Corporate Valuation DCF-WACC Method APV Method FTE Method

Slides:

Advertisements

Similar presentations

Copyright © 2002 Harcourt, Inc.All rights reserved. CHAPTER 12 Corporate Valuation and Value- Based Management Corporate Valuation Value-Based Management.

Advertisements

Corporate Valuation: List the two types of assets that a company owns.

1 Free Cash Flow. 2 Free Cash Flow (FCF) FCF is the amount of cash available to make payments to both Debt and Equity investors: Payments to creditors.

Stocks and Their Valuation Chapter 10  Features of Common Stock  Determining Common Stock Values  Preferred Stock 10-1.

Valuing Stocks Chapter 5.

The McGraw-Hill Companies, Inc., 2000

DES Chapter 2 1 A Complete Corporate Valuation for a Simple Company.

Lecture 7 The Value of Common Stocks Managerial Finance FINA 6335 Ronald F. Singer.

Drake DRAKE UNIVERSITY Fin 200 Firm Valuation A Discounted Cash Flow Approach.

The Value of Common Stocks Chapter 4. Topics Covered  How Common Stocks are Traded  How To Value Common Stock  Capitalization Rates  Stock Prices.

Valuation and levered Betas

The Weighted Average Cost of Capital (WACC). WACC What precisely do the terms “cost of capital” and “weighted average cost of capital” mean? To begin,

Corporate Valuation, Value-Based Management and Corporate Governance

Financing and Valuation

Corporate Valuation.

The Value of Common Stocks

FIN 819: lecture 2'1 Review of the Valuation of Common Stocks How to apply the PV concept.

Financing and Valuation

DES Chapter 2 1 Chapter 2 A Complete Corporate Valuation for a Simple Company.

Kelvin Xu Slides prepared by: Asthon Wu, Garrett Kuhlmann.

Ch 3 and Ch 15 Corporate Valuation

The value of common stocks

Financing and Valuation

1 Valuing the Enterprise: Free Cash Flow Valuation Discount estimates of free cash flow that the firm will generate in the future. WACC: after-tax weighted.

 Interactions of Investment and Financing Decisions Principles of Corporate Finance Brealey and Myers Sixth Edition Slides by Matthew Will Chapter 19.

VALUATION AND FINANCING

Corporate Valuation and Value-Based Management

CHAPTER 9 Stocks and Their Valuation

Chapter 20 Principles PrinciplesofCorporateFinance Ninth Edition Financing and Valuation Slides by Matthew Will Copyright © 2008 by The McGraw-Hill Companies,

Chapter 19 Principles PrinciplesofCorporateFinance Tenth Edition Financing and Valuation Slides by Matthew Will Copyright © 2010 by The McGraw-Hill Companies,

VALORACION ECONOMICA DE EMPRESAS Manuel Carreño 2010 ®

Corporate Valuation and Value-Based Management

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license.

1 CHAPTER 15: Corporate Valuation, Value- Based Management, and Corporate Governance Corporate Valuation Value-Based Management Corporate Governance.

CHAPTER 26 Merger Analysis.

Chapter 02 Financial Statements. 2 Value = FCF 1 FCF 2 FCF ∞ (1 + WACC) 1 (1 + WACC) ∞ (1 + WACC) 2 Free cash flow (FCF) Market interest rates Firm’s.

1 CHAPTERS 15 & 25 Corporate Valuation and Merger Analysis.

Ch 7. Valuation of Stocks and Corporations. Goals To understand characteristics of common and preferred stocks To understand stock valuations.

Corporate Valuation and Value- Based Management Corporate Valuation Value-Based Management Corporate Governance.

What three aspects of cash flows affect an investment’s value?

8-1 Stocks and Their Valuation. 8-2 Cash Flows for Stockholders If you buy a share of stock, you can receive cash in two ways The company pays dividends.

Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Cost of Capital Cost of Capital - The return the firm’s.

1 Chapter 11 Corporate Valuation Based on Free Cash Flows (FCF)

Estimating the Value of ACME 1. Steps in a valuation Estimate cost of capital (WACC) – Debt – Equity Project financial statements and FCF Calculate horizon.

Chapter 2 Financial Statements, Cash Flow, and Taxes 1.

Chapter 12 Fundamentals of Corporate Finance Fifth Edition Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc.

Cost of debt = Interest Payments. Debts are the borrowing which company takes to finance the company therefore they have to pay interest on those borrowing.

Valuation of Stocks and Corporations

1 CHAPTER 21 Extra Calculation Example. 2 APV Valuation Analysis (In Millions) Based on Post-Acquisition Cash Flows Net sales60.00$ 90.00$

FNCE 3010 CHAPTER 7 Valuation of Stocks and Corporations 1 GJ Madigan F2014.

