitations and their
implications are. Although this
paper is on a basic level, it requires some knowledge of
accounting and corporate
finance, as well as a good understanding of general economic
coherencies, since not
every topic can be explained in detail due to size limitations.
1.1 Problem Definition and Objective
Since the beginning of the year 2008, Goldman Sachs has
advised clients on merger and
acquisition (M&A) deals with aggregated enterprise values (EV)
of more than EURm
475,000 according to recent league tables (Thomson One
Banker, 2008). There are
“probably almost as many motives for M&As as there are bidder
and targets”
14. (Mukherjee, Kiymaz, & Bake, 2004, p. 8), but the transaction
volumes indicate the
importance that M&A activities have for the worldwide
economy and underline the
necessity for efficient methods to adequately value companies.
The DCF method is based upon forward looking data and
therefore requires a relatively
large amount of predictions for the future business situation of
the company and the
economy in general. Minor changes in the underlying
assumptions will result in large
differences in the company’s value. It is therefore very
important to know which
assumptions are used and how they influence the outcome of the
analysis. For this
reason, this paper will introduce the key input factors that are
needed for the DCF
analysis and examine the consequences that changes in the
assumptions have on the
company value.
The DCF analysis is a very powerful tool that is not only used
to value companies but
also to price initial public offerings (IPOs) and other financial
assets. It is such a
15. powerful tool in finance, that it is so widely used by
professionals in investment banks,
consultancies and managers around the world for a range of
tasks that it is even referred
to as “the heart of most corporate capital-budgeting systems”
(Luehrman, 1998, p. 51).
Discounted Cash Flow Valuation 2
1.2 Course of the Investigation
This paper begins with a brief introduction to valuation
techniques in general and shows
how valuation techniques can be used to assess a company’s
value. Afterwards the basic
idea behind the DCF valuation technique will be introduced and
the key input factors
will be explained and discussed, since it is most important to
gain a deep understanding
on how the input is computed to state the company value. In the
next step a sensitivity
analysis will be conducted using BASF as an example to explain
how varying input will
16. lead to different results. In the end, a conclusion will be drawn
on the benefits and
shortfalls of the DCF valuation technique.
2 Company valuation
2.1 General Goal and Use of Company Valuation
The goal of company valuation is to give owners, potential
buyers and other interested
stakeholders an approximate value of what a company is worth.
There are different
approaches to determine this value but some general guidelines
apply to all of them.
In general there are two kind of possible takeover approaches.
An interested buyer could
either buy the assets of a company, known as asset deal, or the
buyer could take over a
majority of the company’s equity, known as share deal.
2
Since taking over the assets
will not transfer ownership of the legal entity known as “the
company”, share deals are
much more common in large transactions. Due to the financing
of a company by debt
and equity, valuation techniques that focus on share deals either
17. value the equity,
resulting in the equity value (Eq. V.) or the total liabilities,
stating the enterprise value
(EV) or firm value (FV). It is possible to derive the EV from the
Eq. V. and vice versa
(Bodie, Kane, & Marcus, 2008, pp. 630-631) by using the
following formula:
�� − ��� ���� − ��������� ����������� =
��. �.
Net debt and the corporate adjustments are derived with the
following definitions:
��� ���� = ���� ���� ���� + ����� ����
���� + ����������� ������
+ ����� �������� �������� ���������� −
���� ��� �������� ������
____________
2
Actually there are more possibilities to gain ownership of a
company, like a debt-to-equity swap,
where debt holders offer the equity holders to swap their debt
into equity of the company and therewith
gain equity ownership. This usually happens with companies
that are in financial distress like insolvency
18. or bankruptcy.
Discounted Cash Flow Valuation 3
��������� �����������
= �������� ��������� + �� �� �������
�������
+ ���������� ����� ����������� ±
���������� ���������
2.2 Other Valuation Methods
There are many other valuation techniques besides the DCF
approach which are
commonly used. In fact, most of the time various techniques are
used and the results are
then compared to each other to increase the confidence that the
result is reasonable.
A widely used method is the so-called trading comparables
analysis. In this method a
peer group of listed companies is built, usually using firms with
similar standard
industry classification (SIC) and other similarities to the target
company like geographic
focus, financing structure, and client segments. If the company
19. is listed, the equity value
is simply the market capitalization
3
. The EV can be calculated based on this Eq. V. as
described above. Then some multiples are calculated to state
relationship between EV
and Eq. V. to a company’s fundamental data. Usually the
multiples are the following:
��
�����
��
�����
��
����
��. �.
��� ������
4
The median and arithmetic average of these multiples is then
calculated for the peer
group.
20. 5
These figures are a good approximation for a target’s EV and
Eq. V., but they
tend to be lower than actual transaction values, since trading
comparables do not include
majority premiums that have to be paid when acquiring a
majority stake in a company.
A similar approach to the trading comparables method is the
transaction comparables
valuation approach. It uses the same multiples, but the peer
group consists of previous
transactions and therefore includes all premiums that arise
during transactions. This
method is very reliable but since it is very difficult to find
previous transactions that are
similar, it is difficult to build peer groups that are statistically
significant
6
. These two
methods, in combination with the DCF are the most widely used
in modern finance.
____________
3
������ ��� = ����� ����� ∗ ������ ��
21. ������ �����������
4
The
�� .�.
��� ������
is the same as the trailing (historical)
�
�
ratio
5
Please see table 2 in the appendix for an exemplary trading
comparables analysis of the European car
rental market
6
Please see table 3 in the appendix for an example
Discounted Cash Flow Valuation 4
3 The Discounted Cash Flow Valuation Method
3.1 Approach of the Discounted Cash Flow Valuation
22. The DCF method values the company on basis of the net present
value (NPV) of its
future free cash flows which are discounted by an appropriate
discount rate. The
formula for determining the NPV of numerous future cash flows
is shown below. It can
be found in various sources, e.g. in “Financial Management –
Theory and Practice”
(Brigham & Gapenski, 1997, p. 254).
��� =
����
(1 + �)�
�
�=0
The free cash flow is the amount of “cash not required for
operations or reinvestment”
(Brealey, Myers, & Allen, 2006, p. 998). Another possibility to
analyze a company’s
value using discounted cash flows is the adjusted present value
(APV). The APV is the
net present value of the company’s free cash flows assuming
pure equity financing and
23. adding the present value of any financing side effect, like tax
shield (Brealey, Myers, &
Allen, 2006, p. 993) In general you can say, that the APV is
based on the “principle of
value additivity” (Luehrmann, 1997, S. 135). However, APV
and NPV lead to the same
result.
Since the DCF method is a valuation technique that is based on
predictions, a scenario
analysis is usually conducted to examine the effects of changes
in the underlying
assumptions. Such a scenario analysis is usually based on three
scenarios, namely the
“base case” or “management scenario” that uses the
management’s estimations for the
relevant metrics, a “bull case” which uses very optimistic
assumptions and a “bear case”
that calculates the company’s value if it performs badly.
The process of valuing a company with the DCF method
contains different stages. In
the first stage scenarios are developed to predict future free
cash flows (FCF) for the
next five to ten years. Afterwards, an appropriate discount rate,
the weighted average
24. cost of capital (WACC) has to be determined to discount all
future FCFs to calculate
their NPVs. In the next step the terminal value (TV) has to be
identified. The TV is the
net present value of all future cash flows that accrue after the
time period that is covered
Discounted Cash Flow Valuation 5
by the scenario analysis. In the last step the net present values
of the cash flows are
summed up with the terminal value.
7
������� ����� =
����
(1 + �)�
�
�=0
+ �������� �����
3.2 Calculation of the Free Cash Flow
25. 3.2.1 Cash Flow to Firm and Cash Flow to Equity
There are two ways of using cash flows for the DCF valuation.
