Investment appraisal and company valuation methods for beginners.
Concepts such as time value of money, simple interest, compound interest, CARG, cash-flows, WACC, inflation, discounting and capitalizing cash-flows are covered; in order to analyse and determine the economic feasibility of a project and what is the intrinsic or fair value of a company.
What is the 'Time Value of Money - TVM'
The time value of money (TVM) is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. TVM is also referred to as present discounted value.
BREAKING DOWN 'Time Value of Money - TVM'
Money deposited in a savings account earns a certain interest rate. Rational investors prefer to receive money today rather than the same amount of money in the future because of money's potential to grow in value over a given period of time. Money earning an interest rate is said to be compounding in value.
BREAKING DOWN 'Compound Interest'
Compound Interest Formula
Compound interest is calculated by multiplying the principal amount by one plus the annual interest rate raised to the number of compound periods minus one.The total initial amount of the loan is then subtracted from the resulting value.
This is the third presentation for the University of New England Graduate School of Business unit GSB711 - Managerial Finance. It explores the time value of money, using examples to help students clarify this concept.
What is the 'Time Value of Money - TVM'
The time value of money (TVM) is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. TVM is also referred to as present discounted value.
BREAKING DOWN 'Time Value of Money - TVM'
Money deposited in a savings account earns a certain interest rate. Rational investors prefer to receive money today rather than the same amount of money in the future because of money's potential to grow in value over a given period of time. Money earning an interest rate is said to be compounding in value.
BREAKING DOWN 'Compound Interest'
Compound Interest Formula
Compound interest is calculated by multiplying the principal amount by one plus the annual interest rate raised to the number of compound periods minus one.The total initial amount of the loan is then subtracted from the resulting value.
This is the third presentation for the University of New England Graduate School of Business unit GSB711 - Managerial Finance. It explores the time value of money, using examples to help students clarify this concept.
This introductory revision presentation guides students through the concept of basic investment appraisal. It examines the nature of capital investment spending and then outlines three common approaches to investment appraisal: payback period, net present value and accounting rate of return. Some key evaluative points relating to investment appraisal are also discussed.
Investment appraisal and company valuation methods for beginners.
Concepts such as time value of money, simple interest, compound interest, CARG, cash-flows, WACC, inflation, discounting and capitalizing cash-flows are covered; in order to analyse and determine the economic feasibility of a project and what is the intrinsic or fair value of a company introducing discounted cash-flow techniques and multiples valuation
Best Practices in Understanding and Increasing Your Company ValuationRoseRyan
Want to raise your company’s share price or valuation? Look beyond the benchmark. In this slide presentation from our October 2013 webinar with Proformative, RoseRyan CEO Kathy Ryan and Assay Founding Partner Adrian Bray reveal the science of increasing value throughout an organization and identify key factors that affect company valuation.
Concepts such as time value of money, simple interest, compound interest, CARG, inflation, discounting and capitalizing cash-flows are covered; in order to establish the foundations to analyse and determine the economic feasibility of a project and what is the intrinsic or fair value of a company introducing discounted cash-flow techniques and multiples valuation.
Investment appraisal & company valuation for beginnersAntonio Alcocer
Investment appraisal and company valuation methods for beginners.
Concepts such as time value of money, simple interest, compound interest, CARG, cash-flows, WACC, inflation, discounting and capitalizing cash-flows are covered; in order to analyse and determine the economic feasibility of a project and what is the intrinsic or fair value of a company introducing discounted cash-flow techniques and multiples valuation
Investment appraisal and company valuation methods for beginners.
Concepts such as time value of money, simple interest, compound interest, CARG, cash-flows, WACC, inflation, discounting and capitalizing cash-flows are covered; in order to analyse and determine the economic feasibility of a project and what is the intrinsic or fair value of a company introducing discounted cash-flow techniques and multiples valuation
The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.
What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
So if you are interested in selling your pi network coins at a high rate tho. Or you can't wait till the mainnet launch in 2026. You can easily trade your pi coins with a merchant.
A merchant is someone who buys pi coins from miners and resell them to Investors looking forward to hold massive quantities till mainnet launch.
I will leave the telegram contact of my personal pi vendor to trade with.
