Week 5 건국대학교 벤쳐전문기술

Hans Kim 2 기업가치분석 (Valuation)  Why value the Value  What is DCF  DCF Case Study Week 5

Hans Kim 3 Valuation _ Why value the Value? Why value the Value  Broadened acceptance of Shareholder Value  The continuing debate on importance of shareholder value vs. other measures (employment, social responsibility, and the environment)  UK & US  shareholders are the owner of the corporation  BOD is the representative of shareholders and elected by them  objective function of corporation is to maximize shareholder value  Continental Europe  For instance, under Dutch law, the board of a Structural N.V. (= a large corporation) is mandated to ensure the continuity of the business, not to represent shareholders in pursuit of value maximization  Similar to Germany & France  Case of Vodafone AirTouch’s hostile acquisition of Mannesmann the German conglomerate in 2000, broadened the acceptance of shareholder value in Europe ( McKinsey Report) Vodafone  1985 년 영국에서 설립된 가입자 기준 세계최대 휴대폰회사 Mannesmann  1890 년 독일에서 설립된 강관회사가 모체로, 정보처리, 정밀기기, 건설, 무역 등의 재벌회사  The broadened acceptance of shareholder value  motivated to value the Value  triggered various valuation methods (Multiple  DCF  Real Option…)  Did the currency crisis in late ’90s in Korea similarly broaden the acceptance of shareholder value and valuation methodology ?  Please recall when the concept of PER was introduced to Korean stock market

Hans Kim 4 Valuation _ Why value the Value? Factors of ascendancy of shareholder value in US market 1.The increased role of stock option  1970s’ concern on divergence between managers’ and shareholders’ interest  agency problem  1980s’ US economy’s recover from 70s’ high inflation and low growth  the emergency of LBO, especially management buyout and Fed’s new program to drastically reduce inflation  rise in equity value  increased role of stock option  more importance of valuing equity 2.Pension insolvency  Pay-as-you-go system  workers today pay for retirement of current retirees  Problem as less workers and more retirees  pension crisis without easy fixes  Investment fund needs to generate good return covering the future shortfall  to reduce the burden to a level where political consensus becomes feasible such as gradually increasing the retirement age  more equity investment  more importance of valuing equity  What does it imply to Korean Pension system  군인공제회의 성공 vs 국민연금의 현황

Hans Kim 5 Valuation _ Why value the Value? Factors of ascendancy of shareholder value in US market (continued) 3.Popularization of Equity  Direct share ownership  Indirect share ownership  Mutual funds  Retirement account…..  What does this imply to Korean market ?

Hans Kim 6 Valuation _ What is DCF (Discount Cash Flow, 현금흐름 할인법 ) Discount Cash Flow  Valuation Methodology  Snapshot on Interest rate  Valuation of Bond  Applying bond valuation to equity valuation  DCF

Hans Kim 7 Valuation _ DCF _Various Valuation Methodology

Hans Kim 8 Valuation _ DCF_ Snapshot on Interest rate  Why pay Interest  유동성 선호 이론 (Liquidity Preference)  미래 보다 현재의 현금을 선호, 따라서 보상이 필요  화폐의 시간가치 발생  유동성 선호의 이유  시차선호 (Time value of money)  현재소비를 미래소비보다 더 선호  재화의 생산성 (productivity)  재화는 시간에 따라 생산성을 지님  물가 상승 (Inflation)  Inflation 으로 인한 실질 구매력의 감소 가능성  미래 불확실성 (Uncertainty)  미래 불확실성으로 인한 위험의 존재  일반적 이자율의 특성  Longer maturity (time)  Higher Risk  Higher interest rate  Lower Credit  Higher Risk  Higher interest rate

Hans Kim 9 Valuation _DCF_ Snap shot on Interest rate  Type of Interest  Simple interest rate  Interest amount of 5 year at 10% for 100 $  100 X 0.1 X 5 (yrs) = 50$  Compounding interest rate  DCF 적용  Interest amount of 5 year at 10% for 100 $  100 X ( ) ^ $ = 61$  FV = PV (1 + r ) ^ n  PV = FV / (1 + r ) ^ n  Interest rate ( 이자율 ) Future Value = Present Value X interest rate  Discount rate ( 할인율 ) Present Value = Future Value / Discount rate

Hans Kim 10 Valuation _ DCF _ Valuation of Bond  채권의 현금흐름과 현재가치  PV = Present Value  CPN = Coupon payment by coupon rate  FV = Face Value (Future Value, Maturity amount)  r = discount rate PV Coupon FV Coupon