You can either use the
free cash flow to the firm (FCFF) which is the cash flow that is
available to debt- and
equity holders, or you can use the free cash flow to equity
(FCFE) which is the cash
flow that is available to the company’s equity holders only.
When using the FCFF, all inputs have to be based on accounting
figures that are
calculated before any interest payments are paid out to the debt
holders. The FCFE in
contrast uses figures from which interest payments have already
been deducted. Using
the FCFF as base for the analysis will result in the enterprise
value of the company,
using the FCFE will give the equity value. Since an acquirer
usually takes over all
liabilities, debt and equity, the FCFF is more relevant than the
equity approach.
The FCFF is calculated by deducting taxes from the company’s
earnings before interest
and taxes (EBIT), resulting in the net operating profit after tax
(NOPAT). All
26. calculatory costs (e.g. D&A) are then added back, since they do
not express any cash
flows. The capital expenditure (Capex) is deducted. It is a cash
outflow that is not
reflected in the income statement, because Capex is activated on
the asset side of the
balance sheet. The increase in net working capital (NWC) is
also deducted, because it is
does not represent any actual cash flows. The formula for
calculating the FCFF is
shown below. (Damodaran, 1996, p. 237)
���� = ����� + �&� − ����� − �������� ��
���
There are more methods that can be used to calculate the FCFF,
but they will all result
in the same value.
____________
7
�������� ����� =
����
(1+�)�
∞
27. �=�+1
Discounted Cash Flow Valuation 6
3.2.2 Building Future Scenarios
Deriving the NPV of the free cash flows that accrue in the
scenario period is very
complex, because all these cash flows are based on assumptions.
The method therefore
requires a detailed picture of the company’s future situation,
e.g. EBIT and Capex.
Predictions are usually made for the next five to fifteen years.
The NPV of the cash
flows accruing after this scenario period is included in the
terminal value, which is
derived using much less assumptions. These predictions are
usually based on historical
data, but may also reflect changes in the company’s business
plan, industry or in the
global economy.
To provide a detailed view on how the company’s value might
be affected by a change
in the underlying assumption, a scenario analysis is usually
28. conducted. In the bear case
scenario, low assumptions for rates of growth and margins are
used to build a very
pessimistic scenario. In the bull case the opposite is the case,
all assumptions are very
optimistic. These two cases mark the boundaries of where in
between the fair value of
the company should be with a high certainty. Of course,
additional scenario and risk
testing methods like value at risk using a Monte Carlo
Simulation can be used to further
evaluate any risks.
The most important scenario in the valuation of a company is
the base case. In this case
the management’s predictions and opinions regarding the future
development of the
company, its relevant markets and competitors are used to build
the scenario that is
most likely to happen. However, attention has to be paid to the
reliability of any
management provided figures, since managers often have a
personal incentive to
increase the takeover price and therefore might provide biased
estimates.
29. Another item that is usually included are potential synergies
between the target and the
acquirer. If the potential acquirer is a strategic acquirer who
runs a similar business,
many synergies can be realized. This will allow the strategic
bidder to offer a higher
price than a financial bidder, like a private equity funds for
example.
3.3 The Weighted Average Cost of Capital
Determining the discount rate requires extensive analysis of the
company’s financing
structure and the current market conditions. The rate that is
used to discount the FCFs is
called the weighted average cost of capital (WACC). The
WACC is one of the most
important input factors in the DCF model. Small changes in the
WACC will cause large
Discounted Cash Flow Valuation 7
changes in the firm value. The WACC is calculated by
weighting the sources of capital
according to the company’s financial structure and then
30. multiplying them with their
costs. Therefore the formula for the WACC calculation is:
8
���� =
������
���� + ������
∗ ���� �� ������ +
����
���� + ������
∗ ���� �� ����
3.3.1 Cost of Equity
The cost of equity (COE) is calculated with the help of the
capital asset pricing model
(CAPM). The CAPM reveals the return that investors require for
bearing the risk of
holding a company’s share. This required return is the return on
equity (ROE) that
investors demand to bear the risk of holding the company’s
share, and is therefore
equivalent to the company’s cost of equity. According to the
CAPM, the required ROE,
or in this case the COE is derived with the following formula
(Ross, Westerfield, &
31. Jordan, 2008, p. 426):
��� = �� + � �� − ��
Although the risk-free interest rate is the yield on T-Bills or T-
Bonds, professionals use
the London Interbank Offer Rates (LIBOR) as an approximation
for the short-term risk-
free interest rates, since “. . . treasury rates are too low to be
used as risk-free rates . . . “
(Hull, 2008, p. 74) It is therefore common to use the LIBOR as
the risk-free rate for
valuation purposes.
The input factor β is the risk, that holding the stock will add to
the investor’s portfolio
9
(Rhaiem, Ben, & Mabrouk, 2007, p. 80). It is derived using
linear regression analysis,
where the excess return of the stock is the dependent variable
and the excess market
return is the independent variable. The beta is the slope of the
regression line. (Brealey,
Myers, & Allen, 2006, p. 220) Beta is an empirical determined
input factor that is also
32. based on the company’s historical level of leverage, because
higher leverage ratios
increase the shareholder’s risk. Since the company’s level of
leverage often changes
during a transaction, the beta has to be adjusted for this change
by unlevering and
relevering to the new capital structure. If the company is not
listed there is no data
____________
8
In case of any preferred share outstanding, the formula has to be
rearranged to include this source of
financing as well. The adjusted formula will be as following:
���� =
������
������
∗ ��� +
����
������
∗ ��� +
���������
������
∗ ���� �� ��������� �������
33. 9
� =
��� (����� ,������ )
��� (������ )
Discounted Cash Flow Valuation 8
available to compute a linear regression. As a consequence, a
peer group of similar
companies is set up and the median of their unlevered betas is
then relevered to fit the
target’s financing structure. Although the CAPM approach is
very useful to estimate the
cost of equity, some scientists argue that the CAPM was
developed for liquid assets
(Michailetz, Artemenkov, & Artemenkov, 2007, p. 44), and
therefore its significance
for the valuation of illiquid assets, like non-listed companies
should be subject to further
research.
3.3.2 Cost of Debt
34. The cost of debt (COD) is the interest rate that a company has
to pay on its outstanding
debt. The most influencing factor on the COD is a company’s
credit rating. A company
with an investment grade credit rating
10
(e.g.: S&P AAA) is able to borrow at
considerably lower interest rates than a company that is rated as
non-investment grade
(e.g.: S&P BB-). The difference between the risk-free interest
rate and the interest rate
that a company has to pay to borrow money is called the
company’s credit spread. The
credit spread does not only depend on a company’s credit
worthiness, but is also
determined by market conditions. An indicator for these
conditions is the spread of the
USD 3m LIBOR vs. the 3m T-Bills
11
depicted in figure 1 in the appendix (Bloomberg
Professional Database, 2008). The chart reflects a massive
widening in credit spreads
that occurred in August 2007 after numerous banks and hedge
35. funds announced a
massive exposure to the so-called subprime mortgage market.
The dependence of
overall market conditions should be kept in mind when
calculating the COD. Especially
when the company has a high leverage ratio, special attention
has to be paid to the credit
markets.