@Pi_vendor_247
How to get verified on Coinbase Account?_.docxBuy bitget
t's important to note that buying verified Coinbase accounts is not recommended and may violate Coinbase's terms of service. Instead of searching to "buy verified Coinbase accounts," follow the proper steps to verify your own account to ensure compliance and security.
Currently pi network is not tradable on binance or any other exchange because we are still in the enclosed mainnet.
Right now the only way to sell pi coins is by trading with a verified merchant.
What is a pi merchant?
A pi merchant is someone verified by pi network team and allowed to barter pi coins for goods and services.
Since pi network is not doing any pre-sale The only way exchanges like binance/huobi or crypto whales can get pi is by buying from miners. And a merchant stands in between the exchanges and the miners.
I will leave the telegram contact of my personal pi merchant. I and my friends has traded more than 6000pi coins successfully
Tele-gram
@Pi_vendor_247
how can i use my minded pi coins I need some funds.DOT TECH
If you are interested in selling your pi coins, i have a verified pi merchant, who buys pi coins and resell them to exchanges looking forward to hold till mainnet launch.
Because the core team has announced that pi network will not be doing any pre-sale. The only way exchanges like huobi, bitmart and hotbit can get pi is by buying from miners.
Now a merchant stands in between these exchanges and the miners. As a link to make transactions smooth. Because right now in the enclosed mainnet you can't sell pi coins your self. You need the help of a merchant,
i will leave the telegram contact of my personal pi merchant below. 👇 I and my friends has traded more than 3000pi coins with him successfully.
@Pi_vendor_247
Even tho Pi network is not listed on any exchange yet.
Buying/Selling or investing in pi network coins is highly possible through the help of vendors. You can buy from vendors[ buy directly from the pi network miners and resell it]. I will leave the telegram contact of my personal vendor.
@Pi_vendor_247
how to sell pi coins at high rate quickly.DOT TECH
Where can I sell my pi coins at a high rate.
Pi is not launched yet on any exchange. But one can easily sell his or her pi coins to investors who want to hold pi till mainnet launch.
This means crypto whales want to hold pi. And you can get a good rate for selling pi to them. I will leave the telegram contact of my personal pi vendor below.
A vendor is someone who buys from a miner and resell it to a holder or crypto whale.
Here is the telegram contact of my vendor:
@Pi_vendor_247
Financial Assets: Debit vs Equity Securities.pptxWrito-Finance
financial assets represent claim for future benefit or cash. Financial assets are formed by establishing contracts between participants. These financial assets are used for collection of huge amounts of money for business purposes.
Two major Types: Debt Securities and Equity Securities.
Debt Securities are Also known as fixed-income securities or instruments. The type of assets is formed by establishing contracts between investor and issuer of the asset.
• The first type of Debit securities is BONDS. Bonds are issued by corporations and government (both local and national government).
• The second important type of Debit security is NOTES. Apart from similarities associated with notes and bonds, notes have shorter term maturity.
• The 3rd important type of Debit security is TRESURY BILLS. These securities have short-term ranging from three months, six months, and one year. Issuer of such securities are governments.
• Above discussed debit securities are mostly issued by governments and corporations. CERTIFICATE OF DEPOSITS CDs are issued by Banks and Financial Institutions. Risk factor associated with CDs gets reduced when issued by reputable institutions or Banks.
Following are the risk attached with debt securities: Credit risk, interest rate risk and currency risk
There are no fixed maturity dates in such securities, and asset’s value is determined by company’s performance. There are two major types of equity securities: common stock and preferred stock.
Common Stock: These are simple equity securities and bear no complexities which the preferred stock bears. Holders of such securities or instrument have the voting rights when it comes to select the company’s board of director or the business decisions to be made.
Preferred Stock: Preferred stocks are sometime referred to as hybrid securities, because it contains elements of both debit security and equity security. Preferred stock confers ownership rights to security holder that is why it is equity instrument
<a href="https://www.writofinance.com/equity-securities-features-types-risk/" >Equity securities </a> as a whole is used for capital funding for companies. Companies have multiple expenses to cover. Potential growth of company is required in competitive market. So, these securities are used for capital generation, and then uses it for company’s growth.