Stocks and Their Valuation

Estimating the Value of ACME

The Value of Common Stocks

Stocks and Their Valuation

Accounting for Financial Management

A Complete Corporate Valuation for a Simple Company

A Complete Corporate Valuation for a Simple Company

Chapter 13 Learning Objectives

Stocks and Their Valuation

CHAPTER 8 Basic Stock Valuation.

Financing and Valuation

Chapter 4 The Value of Common Stocks Principles of Corporate Finance

A firm which does not pay dividends can be valued by discounting all its FREE CASH FLOWS by its WACC Free Cash Flows = the cash flows actually available.

Estimating the Value of ACME

Corporate Valuation and Financial Planning

CHAPTER 8 Basic Stock Valuation.

Stocks and Their Valuation

Lecture 4 The Value of Common Stocks

Financing and Valuation

Corporate Valuation, Value-Based Management, and Corporate Governance

Presentation transcript:

Corporate Valuation DCF-WACC Method APV Method FTE Method We will learn the DCF-WACC method, the most widely used method. 1

Corporate Valuation: Two types of assets that a company owns. Operating assets Non-operating assets (or financial assets)

Operating Assets Operating assets are tangible, such as buildings, machines, inventory. They generate free cash flows. The PV of their expected future free cash flows, discounted at the WACC, is the value of operations.

Free Cash Flow FCF=(EBIT)(1-T)+ ΔDEP-(ΔNWC+ ΔFA) FCF=(EBIT)(1-T)+ ΔDEP-(ΔC) FCF=(EBIT)(1-T)-(ΔNWC+ ΔNFA) FCF=NOPAT-(ΔNWC+ ΔNFA)

Value of Operations

Value of Operations: Constant Growth Suppose FCF grows at constant rate g.

Constant Growth Formula Notice that the term in parentheses is less than one and gets smaller as t gets larger. As t gets very large, term approaches zero.

Constant Growth Formula (Cont.) The summation can be replaced by a single formula:

Nonoperating Assets Marketable securities Ownership of non-controlling interest in another company Value of nonoperating assets usually is very close to figure that is reported on balance sheets.

Total Corporate Value Total corporate value is sum of: Value of operations Value of nonoperating assets

Claims on Corporate Value Debtholders have first claim. Preferred stockholders have the next claim. Any remaining value belongs to stockholders. Value of the firm = Value of debt + Value of PF + Value of E

Valuation Analysis Value of firm = value of operating assets + value of non-operating assets Value of the firm = Value of debt + Value of PF + Value of E V=D+PF+E E=V-D-PF Value per share =P=E/N where N is the number of shares o/s

Applying the Corporate Valuation Model Forecast the financial statements. Calculate the projected free cash flows. Model can be applied to a company that does not pay dividends, a privately held company, or a division of a company, since FCF can be calculated for each of these situations.

Data for Valuation FCF0 = $20 million WACC = 10% g = 5% Marketable securities = $100 million Debt = $200 million Preferred stock = $50 million Book value of equity = $210 million

Find Value of Operations

Value of Equity Sources of Corporate Value Value of operations = $420 Value of non-operating assets = $100 Claims on Corporate Value Value of Debt = $200 Value of Preferred Stock = $50 Value of Equity = ?

Value of Equity Total corporate value = VOp + Mkt. Sec. = $420 + $100 = $520 million Value of equity = Total - Debt - Pref. = $520 - $200 - $50 = $270 million

Market Value Added (MVA) MVA = Total corporate value of firm minus total book value of firm Total book value of firm = book value of equity + book value of debt + book value of preferred stock MVA = $520 - ($210 + $200 + $50) = $60 million

Breakdown of Corporate Value

Firm valuation with nonconstant growth Current market value of debt=$40 million Projected free cash flows (FCF): Year 1 FCF = -$5 million. Year 2 FCF = $10 million. Year 3 FCF = $20 million FCF grows at constant rate of 6% after year 3. (More…)

The weighted average cost of capital, R, is 10%. The company has 10 million shares of stock.

Horizon (Terminal) Value Free cash flows are forecast for three years in this example, so the forecast period is three years. The horizon year is year 3. Growth in free cash flows is not constant during the forecast period,so we can’t use the constant growth formula to find the value of operations at time 0.

Horizon (Terminal) Value(Cont.) Growth is constant after the horizon year, so we can modify the constant growth formula to find the value of all free cash flows beyond the horizon year, discounted back to the horizon year.

Horizon (Terminal) Value Formula Horizon value is also called terminal value, or continuing value.

Find the value of operations by discounting the free cash flows at the cost of capital. 1 2 3 4 R=10% g = 6% FCF= -5.00 10.00 20.00 21.2 -4.545 8.264 15.026 $21.2 HV 398.20   $530. . 10  . 06 416.94 = Vop

Value per share of common stock. Value of equity = Value of operations - Value of debt = $416.94 - $40 = $376.94 million. Value per share = $376.94 /10 = $37.69.