Interest rate costs are tax deductable in most economies, so that
the true COD is lower
than the interest rate a company pays out to its debt holders
12
. Due to the fact that
taxation laws are very different around the world, a very
thorough analysis is needed to
verify how much of the interest costs are deductable. The COD
after tax can be
calculated as following, where i is the interest rate on
outstanding debt and t is the
effective tax rate paid by the company:
____________
10
36. Please see table 1 for an overview of long term credit rating
scales of different rating agencies
11
Another widely used benchmark to assess the credit spread is
the iTraxx Europe index, a credit index
consisting of 125 investment grade companies in Europe
12
Assuming the fact that the company is paying taxes from which
the COD can be deducted
Discounted Cash Flow Valuation 9
��� = � ∗ (1 − �)
If the company has different kinds of debt outstanding, the COD
is the weighted
average cost of debt of these different tranches, adjusted for
tax:
13
��� = 1 − � ∗ ����
�
37. �=1
3.3.3 Summary
By plugging in the formulas for the COE and COD, we get the
full formula for the
WACC including all factors that influence the discount rate:
���� =
�
� + �
∗ �� + � �� − �� +
�
� + �
∗ � ∗ (1 − �)
The WACC is therefore determined by the COE, which is
derived by applying the
CAPM with its underlying assumptions for beta. The COD is
derived from the interest
rate that the company has to pay to its debt holders and by the
tax rate that the
corporation has to pay on its profits. Changing the assumptions
for the cost of capital
will have large effects on the result of the overall valuation
process.
38. The WACC of a company is dependent on a variety of economic
factors. Especially the
company’s industry and the steadiness of its cash flows
influence it. Companies with
stable cash flows in mature industries with low growth rates
will typically have low
capital costs (Morningstar, 2007, pp. 1-2). For example, Bayer
will have a substantially
lower WACC than Conergy.
The WACC is used to discount the FCFs that we predicted in
our scenario analysis. The
result is the NPV of the company in the scenario period, to
which we will later add the
terminal value, which also makes uses of the WACC.
Using current figures for beta, risk-free rate, credit spread, and
interest costs will lead to
a fairly realistic approximation for the discount rate in most
cases. However, to get an
exact value, the company’s future WACC must be used.
Therefore, all input factors of
the WACC formula have to be predicted, resulting in leeway for
the outcome of the
DCF analysis.
39. ____________
13
The weights are calculated by dividing the market value of a
tranche by the market value of total
debt outstanding: �� =
������ ����� �� ����� ��
������ ����� �� ����� ����
Discounted Cash Flow Valuation 10
3.4 Calculation of the Terminal Value
The terminal value is the NPV of all future cash flows that
accrue after the time period
that is covered by the scenario analysis. Due to the fact that it is
very difficult to
estimate precise figures showing how a company will develop
over a long period of
time, the terminal value is based on average growth
expectations, which are easier to
predict.
The idea behind the terminal value is to assume constant growth
rates for the time
40. following the time period that was analyzed more extensively.
The constant perpetual
growth rate g, together with the WACC as the discount rate r
allows for the use of a
simple dividend discount model to determine the terminal value.
Therefore the TV can
be expresses as
14
(Beranek & Howe, 1990, p. 193), where the FCF is one period
before
the TV period:
�� =
����� ∗ (1 + �)
�
(1 + �)�
∞
�=1
=
����� (1 + �)
� − �
Since all these cash flows are discounted to a date in the future,
41. the TV has to be
discounted again to give us the NPV of all free cash flows that
occur after the scenario
predicted period.
The determination of the perpetual growth rate is one of the
most important and
complex tasks of the whole DCF analysis process, since minor
changes in this rate will
have major effects on the TV and therefore on the firm value in
total. The huge range of
values that result from a change in this growth rate will be
examined in a case study
later on in this chapter. In most cases a perpetual growth rate
should be between 0% and
5%. It has to be positive since in the long-term, the economy is
always growing.
However, according to economists, any growth rate above 5% is
not sustainable on the
long-term. The perpetual growth rate should be in line with the
nominal GDP growth.
(JP Morgan Chase, 2006).
Due to the fact, that the TV often accounts for more than half of
the total company
42. value, special attention has to be paid to its calculation and
input coefficients. As
discussed in the case study later in this paper, even very small
changes that might not
____________
14
�� =
���∗ 1+� 1
1+� 1
+
���∗ 1+� 2
1+� 2
+
���∗ 1+� 3
(1+�)3
…
���∗ 1+� �
(1+�)�
which can be mathematically
rearranged to equal the formula given in the text
Discounted Cash Flow Valuation 11
43. even be significant from an economist’s perspective will result
in substantial changes in
the company value. Therefore it is very easy to move the TV
into the desired direction
without having to drastically change any underlying business
predictions, like EBIT
margin or capital expenses.
3.5 Determination of Company Value
After having determined the NPV of the cash flows accruing
within the scenario period
and the TV, the TV is discounted to its NPV. Both NPVs are
then added together to
give the enterprise value or the equity value, depending on
whether the valuation is
based on FCFFs or FCFEs:
������� ����� =
����
(1 + �)�
+
��
(1 + �)�+1
�
44. �=0
Usually the company value is calculated using different levels
of leverage to find an
optimal financing structure. The determined company value can
then be used for further
analysis, e.g. the equity value could be divided by the number
of shares outstanding to
determine a fair share price for listed companies.
4 Validity of the Discounted Cash Flow Valuation Approach
4.1 Case Study: BASF
To demonstrate the wide range of possible results of the DCF
analysis, this paper will
now analyze the BASF stock and the DCF’s sensitivity to
changes in the WACC, the
perpetual growth rate, and sales growth. For this purpose, a base
scenario based on
broker estimates (Credit Suisse Equity Research, 2008) will be
built to obtain a fair
reference value for one BASF stock. Afterwards a sensitivity
analysis will be conducted
to examine the effects on this reference price that modifying
factors will have.
45. The base case scenario uses the estimates by Credit Suisse
analysts for the cash flow
forecasts for the years 2008 to 2013. The unlevered beta was
determined to be 0.9 using
a linear regression model leading to the cost of equity of 10.3%.
BASF’s current credit
rating results in a credit spread of 500bp according to analysts
(Credit Suisse Equity
Research, 2008). This leads to a WACC of 9.0%. Furthermore
we assume the perpetual
growth rate to be equal to 1.5%. Discounting the predicted free
cash flows to the firm
for the years 2008 to 2013 using the WACC of 9.0% and then
adding the discounted
Discounted Cash Flow Valuation 12
terminal value results in an enterprise value of EURm 67,850.
Please see tables 3 - 7 for
the exact calculations.
Period 2008E 2009E 2010E 2011E 2012E 2013E TV
FCFF 4,284 4,405 4,866 5,409 6,148 6,212 -
46. NPV 3,930 3,708 3,758 3,832 3,996 3,704 44,923
EV 67,850
Table 4: Case Study: Calculation of the enterprise
value
It is remarkable that the terminal value accounts for EURm
44,923 of the total EV. This
makes obvious, that the outcome of the DCF analysis is highly
sensitive to changes in
the perpetual growth rate, since it has a major effect on the TV.
Having determined the
EV, net debt and corporate adjustments are deducted from the
EV to calculate the equity
value of EURm 55,332. The equity value is then divided by the
number of shares
outstanding. The result of EUR 58.49 is the fair price for one
BASF share given the
underlying assumptions. Knowing the fact that the current share
price equals only EUR
39.41 (Thomson Reuters, 2008), this would make the BASF
share a great investment if
you believe that the underlying assumptions are valid. This
share price will serve as the
47. reference value for the sensitivity analysis, since it lies in
between of most research
analyst’s target price for BASF.
4.2 Sensitivity Analysis
To investigate the sensitivity of the DCF method, the BASF
case study developed above
will be used. The changes that occur in the share price will be
stated as percentage
offset from the base case share price of EUR 58.49.
The WACC and the perpetual growth rate are two main input
factors that have large
effect on the outcome of the analysis. Therefore the table below
shows the result of the
sensitivity analysis regarding those two factors. The base case
assumptions of 9.0% for
the WACC and 1.5% for the perpetual growth rate are
highlighted in dark blue.