Concluding remarks
Both are employed in business. Businesses are often established through debit securities, then what is the need for equity securities. Companies have to cover multiple expenses and expansion of business. They can also use equity instruments for repayment of debits. So, there are multiple uses for securities. As an investor, you need tools for analysis. Investment decisions are made by carefully analyzing the market. For better analysis of the stock market, investors often employ financial analysis of companies.
Poonawalla Fincorp and IndusInd Bank Introduce New Co-Branded Credit Cardnickysharmasucks
The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
how to sell pi coins on Bitmart crypto exchangeDOT TECH
Yes. Pi network coins can be exchanged but not on bitmart exchange. Because pi network is still in the enclosed mainnet. The only way pioneers are able to trade pi coins is by reselling the pi coins to pi verified merchants.
A verified merchant is someone who buys pi network coins and resell it to exchanges looking forward to hold till mainnet launch.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
how to swap pi coins to foreign currency withdrawable.DOT TECH
As of my last update, Pi is still in the testing phase and is not tradable on any exchanges.
However, Pi Network has announced plans to launch its Testnet and Mainnet in the future, which may include listing Pi on exchanges.
The current method for selling pi coins involves exchanging them with a pi vendor who purchases pi coins for investment reasons.
If you want to sell your pi coins, reach out to a pi vendor and sell them to anyone looking to sell pi coins from any country around the globe.
Below is the contact information for my personal pi vendor.
Telegram: @Pi_vendor_247
2. www.antonioalcocer.com
4. Company valuation methods
3. Investment appraisal for economic feasibility
PRESENTS
2. Compound interest & CAGR
1. Time value of money definition
3. Why ($100, today) are not equivalent to
($100, when I was younger)?
www.antonioalcocer.com
11. Opportunity cost
“Money can be invested
today in different options
with a different return
ovetime”
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12. www.antonioalcocer.com
OPTION 1
($398 in t21=2011)
OPTION 2
($100 in t21=2011)
($100 in t0=1990) OPTION 3
($0 in t21=2011)
CAGR= Compound Annual Growing Rate
Apple share price: 01/08/1990: $9.96 – 01/08/2011: $396.75 – CAGR: 19.17%
Money at home below my pillow: 01/08/1990: $100 – 01/08/2011: $100 – CAGR: 0%
Money placed at a default subprime product: 01/08/1990: $100 – 01/08/2011: $0 – CAGR: -100%
13. TIME VALUE OF MONEY
MEANS OPPORTUNITY COST
MEANING
THAT IN FINANCE
WE TALK
ABOUT
THE
PAIR:
($,time)
That is why different cash-flows at different moments in time
www.antonioalcocer.com
cannot be operated unless moved to the same point in time
15. Compound interest formula
VF=V0 x (1+i)^t
Two cash-flows are equal in time at a given interest rate
VF: Future value of the cash-flow
V0: Present or actual value of the cash-flow
i: Compound annual interest or growing rate
www.antonioalcocer.com
t: Time between both cash-flows
16. CAGR = ((V /V )^(1/t))-1
F O
R”
“CAG
n as
know
Also
CAGR=Compound Annual Growing Rate
www.antonioalcocer.com
t in years so CAGR on a yearly basis
17. …and moving cash-flows to the future
is called:
N
T IO
SA
LI
TA
PI
C A
VF=V0 x (1+i)^t
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18. …and moving cash-flows from the future
is called:
Ic%
VO Vf
DISCOUNTING
Vo=VF / (1+i)^t
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20. Simple interest - Is
VF=V0 x (1+i*t)
“Interests earnt are not re-invested”
Compound interest - Ic TIME VALUE OF MONEY
VF=V0 x (1+i)^t
“Interests earnt are re-invested”
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21. Yield =12%
[annual]
I12=1% I6=2% I4=3% I2=6%
MONTHLY BI-MONTHLY QUARTERLY SEMI-ANNUALLY
NO REINVESTMENT REINVESTMENT
Is Ic
By convention yields are provided in a yearly basis IF NOT SPECIFIED www.antonioalcocer.com
22. EXAMPLE 1
Banking deposit
3-years time
10% annual interest rate (*)
Initial investment: €1.000
(*) The 10% interest rate is an annual yield. It depends if there are reinvestment of interests, using compound interest.