Hans Kim 11 Valuation _ DCF _ Valuation of Bond  채권의 현금흐름과 현재가치  Case Study

Hans Kim 12 Valuation _ DCF _ Valuation of Bond & DCF Valuation Similarity of Bond Valuation and DCF Valuation

Hans Kim 13 Valuation _ DCF _ Valuation of Bond & DCF Valuation  채권의 평가방법과 DCF 의 유사성  FCF = Free Cash Flow  TV = Terminal Value  WACC = discount rate  EV = Enterprise Value EV FCF TV FCF EV = Net debt + Equity Value

Hans Kim 14 Valuation _ DCF _ TV (Terminal Value)  Perpetuity ( 영구연금 ) = 연금의 형태로 일정한 현금흐름이 영원히 발생하는 경우 ( 영국의 연금채권 )  Present value of Perpetuity: PV = C/r (  r = C/PV )  Present value of growing perpetuity: PV = C /(r - g)  Terminal Value = 마지막 Free cash flow 시점을 perpetuity 로 간주  Terminal Value: TV = Final FCF X ( 1 + g ) / (r –g) 즉, TV 는 마지막 FCF 발생시점을 현재기준으로, PV of growing perpetuity 개념 적용  PV of TV: PV of TV = TV / (1 + r ) ^ n DCF Valuation 에서 TV 또한 다른 FCF 와 함께, 현가 (PV) 로 계산하여 총 기업가치 (EV) 에 포함 Perpetuity & Terminal Value

Hans Kim 15 Valuation _ DCF _ TV (Terminal Value) PV of TV = TV / (1+r)^n Time Line Perpetuity 1: PV = C/ (r – g) Perpetuity 2: Perpetuity 2 = TV = FCF (1 + g) /(r-g) Final FCF Diagram of Terminal Value

Hans Kim 16 Valuation _ DCF _Discount Cash Flow Key Words of DCF  Revenue  COGS  SG&A  Depreciation  Capital Expenditure  Net working Capital  Free Cash Flow  Beta  Cost of equity  Cost of debt  WACC  Perpetual Growth Rate  Terminal Value  Country risk premium  Enterprise value (or Firm Value)  Net debt  Equity Value

Hans Kim 17 Valuation _ DCF _ Case Study Case Study of DCF Koryo Tanning  Private Company  Valuation as of 1st Jan 2005  Projection for the next 3 years time

Hans Kim 18 Valuation _ DCF (Discount Cash Flow, 현금흐름 할인법 )  Revenue  COGS  SG&A  Depreciation  Capital Expenditure  Net working Capital  Free Cash Flow  DCF valuation

Hans Kim 19 Valuation _ DCF (Discount Cash Flow, 현금흐름 할인법 )  Revenue  COGS  SG&A  Depreciation  Capital Expenditure  Net working Capital  Free Cash Flow  DCF valuation

Hans Kim 20 Valuation _ DCF (Discount Cash Flow, 현금흐름 할인법 )  Revenue  COGS  SG&A  Depreciation  Capital Expenditure  Net working Capital  Free Cash Flow  DCF valuation

Hans Kim 21 Valuation _ DCF (Discount Cash Flow, 현금흐름 할인법 )  Revenue  COGS  SG&A  Depreciation  Capital Expenditure  Net working Capital  Free Cash Flow  DCF valuation

Hans Kim 22 Valuation _ DCF (Discount Cash Flow, 현금흐름 할인법 )  Revenue  COGS  SG&A  Depreciation  Capital Expenditure  Net working Capital  Free Cash Flow  DCF valuation

Hans Kim 23 Valuation _ DCF (Discount Cash Flow, 현금흐름 할인법 )  Revenue  COGS  SG&A  Depreciation  Capital Expenditure  Net working Capital  Free Cash Flow  DCF valuation

Hans Kim 24 Valuation _ DCF (Discount Cash Flow, 현금흐름 할인법 )  Revenue  COGS  SG&A  Depreciation  Capital Expenditure  Net working Capital  Free Cash Flow  DCF valuation

Hans Kim 25 Valuation _ DCF _Discount Cash Flow Please Recall Key Words of DCF  Revenue  COGS  SG&A  Depreciation  Capital Expenditure  Net working Capital  Free Cash Flow  Beta  Cost of equity  Cost of debt  WACC  Perpetual Growth Rate  Terminal Value  Country risk premium  Enterprise value (or Firm Value)  Net debt  Equity Value