Discounted Cash Flow Valuation 13
48. WACC (%)
0.00 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% 10.5% 11.0%
P
e
r
p
e
tu
a
l
g
r
o
w
th
r
a
te
(
%
)
0.0% 19.2% 9.0% 0.2% -7.6% -14.5% -20.7% -26.2% -31.2% -
31.2%
0.5% 27.2% 15.8% 5.9% -2.7% -10.3% -17.0% -23.0% -28.3% -
49. 28.3%
1.0% 36.6% 23.6% 12.5% 2.9% -5.4% -12.8% -19.3% -25.1% -
25.1%
1.5% 47.6% 32.7% 20.1% 9.3% 0.0% -8.1% -15.3% -21.6% -
21.6%
2.0% 60.9% 43.5% 29.0% 16.7% 6.2% -2.8% -10.7% -17.7% -
17.7%
2.5% 77.2% 56.4% 39.4% 25.3% 13.4% 3.2% -5.6% -13.3% -
13.3%
3.0% 97.5% 72.2% 52.0% 35.5% 21.8% 10.2% 0.3% -8.2% -
8.2%
Table 5: Case Study: Sensitivity Analysis WACC, Perpetual
growth rate
The table clearly shows that even slight changes in the WACC
or in the perpetual
growth rate, which might not even be significant from an
economist’s perspective, will
largely offset the determined fair share price from the base case
scenario. For example
increasing the WACC by 100bp and simultaneously decreasing
the perpetual growth
rate by 50bp will shrink the calculated fair stock price by more
than 19%. Since it is
50. very difficult to estimate the perpetual growth rate or the cost
of capital with an
exactness of just a few base points, the determined fair share
price can only be seen as
guidance, but not as an absolutely exact value.
The sensitivity to changes in the WACC can be expressed as the
first derivative of the
company value in respect to the discount rate, similar to the
concept of bond duration.
The formula below shows the approximate change in the
company value when
modifying the WACC.
15
��
��
=
1
1 + �
−� ∗ ����
(1 + �)�
�
51. �=0
The next step in the sensitivity analysis is to assess whether
changes in the perpetual
growth rate or in the growth rate for the predicted period (Sales
CAGR) have a higher
impact on the share price. Since both growth rates affect the
nominal value free cash
flow, the result of the analysis should be helpful to understand
the importance that the
terminal value has on the DCF analysis since all other factors
are kept fixated. If
modifying the perpetual growth rate leads to larger changes than
modifying the sales
CAGR for the scenario period, the terminal value would be of
significantly higher
importance than the scenario predictions for the first years.
____________
15
Due to convexity however, this approximation should only be
used in the case of small changes
in the discount rate.
53. 8.25% -6.4% -3.9% -1.3% 1.5% 4.5% 7.6% 11.0% 14.7% 18.6%
Table 6: Case Study: Sensitivity analysis perpetual growth
rate, sales CAGR
As expected, changes in the perpetual growth rate have a higher
impact than changes in
the sales CAGR have. For example an increase in the perpetual
growth rate by 25bp
result in a 3% higher share price, whereas a change by the same
amount in the sales
CAGR will only drive the fair share price up by 1.5%. Looking
at this result, the
importance of the terminal value becomes evident again. It
underlines the fact that the
TV includes all cash flows from the end of the scenario period
up to infinity compared
to just a few years in the scenario period. Therefore the TV,
together with its underlying
assumptions, is the most important and influential part of the
whole discounted cash
flow analysis. As mentioned before it is very easy to slightly
adjust the assumptions that
influence the TV, without having to justify these changes since
they are very small.
54. However, these small adjustments will significantly change the
TV and therefore the
value of the whole company.
5 Conclusion
The sensitivity analysis has shown that the DCF method is very
vulnerable to changes
in the underlying assumptions. Only marginally changes in the
perpetual growth rate
will lead to huge variances in the terminal value. Since the
terminal value accounts for a
large portion of the company’s value, this is of big significance
for the validity of the
DCF method.
It is very easy to manipulate the DCF analysis to result in the
value that you want it to
result in by adjusting the inputs. This is even possible without
making changes that
would be significant from an economist’s point of perspective,
e.g. a change in the
perpetual growth rate or in the WACC by just a few base points.
Analysts or business
professionals have no tools to estimate the input factors with
that kind of exactness.
55. Discounted Cash Flow Valuation 15
However, the DCF analysis is a great tool to analyze what
assumptions and conditions
have to be fulfilled in order to reach a certain company value.
This is especially helpful
in the case of capital budgeting and in the creation of feasibility
plans.
The company valuation using discounted cash flows is a valid
method to assess the
company’s value if special precaution is put on the validity of
the underlying
assumptions. As with all other financial models, the validity of
the DCF method almost
completely depends on the quality and validity of the data that
is used as input. If used
wisely, the discounted cash flow valuation is a powerful tool to
evaluate the values of a
variety of assets and also to analyze the effects that different
economic scenarios have
on a company’s value.
The range of reasonable rates for discount factor and perpetual
56. growth rate depends on
each specific firm, its business situation and many more
variables. In general you can
say that the more risky a firm is, the higher its capital costs
(WACC) are. The perpetual
growth rate should be the same for all industries, since
according to the arbitrage theory
in the long run all companies and industries will grow by the
same rate.
I conclude that using the DCF method in combination with other
methods, like the
trading comparables or precedent transaction analysis, is an
effective approach to obtain
a realistic range of appropriate company values. This
combination technique is indeed
the method that most companies and investment banks use
today. When using several
valuation techniques, their individual shortfalls are eliminated
and the ultimate goal in
the field of company valuation can be reached: determining a
fair and valid company
value.
57. Discounted Cash Flow Valuation 16
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Morningstar. (2007). Morningstar's Approach to Rating Stocks.
Mukherjee, T. K., Kiymaz, H., & Bake, H. K. (2004,
Fall/Winter). Merger Motives and
Targets: A Survey of Evidence from CFOs. Journal of Applied
Finance , 7-24.
59. Discounted Cash Flow Valuation 17
Rhaiem, N., Ben, S., & Mabrouk, A. B. (2007). Estimation of
Capital Asset Pricing
Model at Different Time Scales. The International Journal of
Applied
Economics and Finance , 80.
Ross, Westerfield, & Jordan. (2008). Corporate Finance
Fundamentals. New York:
McGraw-Hill Irwin.
Thomson One Banker. (2008, August 14). M&A League Tables.
Retrieved August 14,
2008, from Thomson One Banker:
http://banker.thomsonib.com/ta
Thomson Reuters. (2008, August 26). Worldscope Database.
New York.
Discounted Cash Flow Valuation 18
Appendix
Table 1: Long term credit rating scales
60. Rating Agency Moody's
Standard & Poor's
(S&P)
Fitch
Investment
grade debt
Aaa AAA AAA
Aa1 AA+ AA+
Aa2 AA AA
Aa3 AA- AA-
A1 A+ A+
A2 A A
A3 A- A-
Baa1 BBB+ BBB+
Baa2 BBB BBB
Baa3 BBB- BBB-
Non-investment
grade debt
61. Ba1 BB+ BB+
Ba2 BB BB
Ba3 BB- BB-
B1 B+ B+
B2 B B
B3 B- B-
Caa1 CCC+ CCC+
Caa2 CCC CCC
Caa3 CCC- CCC-
Ca CC CC
C C C
Default grade
debt C D D
Table 2: Trading comparables analysis
2008e 2009e 2010e 2008e 2009e 2010e 2008e 2009e 2010e
63. Table 4: Case Study: Calculation of the enterprise value
Period 2008E 2009E 2010E 2011E 2012E 2013E TV
FCFF 4,284 4,405 4,866 5,409 6,148 6,212 -
NPV 3,930 3,708 3,758 3,832 3,996 3,704 44,923
EV 67,850
Table 5: Case Study: Sensitivity Analysis WACC,
perpetual growth rate
WACC (%)
0.00 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% 10.5% 11.0%
P
e
r
p
e
tu
a
l
g
r
o
w
66. Table 7: Case Study: Income statement estimates
Target Acquirer Date EV (€m) EV / SALES EV / EBITDA EV /
EBIT EqV / Net Income
Vanguard Car Rental EMEA Europcar International 13/11/2006
670.00 1.70x 6.34x 23.92x n.m.
