Corporate Valuation: A Guide for Managers and Investors Phillip R. Daves Michael C. Ehrhardt Ronald E. Shrieves University of Tennessee (c) 2004 DES Chapter 1

Chapter 1: Why Corporate Valuation? Financial decisions made every day Investors—buy and sell decisions Managers—implement operating decisions Financial staff—evaluate acquisitions Success or failure depends on whether value correctly identified DES Chapter 1

Goals Provide investors and managers with knowledge to value a company Use free cash flow valuation Use non-proprietary Excel model Online data sources—plus Thomson ONE-Business School Edition DES Chapter 1

How this model might be used Investors: identify undervalued stocks Investors: to asses fund manager performance Managers: to make better business decisions Managers & investors perform scenario analysis DES Chapter 1

Plan of attack Finance requires circular approach: need to know finance to do financial analysis. Need to know how to do financial analysis to understand finance. Text: start simply and slowly then increases level of detail. DES Chapter 1

Outline Chapter 2—complete outline, apply to simple company, MPR Chapters 3, 4—More advanced skills, more complicated company, ACME Chapters 5-8—Still more advanced skills, more complicated company, Van Leer, Inc. Chapters 9-13—Home Depot valuation DES Chapter 1

Discounted Cash Flow (DCF) DCF analysis: heart of valuation Basic concepts Present value Discount rate– Weighted Average Cost of Capital (WACC) Free cash flows (FCF) DES Chapter 1

Present Value Present value = $1/(1 + r) If r = 9%, PV = $1/(1.09) = $0.917 A dollar to be received in 1 year is worth 91.7 cents today if the discount rate is 9 percent. DES Chapter 1

WACC and FCF WACC: average rate of return all of company’s investors must earn FCF: amount of cash flow available for distribution to all of firm’s investors (debtholders and shareholders) after making investments necessary to support growth plans. DES Chapter 1

Become an accountant? NO! But accounting understanding crucial. So are Excel & research skills Will use dozens of online sources of financial data, including Thomson ONE-Business School Edition. DES Chapter 1