In the case there are not re-investment of interests we use simple interest formula
23. +€1000+€100+€100+€100
Is (+€100) (+€100) (+€100)
1 2 3
VF = 1000*(1+10%*3) = €1300
-€1000
+€1000+€100+€110+€121
Ic (+€100) (+€110) (+€121)
1 2 3
VF = 1000*(1+10%)^3 = €1331
-€1000
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Calculations made for a 3-years bank deposit with a 10% annual interest rate and €1000 initial investment
As you can see due to “time value of money”, and if interests are reinvested or not reinvested; €1000 at t0 are equal to €1331 at a10% compound interest rate or €1300 at a 10% simple interest
Simple interest is used if the interests earnt are not reinvested. Compound interest is used if interests are reinvested
As general rule, investments lasting less than 1 year use simple interest and investments lasting>=1 year use compound interest but which one to use if determined by the existance or not of the re-investment of the interests
24. EXAMPLE 2
Banking deposit
2-years time
10% annual interest rate
Bi-monthly re-investment of interests
4 semesters
Initial investment: €1.000
25. Ic
12% ANNUAL YIELD = 12% / 2 = 6% BI-MONTHLY YIELD
CAGR = ((V /V )^(1/t))-1=((1263/1000)^(1/2))-1
F O +€1000+€60+€63.6+€67.4+€71.4
12.38%
(+€60) (+€63.6) (+€67.4) (+€71.4)
1s 2s 3s 4s
VF = 1000*(1+6%)^4 = €1263
-€1000
Annual yield is used to obtain the bi-monthly yield, and then apply compound interest formula for calculations in order to obtain €1263
But this investment has not a compound annual growing rate (CAGR)=12% due to the bi-monthly reinvestment. www.antonioalcocer.com
26. but as a general rule in finance we assume…
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30. Example 1: Investment in the S&P500 – CAGR: 7.16%
Vf
$337.494
Vo
$30.000
t0=30 t35=65
S&P500 CAGR = 7.16% in the period 01/02/1950-01/02/2010
VF=30.000*(1+7.16%)^35=Vf*(1+i)^t www.antonioalcocer.com
31. You better would
have invested in
Berkshire Hathway
- Oracle of Omaha’s word -
www.antonioalcocer.com
32. Example 2: Investment in Berkshire Hat. – CAGR: 20.3%
Vf
$19.338.296
Vo
$30.000
t0=30 t35=65
Warren Buffet’s Berkshire Hathway Investment Fund CAGR = 20.3% in the period 1965-2009 year ending
VF=30.000*(1+20.3%)^35=Vf*(1+i)^t www.antonioalcocer.com
33. I rather go for Apples
www.antonioalcocer.com - Get back soon Steve! -
34. Example 3: Investment in Apple shares – CAGR: 23.06%
Vf
$42.812.697
Vo
$30.000
t0=30 t35=65
Apple shares’ CAGR = 23.06% in the period 27 August 1985 – 27 August 2011
VF=30.000*(1+23.06%)^35=Vf*(1+i)^t www.antonioalcocer.com
36. Yes, $42.8 million
But in 35-years time
& we know about time value of money
& the pair ($,t)
& moving cash-flows in time
& discounting cash-flows
www.antonioalcocer.com
Using Vo=Vf / (1+i)^t
37. So you are telling me that today I would not be
worthy $42.8 million?
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38. Yes, because of INFLATION!
CPI CAGR=2.7%
CAGR Consumer Price Index (inflation) in the period 1920-2005 = 2.7%
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39. www.antonioalcocer.com
$42.8 millions
in t=35 years
would be
$16.85 millions
today at a 2,7%
Vo=Vf/(1+i)^35=42.8/(1+2.7%)^35=$16.85 millions
40. So you better assume
your purchasing
power today
would be
$16.85 million
rather than
$42.8 million
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41. Yes, if you would have invested in Apples
HAVE YOU?