Keddy Car Europcar International 30/06/2006 0.00
Europcar International Eurazeo SA 03.09.2006 3083.00 2.41x
Hertz Group (Canada) FirstGroup plc 20/12/2000 18.07 1.22x
Laidlaw International FirstGroup plc 02.09.2007 2701.76 1.11x
7.43x 13.84x 22.10x
Cognisa Transportation First Transit, Inc 01.05.2007 11.87
SKE Support Services FirstGroup plc 13/09/2004 22.85 0.38x
Aircoach FirstGroup plc 11.01.2003 16.99
GB Railways Group FirstGroup plc 16/07/2003 44.51 0.34x
29.67x 55.64x 88.99x
Coach USA Kohlberg & Company LLC 06.06.2003 130.99
0.72x
Verona Bus Service FirstGroup plc 08.01.2001 6.51 1.00x 3.81x
7.15x
Avis Greece Piraeus Bank SA 05.02.2007 215.50 2.65x
67. Avis French Avis Europe plc 02.03.2003 8.50 0.43x
Budget International Avis Europe plc 23/01/2003 37.28
SAISC Avis Europe plc 31/01/2002 25.58
3 Arrows Avis Europe plc 12.10.1998 57.09
Fraikin SA CVC Capital 12.08.2006 1350.00 2.21x 18.10x
Average 1.29x 11.81x 23.73x 55.54x
Median 1.11x 6.89x 18.10x 55.54x
Discounted Cash Flow Valuation 20
Period 2008E 2009E 2010E 2011E 2012E 2013E 2014E
Sales 64,702.10 65,388.80 67,645.50 71,390.10 74,631.10
76,870.00 86,517.90
EBIT Margin 12.2% 11.2% 11.9% 13.2% 14.0% 13.0% 11.0%
EBIT 7,893.66 7,323.55 8,049.81 9,423.49 10,448.35 9,993.10
9,516.97
Taxes (2,368.10) (2,197.06) (2,414.94) (2,827.05) (3,134.51)
(2,997.93) (2,855.09)
NOPLAT 5,525.56 5,126.48 5,634.87 6,596.45 7,313.85
68. 6,995.17 6,661.88
D&A 2,700.90 2,740.90 2,779.20 2,829.50 2,902.30 2,989.40
3,431.80
Increase in
NWC (1,031.20) (519.80) (503.60) (804.20) (709.70) (783.60)
(593.80)
Capex (2,911.60) (2,942.50) (3,044.00) (3,212.60) (3,358.40)
(2,989.40) (3,431.80)
FCFF 4,283.66 4,405.08 4,866.47 5,409.15 6,148.05 6,211.57
6,068.08
Table 8: Case Study: Liabilities structure
Shareholders
Equity 20,097.90
Financial Debt 10,100.70
Long Term 6,953.00
Short Term 3,147.70
Leverage 0.33
Table 9: Case Study: WACC calculation
69. Cost of Equity (%)
Risk free rate (%) 4.3%
Unlevered Beta 0.9
Levered Beta 1.2
Market return (%) 9.3%
CAPM required RoE 10.3%
Cost of Debt (%)
Average Credit Spread (%) 5.0%
Cost of Debt before taxes 9.3%
CoD adjusted for tax 6.5%
WACC 9.0%
Table 10: Case Study: Terminal Value calculation
Discounted Cash Flow Valuation 21
FCFF in terminal period 6,068.08
Perpetual growth rate (%) 1.5%
70. WACC (%) 9.0%
Terminal Value 81,731.65
NPV of TV 44,607.47
Table 11: Case Study: DCF valuation
Period 2008E 2009E 2010E 2011E 2012E 2013E TV
FCFF (EURm) 4,283.66 4,405.08 4,866.47 5,409.15 6,148.05
6,211.57 -
NPV (EURm) 3,929.96 3,707.67 3,757.81 3,831.97 3,995.81
3,703.76 44,923.18
EV (EURm) 67,850.16
Net debt (EURm) (11,547.00)
Minorities
(EURm) (971.20)
Eq.V. (EURm) 55,331.96
No. Of shares (m) 946
Fair share price 58.49
Figure 1: LIBOR credit spread (in bp)
79. 0
0
8
USD LIBOR 3m vs US Treasury 3m …
FIN 430 — Finance Theory and PracticeStock Valuation project
The purpose of the project is to estimate and justify: (1) an
intrinsic (fundamental) value for the company of your choice
and (2) the fundamental price/share of equity in the firm. You
should attempt to justify that you have calculated your best
estimate of the firm’s stock price. You may compare your
values (ratios/prices/calculations, etc.) to those you find on the
internet, but your work should be your own and your job is to
calculate these figures. All calculations/ratios/values are
assumed to have been calculated by you own. You should not
substitute those figures for yours and using such figures from
other sources is plagiarism. All of your reports (including table,
graph, figures, reference, etc) should not be longer than 25
pages.
You may use up to three different methodsto calculate firm
stock value (the FCF method is most important and you have to
include this analysis in your project). The three methods that
we study for valuing corporations include:
1. Free Cash Flow Method (or discounted cash flow
method). This method requires you to produce pro forma
financial statements as based upon the additional funds needed,
percentage of sales and constant ratio methods (see “Financial
forecasting” in the index). The pro forma statements are then
used to calculate the free cash flow as based upon the
formulas/examples in the: "Financial Statements, Cash Flow
and Taxes," "Financial Planning and Forecasting Financial
Statements," and the "Corporate Valuation," chapters in the
text. The FCF is discounted back to the present by the WACC,
80. which leads to the firm value as follows. Note that the present
value of the FCFs = the Value of Operations (see the CH 7 and
the formula runs as followings).
Value of Operations (Enterprise Value )
+ Value of non-operating assets (one example would be
marketable securities)
= Total Firm value
- Value of Debt [we use the book value of ST and LT debt;
though theory suggests that the market value
- Value of Preferred Shares [if any]
= Value of Equity
÷ Number of Shares of Common Stock outstanding
Price per share
This price per share is your estimate of the fundamental value
of the firm stock, which you would then use to argue that the
firm is either currently over/under/fairly valued according to the
market, i.e., by comparing your price/share to
the current market price/share. Warren Buffet calls this
estimate the "intrinsic value" of the firm. Remember that you
may consider the efficient market hypothesis in relation to your
price estimate.
2. Dividend Growth Model (Multi-stage growth model)
3. Comparables (Stock Price Multiples Model): This method is
relatively easy and provides some useful valuations that often
set the ranges for the stock price. The course packet lecture
entitled “Using Stock Price Multiples to Estimate Stock Price”
describes this method. You may use either a direct competitor
or industry averages. For example, if you are analyzing Ford
Motor Corp. it would be appropriate to use GM as a comparable
firm (and/or the auto industry). Note that sector/industry ratios
can be obtained on Yahoo.finance [look under profiles, then on
the left hand side under Financial Links you should
see competitors]. Many different financial ratios can be used,
81. although the P/E and Price/CF ratios are common. Another
alternative is to create your own "industry" averages from a
diverse group of firms within the industry. You are limited
only by your creativity; and a great deal of information is
available on the Internet. The goal should be to calculate
fundamental values by yourself.