Hans Kim 26 Valuation _ DCF (Discount Cash Flow, 현금흐름 할인법 )  Beta  Cost of equity  Cost of debt  Country risk premium  WACC  TV = Terminal Value  Enterprise Value  Net Debt  Equity Value  Beta 의 의미  The sensitivity measurement of individual security to the well diversified portfolio  Ex, Samsung Electronics vs KOSPI  Beta 값 구하기  Bloomberg  Statistical Calculation = Formula of BETA = Covariance with market / Variance of market  시장의 동종업체  Derivation of Beta from comparable companies  Comparable companies’ leveled Beta(s) from market  median unlevered equity beta  implied levered equity Beta of targeted company = 0.34 ( Beta of Koryo Tanning) Beta = 1/2 Beta = 1 Return of KOSPI Return of 삼성전자

Hans Kim 27 Valuation _ DCF (Discount Cash Flow, 현금흐름 할인법 )  Cost of Equity = Re  CAPM (Capital Asset Pricing Model)  Re = Rf + Beta (Rm-Rf)  Rf = Risk Free rate = 3 year government bond rate = 4.09 %  Beta = 0.34  Rm = The expected return on a fully diversified market portfolio = 20 year return of KOSPI = 10.7 %  (Rm – Rf) = Expected market return over the risk-free rate = 6.61 %  Re = 4.09% (10.7% %) = 6.32%  Cost of Debt  Rd = Expected borrowing cost = 7.59%  WACC = Weighted Average Cost of Capital  WACC = D/V * Rd (1 – t) + E/V*Re = 6.19 %  WACC after country risk premium at 1 % = 6.19% + 1 % = 7.19%  Beta  Cost of equity  Cost of debt  Country risk premium  WACC  TV = Terminal Value  Enterprise Value  Net Debt  Equity Value

Hans Kim 28 Valuation _ DCF (Discount Cash Flow, 현금흐름 할인법 )  TV = Terminal Value  By perpetual growth  TV = FCF (1 + g) /(r-g)  PV of TV = TV / (1+r)^n  TV = 464 X (1 + 1%) / ( 7.2% -1%) = 7,572 (Round error 있음 )  PV of TV = 7,558 / ( %) ^ 3 = 6,148 (Round error 있음 )  By EBITDA Multiple  EV / EBITDA 동종업종 peer companies 평균배수 적용  동종업계 EV/EBITDA multiple X 고려태닝의 마지막 EBITDA = 5.1 X 2,551 = 13,054 (Round Error 있음 )  Perpetual Growth Rate = g  영구 성장율  Beta  Cost of equity  Cost of debt  Country risk premium  WACC  TV = Terminal Value  Enterprise Value  Net Debt  Equity Value

Hans Kim 29 Valuation _ DCF (Discount Cash Flow, 현금흐름 할인법 )  Enterprise value (EV, or Firm Value)  Debt 과 Equity 모두 포함하는 총 기업가치  Net debt = interest bearing debt (IBD) – cash  IBD ( 이자성 부채 ) 항목  Long Term Borrowing ( 고정부채, 장기 차입금 )  Long Term Debt (LTD) ( 고정부채, 사채 )  Current Maturity of LTD ( 유동부채, 유동성 장기 부채 )  Short Term Borrowing ( 유동부채, 단기 차입금 )  Cash & cash equivalent  Cash  적극적인 경우에는 비 현금성 당좌자산을 포함하는 경우도 ….. Short term financial instrument ( 유동자산, 단기금융상품 ) Available-for-Sale Securities ( 유동자산, 매도가능증권 ) Held-to-Maturity Securities ( 유동자산, 만기보유증권 )  Equity Value = EV – Net debt  Beta  Cost of equity  Cost of debt  Country risk premium  WACC  TV = Terminal Value  Enterprise Value  Net Debt  Equity Value

Hans Kim 30 Valuation _ DCF (Discount Cash Flow, 현금흐름 할인법 )

Hans Kim 31 Valuation _ DCF (Discount Cash Flow, 현금흐름 할인법 ) WACC

Hans Kim 32 Valuation _ DCF (Discount Cash Flow, 현금흐름 할인법 )

Hans Kim 33 Valuation _ DCF (Discount Cash Flow, 현금흐름 할인법 ) So, what all these mean ?  DCF Valuation 의 한계  Argument on projected cash flow  Argument on WACC  Too much assumptions.. Beta, market return cost of debt Country risk premium ….  DCF Valuation 의 적용

Hans Kim 34 기업가치분석 End of Week 5