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42. Now
We are ready to understand
Investment appraisal methods
Used in Finance to study
The economic feasibility
Of a project
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43. INVESTMENT APPRAISAL METHODS
1. NET PRESENT VALUE (NPV)
2. INTERNAL RATE OF RETURN (IRR)
3. PAYBACK PERIOD
www.antonioalcocer.com
(*) Most important discussed
44. GOLDEN RULE
www.antonioalcocer.com
“We always work with cash-flows in
investment appraisal”
45. “Cash-flow is a fact,
net income
just an opinion”
-Pablo Fernández IESE-
The net income amount is affected by accounting methods & assumptions made
(i.e. depreciation & amortization that are not “real” cash inflows or outflows) www.antonioalcocer.com
Cash-flows are real money “entering” or “exiting” the company or project
46. P&L (*)
Net sales
-Cost of goods sold
GROSS PROFIT
HOW GOOD IS YOUR BUSINESS
-Selling, General & Administration GENERATING “$” DUE THE OWN
-Other operating expenses NATURE OF THE BUSINESS
EBITDA
-Depreciation & Amortization
-Impairment
EBIT
-Interests FINANCING STRUCTURE
INCOME BEFORE TAXES
-Taxes
CORPORATE TAXES FRAMEWORK
NET INCOME
(*) P&L=Profit & Loss account simplified
P&L and Net Income are affected due to the accounting methods used
Net income is an opinion due to it depends on the calculation
of the cost of goods sold, amortization method used & impairment
Net income is not real cash-flow outlays of money www.antonioalcocer.com
Depreciation, amortization & impairment are not real cash-flow outlays
47. “So
now
I understand
in investment appraisal
we use CASH-FLOWS”
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48. But how many
cash-flows exist?
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49. Free CASH-FLOW of the project (FCFF)=
Available “$” for the funds providers:
_BANKS
_SHAREHOLDERS
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50. www.antonioalcocer.com
Free CASH-FLOW of the project (FCFF)=
+EBIT (1-t) X
+D&A
+/-WORKING CAPITAL CHANGE
-CAPEX
FCFF= Real money generated by the project after accounting adjustments (no real cashflows outlays)
D&A=Depreciation & Amortization (added because no real cash-outlay happened)
CAPEX=Capital Expenditures (Investment in fixed assets)
Working Capital Change= Investment in current assets
t=Corporate taxes in %
(*) Simplified formula of the cashflow, there are other terms: non-cash transactions adjustments, other current assets changes, proceeds from long term assets sales, changes in long term assets; to be considered
51. Equity Free CASH-FLOW (FCFE)=
Available “$” for the
equity providers:
_SHAREHOLDERS
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52. www.antonioalcocer.com
Equity Free CASH-FLOW (FCFE)=
+FCFF
+PROCEEDS NEW BANKING DEBT
- AMORTIZATION CURRENT DEBT
- INTERESTS OF DEBT * (1-t)
- DIVIDENDS PAID & T.S. REPUR.
FCFE=Equity free cash-flow.
Cash-flow available for shareholders after paying the banking funs providers.
FCFE would be the money available for shareholders
T.S. REPUR= Treasury stock repurchase
55. Investment appraisal of a project with these free-cashflows
+
+$300m
+$175m +$200m
t0=0 t1=1 t2=2 t3=3
-$150m
-$300m
-
Diagram of the project free-cashflows (FCFF)
Data in millions of US$ www.antonioalcocer.com
Yearly data
56. Houston, we have a problem:
Funding needed:
$300 mill. in 1st year
$150 mill. in 2nd year
www.antonioalcocer.com
57. Don’t worry
Funds providers:
_banks
_shareholders
will gently dispose
them
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58. “OK, have your funds, but [BANK]
at a 6.6% annual interest rate
rat
& maximum amount 65%
Kd= 6.6%
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59. Ke= 20% [SHAREHOLDERS]
“OK, have your funds,
but at a 20% annual
interest rate & 35%
maximum amount”
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60. So,
which amount/ratio should I ask for
Don E. Botín [banks]
& Don C. Slim [shareholders]?