General Guidelines(Mandatory)
The major focus of the project is to calculate and justify your
estimate of the price/share of equity using the FCF
Method. Many other elements of the project are necessary in
order to complete a satisfactory project. Minimally, these
include:
An example is given on CH12 (page 489- 495).
Completing 5-year pro-formas for your firm. The pro formas
serve as the central element of your project. Many steps lead up
to the pro formas, and many important steps follow from the pro
forma. All of your estimates should include
appropriate justification/ support/ explanation. Many of the
estimates of growth rates and ratios needed below should be
calculated using regression analysis.
Growth. You will need to calculate the historical growth
in dividends or in revenue for your firm (in order to obtain an
estimate of future growth). The method for estimating growth
is illustrated by an example of dividend growth for Firm XXX.
– the related file is provided on Blackboard (BB) by the name
of “Growth estimate sheet”.
Data Needed to Construct the Pro Formas
* Dividend data: You can attain the historical data from
https://www.dividata.com/
*An Excel spreadsheet that you use to construct your pro
82. formas. An excel file is provided on BB and here under the
name: CH12 (Figure 1-3) . This file “automatically” completes
the 5 years of pro formas for you; given that you have input the
data and assumptions correctly.
* 2 years of the firm’s historical financial statements,
including annual balance sheets, income and cash flow
statements (these form the basis of your pro formas). You may
also want to download 5-10 year historical data to do a better
estimate. This data may be downloaded at Mergent-
Online (available through the university library) or through the
SEC official site:
http://www.sec.gov/edgar/searchedgar/companysearch.html
NOTE: While you may want to read or skim the 10Ks for your
company, you need not construct the 10 years of financial data
from the 10Ks. Rather, using either SEC site or MergentOnline,
you are able to download the 5-10 years of financial statements
directly as a file which can be read by Excel. Should you have
difficulty, please contact me.
* Estimates of the company’s current and future (long-term
normal – gn ) sales growth (this should be completed in the
same manner that you calculate dividend growth for a company)
– you may use the Growth estimate sheet available on
Blackboard as a guide. Use the 10 years of financial
statements for the historical sales figures.
* A justification of your choice of constant or non-constant
ratios when completing the pro-formas (the base case should
usually be the constant ratio approach as discussed in the text).
* An estimate of the firm’s target capital structure (see the
guideline below about Calculating a Firm’s WACC) – note that
you need these weights both for the WACC.
* An estimate of the firm’s dividend payout policy.
* The firm’s tax rate.
Steps to Take after Completing the Pro Formas
83. * As mentioned above, the goal is to calculate the firm’s
value (in the end, your estimate of the stock price/share). This
requires that you calculate the firm’s FCFs (free cash flows) as
discussed in the relevant chapters in your text (CH2 and
CH12). This should be a relatively easy procedure, and should
be done on the same Excel spreadsheet as your pro-formas (see
CH12 (Figure 1-3)).
* You also need to calculate the Continuing Value (or
terminal or horizon values) as discussed in CH6 - see the related
equation (it is analogous to the constant growth part of the
supernormal growth model)! This is a crucial part of the
project, because the continuing value of the firm will typically
be the largest proportion of any firm’s current value.
* To discount the FCFs back to the “present” (to the date
of your last historical financial statements) you need to have
an estimate of the firm’s WACC(note that this includes the
weights of debt and equity, the costs of debt and equity, the
latter of which is calculated by using the CAPM, with your
estimate of the firm’s beta). Again, see the guidelines of
WACC Calculationabout Calculating a Firm’s WACC, and also
review the “Four Mistakes to Avoid” (see the index to your
text).
* Once you have completed these steps, you are then ready
to follow the general steps described above to calculate your
estimate of the stock price/share.
Improving the Quality of your Project(Optional)
Other elements are left up to you, in terms of how complete
and/or creative you want your project to be. Some of these
elements must be completed in order to earn a higher than
average or satisfactory evaluation for the project. You
may/should include these other elements if you believe that they
will improve your “case” for your estimate of the price/share
for your firm. For example, a SWOT analysis is often used in
business. For this project, it may be useful, but only if you can
84. connect the main conclusions of the SWOT analysis to your
evaluation of the firm.
The most important extensions include:
* Using ratios that are not a constant percentage of sales
when constructing the pro formas (the basic percent of sales
method is described in the Financial Planning and Forecasting
Financial Statements chapter of the text). The relevant
procedures are either discussed in the text or are available on
spreadsheets that come with the text and/or are on the text's
homepage (listed in the syllabus). The firm’s profit margin has
a very important impact on firm value. If you use the most
recent profit margin in the pro formas, you may not be
providing an accurate longer-term picture of the firm’s
operations. As a result, it may be useful or even crucial to
analyze this ratio and/or others when constructing the pro
formas.
* Sensitivity analysis. How does your estimate of the
price/share change with changes in the firm’s WACC, the firm’s
short or long-term growth rates, changes in the firm’s profit
margin(s) and so on. The amount of work that could be done
here is almost limitless, so good projects would demonstrate
good judgment in which sensitivity analyses they conduct.
* Scenario analysis. This is similar to sensitivity analysis,
but discrete scenarios (e.g., a recession or a boom) are analyzed
instead.
* Ratio analysis. Ratios can be used as diagnostic tools in
evaluating the “health” of a firm. Note that such analysis would
typically include comparisons of your firm’s financial ratios to
the industry standards (or averages). These averages are
available on the Yahoo.finance site
under: Profile/Competitors (Sector or Industry). Ratio analysis
by itself is not very useful in terms of valuation. It provides a
85. diagnostic view of the company which may be helpful in terms
of analyzing the better and poorer practices of a company. In
order to make ratio analysis relevant for this project, it must be
tied directly to the firm's valuation. For example, if a
company's current Inventory Turnover is very poor, the group
can suggest that it should get better into the future, and then
make the necessary adjustments (which may require changes in
the formulas) in the pro forma sheets, to see how improving the
inventory turnover would increase the firm's value.
Advanced Elements of the Firm Valuation Project If you
attempt any of the following, you should connect the additional
analysis directly to the base case for your firm valuation
project.
* Managerial/Strategy Analysis. You may view your job of
this project as the managers of the firm. In completing the
project, you may recognize that the company is either
performing some function very well or very poorly. It is
perfectly appropriate to make suggestions for improving or
maintaining the operation of the firm.
* Marketing Analysis. Future sales typically depend upon
marketing. Projects which focus on companies for which this
may be particularly important may consider analyzing the
marketing policies of the company in order to determine how
those policies affect firm value.
Updated 08/01/2007
86. Discounted Cash Flow
Analysis
By Ben McClure
http://www.investopedia.com/university/dcf/
Thanks very much for downloading the printable version of this
tutorial.
As always, we welcome any feedback or suggestions.
http://www.investopedia.com/contact.aspx
Table of Contents
1) DCF Analysis: Introduction
2) DCF Analysis: The Forecast Period & Forecasting Revenue
Growth
3) DCF Analysis: Forecasting Free Cash Flows
4) DCF Analysis: Calculating The Discount Rate
5) DCF Analysis: Coming Up With A Fair Value
6) DCF Analysis: Pros & Cons Of DCF
7) DCF Analysis: Conclusion
Introduction
It can be hard to understand how stock analysts come up with
"fair value" for
companies, or why their target price estimates vary so wildly.
The answer often
lies in how they use the valuation method known as discounted
cash flow (DCF).
However, you don't have to rely on the word of analysts. With
some preparation
88. http://www.investopedia.com/terms/p/pricetarget.asp
http://www.investopedia.com/terms/d/dcf.asp
http://www.investopedia.com/articles/01/110701.asp
http://www.investopedia.com/articles/03/011403.asp
Investopedia.com – Your Source For Investing Education.
a year's time. If you turn that thinking on its head, you are
saying that the amount
that you'd have in one year is worth $100 dollars today - or the
discounted value
is $100. Make the same calculation for all the cash you expect a
company to
produce in the future and you have a good measure of the
company's value.
There are several tried and true approaches to discounted cash
flow analysis,
including the dividend discount model (DDM) approach and the
cash flow to firm
approach. In this tutorial, we will use the free cash flow to
equity approach
commonly used by Wall Street analysts to determine the "fair
value" of
companies.
As an investor, you have a lot to gain from mastering DCF
analysis. For starters,
it can serve as a reality check to the fair value prices found in
brokers' reports.
DCF analysis requires you to think through the factors that
89. affect a company,
such as future sales growth and profit margins. It also makes
you consider the
discount rate, which depends on a risk-free interest rate, the
company's costs of
capital and the risk its stock faces. All of this will give you an
appreciation for
what drives share value, and that means you can put a more
realistic price tag on
the company's stock.
To demonstrate how this valuation method works, this tutorial
will take you step-
by-step through a DCF analysis of a fictional company called
The Widget
Company. Let's begin by looking at how to determine the
forecast period for your
analysis and how to forecast revenue growth.
The Forecast Period & Forecasting Revenue Growth
The Forecast Period
The first order of business when doing discounted cash flow
(DCF) analysis is to
determine how far out into the future we should project cash
flows.
For the purposes of our example, we'll assume that The Widget
Company is
growing faster than the gross domestic product (GDP)
expansion of the
economy. During this "excessive return" period, The Widget
Company will be
able to earn returns on new investments that are greater than its
cost of capital.
91. that this valuation method does not restrict your analysis to only
excess return
periods - you could estimate the value of a company growing
slower than the
economy using DCF analysis too.)
The table below shows good guidelines to use when determining
a company's
excess return period/forecast period:
Company Competitive
Position
Excess
Return/Forecast
Period
Slow-growing company;
operates in highly
competitive, low margin
industry
1 year
Solid company; operates with
advantage such as strong
marketing channels,
recognizable brand name, or
regulatory advantage
5 years
Outstanding growth
company; operates with very
92. high barriers to entry,
dominant market position or
prospects
10 years
Figure 1
How far in the future should we forecast The Widget Company's
cash flows?
Let's assume that the company is keeping itself busy meeting
the demand for its
widgets. Thanks to strong marketing channels and upgraded,
efficient factories,
the company has a reasonable competitive position. There is
enough demand for
widgets to maintain five years of strong growth, but after that
the market will be
saturated as new competitors enter the market. So, we will
project cash flows for
the next five years of business.
Revenue Growth Rate
We have decided that we want to estimate the free cash flow
that The Widget
Company will produce over the next five years. To arrive at this
figure, the
standard procedure is to forecast revenue growth over that time
period. Then (as
we will see in later chapters), by breaking down after-tax
operating profits,
estimated capital expenditure and working capital needs, we can
estimate the
cash flow the company will produce.
Let's start with top line growth. Forecasting a company's
94. sales or whether
pricing changes are imminent. But because that future can never
be certain, it is
valuable to consider more than one possible outcome for the
company.
First, the upbeat revenue growth scenario: The Widget Company
has grown
revenues at 20% for the past two years, and your careful market
research
suggests that demand for widgets will not let up any time soon.
Management -
always optimistic - argues that the company will keep growing
at 20%.
That being said, there may be reasons to downplay revenue
growth
expectations. While the company's revenue growth will stay
strong in the first few
years, it could slow to a lower rate by Year 5 as a result of
increasing
international competition and industry commoditization. We
should err on the
side of caution and conservatism and assume that The Widget
Company's top
line growth rate profile will commence at 20% for the first two
years, then drop to
15% for the next two years and finally drop to 10% in Year 5.
Posting $100
million of revenue in its latest annual report, the company is
projected to grow its
revenues to $209.5 million at the end of five years (based on
realistic, rather than
optimistic, growth expectations).
Forecast Revenue Growth Profiles
95. Current Year Year 1 Year 2 Year 3 Year 4 Year 5
Optimistic:
Growth Rate
Revenue
-
$100 M
20%
$120 M
20%
$144 M
20%
$172.8 M
20%
$207.4 M
20%
$248.9 M
98. Free cash flow
represents the actual amount of cash that a company has left
from its operations
that could be used to pursue opportunities that enhance
shareholder value - for
example, developing new products, paying dividends to
investors or doing share
buybacks. (To learn more, see Free Cash Flow: Free, But Not
Always Easy.)
Calculating Free Cash Flow
We work out free cash flow by looking at what's left over from
revenues after
deducting operating costs, taxes, net investment and the
working capital
requirements (see Figure 1). Depreciation and amortization are
not included
since they are non-cash charges. (For more information, see
Understanding The
Income Statement.)
Figure 1 - How free cash flow is calculated
In the previous chapter, we forecasted The Widget Company's
revenues over the
next five years. Here we show you how to project the other
items in our
calculation over that period.
Future Operating Costs
When doing business, a company incurs expenses - such as
salaries, cost of
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http://www.investopedia.com/terms/o/operatingmargin.asp
Investopedia.com – Your Source For Investing Education.
For three years running, The Widget Company has generated an
average
operating cost margin of 70%. In other words, for every $1 of
revenue, the
company incurs $0.70 in operating costs. Management says that
its cost cutting
program will push those margins down to 60% of revenues over
the next five
years.
However, as analysts and investors, we should be concerned
that competing
widget factories might be built, thus squeezing The Widget
Company's
profitability. Therefore, as we did when forecasting revenues,
we will err on the
side of conservatism and assume that operating costs will show
an increase as a
percentage of revenues as the company is forced to lower its
prices to stay
competitive over time. Let's say operating costs will hold at
65% of revenues over
the first three projected years, but will increase to 70% in Year
4 and Year 5 (see
Figure 2).
101. Taxation
Many companies do not actually pay the official corporate tax
rate on their
operating profits. For instance, companies with high capital
expenditures receive
tax breaks. So, it makes sense to calculate the tax rate by taking
the average
annual income tax paid over the past few years divided by
profits before income
tax. This information is available on the company's historic
income statements.
Let's assume that for each of the past three years, The Widget
Company paid
30% income tax. We will project that the company will continue
to pay that 30%
tax rate over the next five years (see Figure 2).
Net Investment
To underpin growth, companies need to keep investing in
capital items such as
property, plants and equipment. You can calculate net
investment by taking
capital expenditure, disclosed in a company's statement of cash
flows, and
subtracting non-cash depreciation charges, found on the income
statement.
Let's say The Widget Company spent $10 million last year on
capital
expenditures, with depreciation of $3 million, giving net
investment of $7 million,
or 7% of total revenues (see Figure 2). But in the two prior
years, the company's
net investment was much higher: 10% of revenues.
103. Change in Working Capital
Working capital refers to the cash a business requires for day-
to-day operations,
or, more specifically, short-term financing to maintain current
assets such as
inventory. The faster a business expands, the more cash it will
need for working
capital and investment.
Working capital is calculated as current assets minus current
liabilities. These
items are found on the company's balance sheet, published in its
quarterly and
annual financial statements. At year end, The Widget
Company's balance sheet
showed current assets of $25 million and current liabilities of
$16 million, giving
net working capital of $9 million.
Net change in working capital is the difference in working
capital levels from one
year to the next. When more cash is tied up in working capital
than the previous
year, the increase in working capital is treated as a cost against
free cash flow.