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61. It seems clear that
The cost of financing this project
Would be the
Weighted average
Cost of capital
WACC
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63. So the $300 mill. + $150 mill.
will be financed
by a 65% banking debt
by a 35% shareholders’ equity
with a WACC=10%
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64. Profitability of the project = 50% in 3-years? www.antonioalcocer.com
+$300m
+$175m +$200m
t0=0 t1=1 t2=2 t3=3
-$150m
-$300m
+300 + 175 + 200 - 300 - 150
%return= = 50%
450
Diagram of the project free-cashflows (FCFF)
Data in millions of US$
Yearly data
66. INVESTMENT APPRAISAL METHODS
1. NET PRESENT VALUE (NPV)
2. INTERNAL RATE OF RETURN (IRR)
3. PAYBACK PERIOD
(*) Most important discussed www.antonioalcocer.com
67. 1. NET PRESENT VALUE = NPV www.antonioalcocer.com
1) All FCFF are discounted to today & summed
2) Using compound interest formula
3) At a WACC rate
68. www.antonioalcocer.com
1. NET PRESENT VALUE=$0
[Undertake project]
Cash-flows generated exactly pay the cash-flows expectations requested by
the banking & shareholders (funds providers)
69. 1. NET PRESENT VALUE>$0 www.antonioalcocer.com
[Undertake project]
Cash-flows generated pay all the cash-flows requested by fund providers in
order to meet their profit expectations (NPV=0) & additional cash-flow=NPV
goes as excess profit for shareholders
70. www.antonioalcocer.com
1. NET PRESENT VALUE<$0
[Do not undertake project]
Cash-flows generated are not enough
to pay the cash-flows demmands by
funds providers according to their
profit expectations (=WACC)
71. 1. Net present value = NPV – WACC=10% www.antonioalcocer.com
+$300m
+$175m +$200m
t0=0 t1=1 t2=2 t3=3
-$150m
-$300m
Undertake project NPV>0
+300 -150 +175 +200
NPV = $131.2 = -300 + + +
(1+10%)^1 (1+10%)^2 (1+10%)^3
Diagram of the project free-cashflows (FCFF)
Data in millions of US$
Yearly data
+$131.2 million of excess cash-flow that shareholders get above their profit (20%) & cash-flow expectations
73. 2. Internal Rate of Return (IRR) = 32.24% > WACC =10%
Undertake project
+$300m
+$175m +$200m
t0=0 t1=1 t2=2 t3=3
-$150m
-$300m
Solve non-linear equation
+300 -150 +175 +200
NPV = $0 = -300 + + +
(1+IRR)^1 (1+IRR)^2 (1+IRR)^3
Diagram of the project free-cashflows (FCFF)
Data in millions of US$
Yearly data www.antonioalcocer.com
IRR is obtained solving the equation
74. 1&2. Net present value summary
IRR>WACC NPV>0 Fund providers more than happy
NPV excess for shareholders
IRR=WACC NPV=0 Fund providers exactly happy
Fund providers unhappy
IRR<WACC NPV<0
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75. 3. PAYBACK PERIOD Years to recover
investment…
…you better pay
Expected number of years in order
cumulative (+) cash-flows>=
www.antonioalcocer.com
cumulative (-) cash-flows
76. 3. Payback period= 1.85 years www.antonioalcocer.com
+$300m
+$175m +$200m
t0=0 t1=1 t2=2 t3=3
-$150m
-$300m
Cumulative
-300 -300+300-150 -300+300-150+175 -300+300-150+175+200
-300 -150 +25 +225
Payback period does not take into account time value of money, so it should not be used in a stand alone basis but as complementary info to NPV and IRR
Diagram of the project free-cashflows (FCFF)
Data in millions of US$
Yearly data
Payback period: Positive cumulative cashflows are > negative cumulative cashflows in year 1-2
175/12=14.58
-150/14.58=10.29 months = 10.29/12= 0.85 years
77. www.antonioalcocer.com
RE
Time value of money
Compound interest
Moving cash-flows in time
We have learnt: Investment appraisal methods
Project free cashflows
WACC
NPV+IRR+Payback
78. [now we can strike back the Empire!]
[and go for company valuations…]
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79. WHAT IS THE
VALUE OF
A COMPANY?
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83. = Enteprise value [EV]
HEY!!!!
WHAT IS THE
VALUE OF A
COMPANY?
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84. “But
in company’s valuation
we need
to calculate
the “intrinsic” or “fair value”
of the company’s equity
“updated”
based on its
future performance=
www.antonioalcocer.com
cashflows”
85. But before we start remember the 2nd GOLDEN RULE:
PRICE IS WHAT YOU PAY
[demmand falls in love with supply]
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87. www.antonioalcocer.com
[VALUATION METHODS USED]
1. fast 2. right
MULTIPLES DISCOUNTING CASH-FLOWS
PER Free-cashflows (FCFF)
Sales Equity cashflows (FCFE)
EBITDA Dividends
Others Other cash-flows
gross fine tune
past future
(*) I will not cover other valuation methods based: book value, adjusted book value, etc.