Working capital typically increases as sales revenues grow, so a
bigger
investment of inventory and receivables will be needed to match
The Widget
Company's revenue growth. In our forecast, we will assume that
changes in
working capital are proportional to revenue growth. In other
words, if revenues
grow by 20% in the first year, working capital requirements will
grow by 20% in
105. Having projected the company's free cash flow for the next five
years, we want to
figure out what these cash flows are worth today. That means
coming up with an
appropriate discount rate which we can use to calculate the net
present value
(NPV) of the cash flows.
So, how do we figure out the company's discount rate? That's a
crucial question,
because a difference of just one or two percentage points in the
cost of capital
can make a big difference in a company's fair value.
A wide variety of methods can be used to determine discount
rates, but in most
cases, these calculations resemble art more than science. Still, it
is better to be
generally correct than precisely incorrect, so it is worth your
while to use a
rigorous method to estimate the discount rate.
A good strategy is to apply the concepts of the weighted
average cost of capital
(WACC). The WACC is essentially a blend of the cost of equity
and the after-tax
cost of debt. (For more information, see Investors Need A Good
WACC.)
Therefore, we need to look at how cost of equity and cost of
debt are calculated.
Cost of Equity
Unlike debt, which the company must pay at a set rate of
interest, equity does
not have a concrete price that the company must pay. But that
107. Therefore, the cost of equity is basically what it costs the
company to maintain a
share price that is satisfactory (at least in theory) to investors.
The most
commonly accepted method for calculating cost of equity comes
from the Nobel
Prize-winning capital asset pricing model (CAPM), where: Cost
of Equity (Re) =
Rf + Beta (Rm-Rf).
Let's explain what the elements of this formula are:
Rf - Risk-Free Rate - This is the amount obtained from
investing in securities
considered free from credit risk, such as government bonds from
developed
countries. The interest rate of U.S. Treasury bills or the long-
term bond rate is
frequently used as a proxy for the risk-free rate.
ß - Beta - This measures how much a company's share price
moves against the
market as a whole. A beta of one, for instance, indicates that the
company
moves in line with the market. If the beta is in excess of one,
the share is
exaggerating the market's movements; less than one means the
share is more
stable. Occasionally, a company may have a negative beta (e.g.
a gold mining
company), which means the share price moves in the opposite
direction to the
broader market. (To learn more, see Beta: Know The Risk.)
(Rm – Rf) = Equity Market Risk Premium - The equity market
risk premium
108. (EMRP) represents the returns investors expect, over and above
the risk-free
rate, to compensate them for taking extra risk by investing in
the stock market. In
other words, it is the difference between the risk-free rate and
the market rate. It
is a highly contentious figure. Many commentators argue that it
has gone up due
to the notion that holding shares has become riskier.
Barra and Ibbotson are valuable subscription services that offer
up-to-date equity
market risk premium rates and betas for public companies.
Once the cost of equity is calculated, adjustments can be made
to take account
of risk factors specific to the company, which may increase or
decrease the risk
profile of the company. Such factors include the size of the
company, pending
lawsuits, concentration of customer base and dependence on key
employees.
Adjustments are entirely a matter of investor judgment and they
vary from
company to company.
Cost of Debt
Compared to cost of equity, cost of debt is fairly
straightforward to calculate. The
rate applied to determine the cost of debt (Rd) should be the
current market rate
the company is paying on its debt. If the company is not paying
market rates, an
appropriate market rate payable by the company should be
estimated.
110. cost of debt
based on the proportion of debt and equity in the company's
capital structure.
The proportion of debt is represented by D/V, a ratio comparing
the company's
debt to the company's total value (equity + debt). The
proportion of equity is
represented by E/V, a ratio comparing the company's equity to
the company's
total value (equity + debt). The WACC is represented by the
following formula:
WACC = Re x E/V + Rd x (1 - corporate tax rate) x D/V.
A company's WACC is a function of the mix between debt and
equity and the
cost of that debt and equity. On the one hand, in the past few
years, falling
interest rates have reduced the WACC of companies. On the
other hand,
corporate disasters like those at Enron and WorldCom have
increased the
perceived risk of equity investments.
Be warned: the WACC formula seems easier to calculate than it
really is. Rarely
will two people derive the same WACC, and even if two people
do reach the
same WACC, all the other applied judgments and valuation
methods will likely
ensure that each has a different opinion regarding the
components that comprise
the company's value.
Widget Company WACC
Returning to our example, let's suppose The Widget Company
has a capital
112. http://www.investopedia.com/terms/c/capitalstructure.asp
Investopedia.com – Your Source For Investing Education.
WACC
Rounded WACC
10.64%
11%
Figure 1
In the next section of the tutorial, we'll do the final calculations
to generate a fair
value for The Widget Company.
Coming Up With A Fair Value
Now that we have calculated the discount rate for the Widget
Company, it's time
to do the final calculations to generate a fair value for the
company's equity.
113. Calculate the Terminal Value
Having estimated the free cash flow produced over the forecast
period, we need
to come up with a reasonable idea of the value of the company's
cash flows after
that period - when the company has settled into middle-age and
maturity.
Remember, if we didn't include the value of long-term future
cash flows, we
would have to assume that the company stopped operating at the
end of the five-
year projection period.
The trouble is that it gets more difficult to forecast cash flows
over time. It's hard
enough to forecast cash flows over just five years, never mind
over the entire
future life of a company. To make the task a little easier, we use
a "terminal
value" approach that involves making some assumptions about
long-term cash
flow growth.
Gordon Growth Model
There are several ways to estimate a terminal value of cash
flows, but one well-
worn method is to value the company as a perpetuity using the
Gordon Growth
Model. The model uses this formula:
Terminal Value = Final Projected Year Cash Flow X (1+Long-
Term Cash Flow Growth Rate)
(Discount Rate – Long-Term Cash
Flow Growth Rate)
115. Returning to the Widget Company, let's assume that the
company's cash flows
will grow in perpetuity by 4% per year. At first glance, 4%
growth rate may seem
low. But seen another way, 4% growth represents roughly
double the 2% long-
term rate of the U.S. economy into eternity.
In the section on "Forecasting Free Cash Flows", we forecast
free cash flow of
$21.3 million for Year 5, the final or "terminal" year in our
Widget Company
projections. You will also recall that we calculated The Widget
Company's
discount rate as 11% (see "Calculating The Discount Rate"). We
can now
calculate the terminal value of the company using the Gordon
Growth Model:
Widget Company Terminal Value = $21.3M X 1.04/ (11% - 4%)
=
$316.9M
Exit Multiple Model
Another way to determine a terminal value of cash flows is to
use a multiplier of
some income or cash flow measure, such as net income, net
operating profit,
EBITDA (earnings before interest, taxes, depreciation, and
amortization),
operating cash flow or free cash flow. The multiple is generally
determined by
looking at how comparable companies are valued by the market.
116. Was there a
recent sale of stock of a similar company? What is the standard
industry
valuation for a company at the same stage of maturity?
In Year 5, the Widget Company is expected to produce free cash
flow of $21.3M.
Multiplying this by a projected price-to-free cash flow of 15
gives us a terminal
value of $319.9M.
Widget Company Terminal Value = $21.3M X 15 =
$319.9M
You will see that the terminal value can contribute a great deal
to total value, so it
is important to use an exit multiple that can be justified. One
way to make the
multiple more believable is to give estimates on the
conservative side. Justifying
a multiple of 15 with your figures would certainly be easier to
justify than one at
20 or 25. Because it can be tricky to justify the multiple, this
method isn't used as
much as the Gordon Growth Model.
Calculating Total Enterprise Value
Now you have the following free cash flow projection for the
Widget Company.
Forecast
Period Year 1 Year 2 Year 3 Year 4 Year 5
Terminal Value (Gordon
Growth Model)