PER = Price Earning Ratio = Share Price in stock market / earnings per share
88. MULTIPLES VALUATION DISCOUNTING CASH-FLOWS
1. It is wrong
2. Does not consider time value of money
3. Based in “static” data: P&L
4. Based in past performance
5. Does not consider future cash-flows
6. Assumes future = present
7. But it is fast
8. And it is widely used by investors
9. Get a “rough” company value estimate 1. It is the right one method
2. Does consider time value of money
3. It is based in “dinamic” data:
4. Does consider future cash-flows
5. But it is a lot of work
6. Used to fine-tune the multiples valuation
5 minutes time 2 weeks time
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89. I was captured by the dark side, and although I know it is WRONG…
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…explain me the MULTIPLES VALUATION method
90. [MULTIPLES VALUATION] www.antonioalcocer.com
EV=ENTERPRISE VALUE [$5-9 millions]
Industry comparable multiple x Company’s metric
1. Choose a metric: EBITDA
2. Company’s EBITDA = $1 million
3. Company in the food & beverage industry (F&B)
4. Comparable purchasing transactions in F&B industry: 5-9 times
92. HOW much would you pay for a cow?
Depends on the future milk
that it can provide
[& not the milk that provided in the past]
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93. What is the value of a company?
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Depends on the future cash-flows it can generate
[you decide using either FCFF or FCFE_it’s up to you]
94. www.antonioalcocer.com
& the annual growing rate “g”(%)
of these future cash-flows
[Should not be greater than a economy’s GDP in the long run <3%]
[In the short term cash-flows growth can exceed long term trend]
97. How do I calculate Ke=shareholders’ profit expectations?
4.54% 6.18%
Ke=RF+B*(RM-RF)
9.7% 0.83
RF: Money invested at no risk (RF=10-years german bonds yield considered a risk free investment)
B*(RM-RF): Upside return/premium for investing in a company with specific risk
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RM=Return of the stock market benchmarked = CAGR Ibex 35 in the 1995-2008 period = 10.72%
B=Company beta = sistematic risk of the company versus the market = Let’s assume 0,83. Beta calculation is biased and depends on the time period analysed
98. WACC & g calculations www.antonioalcocer.com
59% 28.2% 6.3% 41% 9.7%
WACC= %L*(1-t)*Kd + %E*Ke
WACC= 6,62%
g=2,5% (*)
(*) GDP for the European Union in the 1996-2008 period according to Central European Bank (2,2%). We will asume a g=2.5%
T=Effective corporate tax rate paid by the company. It is less than 30% due to fiscal benefits awarded from previous years
%L=proportion of banking debt %E=Proportion of equity
99. [DISCOUNTED CASH-FLOW METHOD SUMMARY]
FCFF
1. [Determine which cash-flows you want to use] FCFE
2. [Determine company’s 5-years future cash-flows (*)]
3. [From year “n+5”, future cash-flows grows at “g” rate (**)] <3%
@WACC if FCFF
4. [Calculate the NPV today of the infinite cash-flows] @Ke if FCFE
[Enteprise value= NPV of all infinite future cashflows @ WACC]
(*) The number of years range from 5 to 10, in terms of estimating the future P&L, balance sheet and company cash-flows.
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More adecuate calculation should range 10 years.
(**) Future cash-flows from year n+5 growth as an infinite geometric progression with a “g” growing rate. This geometric progression with infinite terms is called RESIDUAL VALUE
100. EXAMPLE: Company free cash-flows [FCFF]
5-YEARS CASH-FLOWS ESTIMATION CASH-FLOWS GEOMETRIC PROGRESSION
X (1+g)^(n-3)
X (1+g)
X (1+g)
X (1+g)
195
190
185
181
g=2,5%
149
123
102
87
2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E ………. INFINITE
TODAY
RESIDUAL VALUE
Data in millions of $
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Please note that we assume the company will last forever, so from year 2017 onwards we have infinite cash-flows
The 5-years cashflows estimation must be done according to the mid-range business plan & investment/capex plan; and using the P&L & balance sheet & cashflow statements
After the 5th year, in 2017, we calculate cash-flows as a geometric progression increasing in a “g%”=2,5% every year the latest cash-flow. CFn=CFn-1*(1+g)
It can be demonstrated that the geometric progression with infinite cash-flows starting at 2017, equal a single cash-flow located in 2016 year and value=Cf2017/(WACC-g)
The infinite cash-flows from 2017 onwards are called RESIDUAL VALUE
101. EXAMPLE: Free cash-flows [FCFF] are discounted @ WACC
RESIDUAL VALUE
X (1+g)^(n-3)
X (1+g)
X (1+g)
X (1+g)
195
190
185
181
G=2,5%
149
123
102
87
2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E ………. INFINITE
TODAY
5-YEARS CASH-FLOWS ESTIMATION CASH-FLOWS GEOMETRIC PROGRESSION
181*(1+2.5%)
87 102 123 149 181 6.6%-2.5%
NPV=EV=$3780= + + + + +
(1+6.6%)^1 (1+6.6%)^2 (1+6.6%)^3 (1+6.6%)^4 (1+6.6%)^5 (1+6.6%)^5
RESIDUAL VALUE
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102. Have I done this?
COMPANY’S EV
$3780 millions
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104. “DYNAMIC”
BALANCE SHEET
“UPDATED”
DUE TO IMPACT OF
“STATIC” FUTURE CASH-FLOWS
BALANCE SHEET
TODAY - 2011
EO
E 41%
EV
$3780
mill. ??
L 59%
E: Equity www.antonioalcocer.com
L: Liability (net financial debt) = short term debt + long term debt – cash($)
EO = Company’s Estimated “fair value” of equity
105. [EO= fair value of company’s equities = 3780-400+150-50-200=$3280 mill.]
BALANCE SHEET
“UPDATED”
EO
EV
$3780 - Net Financial Debt -$400 mill.
mill. ??
+Shareholders’ right in other companies +$150 mill.
- Minority interests -$50 mill.
- Long-term pension liability -$200 mill.
EO=Intrinsic value or fair value of the company’s equity www.antonioalcocer.com
Shareholders’ rights in other companies are real cash inflows into the company due to ownership of other companies as minority stake
Net financial debt is the net financial liability position with banks. It is a cash-outflow assuming all the debt is paid.
Minority interests: It is a portion of the value of a company that it is own by “external” minority shareholders and it does not belongs to the company. Cash out-flow
Long term pension liability & other liabilities correspond to future cash-outflows to be paid by the company.
106. BUY?
Fair value>market value
SELL?
Fair value<market value
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107. PRICE IS WHAT YOU PAY
MARKET CAP = $6000 mill.
# shares = 10 mill.
[demmand falls in love with supply]
www.antonioalcocer.com Market share price paid = $600
108. EO=$3280 mill.
# shares = 10 mill.
Equity fair/intrinsic value = $328
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VALUE IS WHAT YOU GET
109. [CONCLUSION 1] www.antonioalcocer.com
I shouldn’t have bought new shares!!!
or
I better sell the ones I already own@$150
$328 $600
Fair value<market value
110. [CONCLUSION 2]
The fair value EO does not change
unless new inputs/info impact
the company’s future cashflows
overall picture & therefore EV
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111. [CONCLUSION 3]
[95% of time_estimating 5-10 years cash-flows]
[5% estimating WACC & “g” rate (=residual value)]
…but
[Discounting cash-flows model is highly sensible to:]
WACC & “g”
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112. SENSIBILITY ANALYSIS
Fair value per share in $ [WACC]
5% 6,62% 8%
2% 486,7 291,9 209,2
[g] 2,5% 586 328,7 229,4
3% 735 375,7 253,5
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113. [CONCLUSION 4]
In company valuation, the most important issues to understand are:
1. Assumptions_How future cash-flows are calculated
2. Understand the risks associated to them in order they do not occur
3. Assume than in valuation we always obtain a price range
4. Company valuations can be highly manipulated by small changes in WACC & g
5. Use multiples valuation for a “rough” number & 5 minutes valuation
6. Use discounted cashflow for a “fine tuned” number & right calculation method
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114. Thank you very much for you time!
Any comment, suggestion is more than welcome:
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