Financial Analysis Fundamental Topic Included: Financial Analysis Fundamental Simple Financial Model Building Project Decision Analysis Share Key Ideas from Seminar Nuttakul Somakettarin Special Project Team 21 May 2015

Financial Analysis Fundamental WHAT IS CAPITAL BUDGETING? I. CAPITAL IS A LIMITED RESOURCE Capital Budgeting is the process of determining which real investment projects should be accepted and given an allocation of funds from the firm. Capital Budgeting คือ กระบวนการคัดสรรการลงทุนในโครงการ จากการวิเคราะห์ผลตอบแทนที่เหมาะสม

Financial Analysis Fundamental II. Basic Steps of Capital Budgeting 1. Estimate the cash flows 2. Assess the riskiness of the cash flows. 3. Determine the appropriate discount rate. 4. Find the PV of the expected cash flows. 5. Accept the project if - PV of inflows > costs. - IRR > Hurdle Rate - and/or payback < policy

Tools and Concepts behind the Capital Budgeting Financial Analysis Fundamental Tools and Concepts behind the Capital Budgeting Time Value of Money DCF (Discounted Cash Flows) Measurements: NPV IRR Payback Etc.

Financial Analysis Fundamental III. Evaluation Techniques A. Payback period B. Net present value (NPV) C. Internal rate of return (IRR) D. Modified internal rate of return (MIRR) E. Profitability index

Financial Analysis Fundamental A. PAYBACK PERIOD : Payback period = Expected number of years required to recover a project’s cost. Weaknesses of Payback: Ignores the time value of money. This weakness is eliminated with the discounted payback method. Ignores cash flows occurring after the payback period. Payback L = 2 + $30/$80 years = 2.4 years. Payback S = 1.6 years.

Financial Analysis Fundamental B. NET PRESENT VALUE 10% =K Discount Factor Discounted CF 1.00 -100 1.10 9.09 1.21 49.59 1.33 60.11 NPV = 18.79 NPVS = $19.98 If the projects are independent, accept both. If the projects are mutually exclusive, accept Project S since NPVS > NPVL.

Financial Analysis Fundamental C. INTERNAL RATE OF RETURN IRRL = 18.1% IRRS = 23.6% If the projects are independent, accept both because IRR > k (@ 10%) If the projects are mutually exclusive, accept Project S since IRRS > IRRL.

Financial Analysis Fundamental WACC calculation KE หรือ Cost of Equity สามารถคำนวนหาได้จาก CAPM (Capital Asset Pricing Model)

Financial Analysis Fundamental WACC calculation KD หรือ Cost of Debt สามารถหาได้จากต้นทุน(ดอกเบี้ย, cost of borrowing) เงินกู้ที่จะนำมาใช้ในการ Financing โครงการนั้นๆ

Financial Analysis Fundamental WACC calculation 􀁑 Equity • Cost of Equity = Riskfree rate + Beta * Risk Premium = 4% + 1.2 (7%) = 12.4% • Market Value of Equity = 700,000 • Equity/(Debt+Equity) = 70% 􀁑 Debt • After-tax Cost of debt = (Interest Rate for the Loan) (1-t) = (6%) (1-.25) = 4.5% • Market Value of Debt = 300,000 • Debt/(Debt +Equity) = 30% 􀁑 Cost of Capital = 12.4%(.70) + 4.5%(.30) = 10.03%

2. Simple Financial Model Building

2. Simple Financial Model Building

2. Simple Financial Model Building

3. Project Decision Analysis A. MAKING GO/NO-GO PROJECT DECISION Focus on cash flows, not profits. Focus on incremental cash flows. Account for time. Time is money. Account for risk.

3. Project Decision Analysis B. THE PROCESS OF PROJECT EVALUATION Carefully estimate expected future cash flows. Select a discount rate consistent with the risk of those future cash flows. Compute a “base-case” NPV.

3. Project Decision Analysis B. THE PROCESS OF PROJECT EVALUATION Identify risks and uncertainties. Run a sensitivity analysis. - Identify “key value drivers”. - Identify break-even assumptions. - Estimate scenario values. - Bound the range of value.

3. Project Decision Analysis B. THE PROCESS OF PROJECT EVALUATION Identify qualitative issues. - Flexibility - Quality - Know-how - Learning Decide

4. Share Key Info. from Seminar Topic : Project Investment and Feasibility Studies 9 – 10 February 2015

4. Share Key Info. from Seminar WACC by Sector (Thai Market)

4. Share Key Info. from Seminar Project Feasibility from Banking Perspective Project Financing is all about ‘risks allocation and mitigation’ Step 1 Risk Identification and analysis Cost analysis Cash flows Step 2 Risk Allocation Allocated by the parties through negotiation of the contractual framework. Step 3 Risk Management Involved and monitor project closely Reporting obligations on the borrower

4. Share Key Info. from Seminar Project Feasibility from Banking Perspective Key Financial Evaluation for Project Financing Debt Tools Details Project Feasibility Project Technical feasibility Project Financial feasibility Project IRR (to look whether it makes sense) Equity IRR Debt Coverage Ratio DCSR to understand the level of cushion to lenders D/E ratio (varied with the nature of the project) Financial Sensitivity Analysis To evaluate the Project’s tolerance level to adverse changes in ‘Cash flows Assumption’ such as Project Costs, Delays, Drop in Revenues, & etc. Normally banks will have 3 main cashflow scenarios (Client case, Bank case, Worse Case)

4. Share Key Info. from Seminar BCG Approach to Minimizing CapEx needed: Capex Optimization Implementation of Cost-focus culture not the Cost-reduction culture. Organization Set-Up. Set a Cost oriented structure. Monitor of Performance. Set up a dashboard to solve the cost problem (ex. Project delay & Cost overrun)

Definition & Investment Criteria 4. Share Key Info. from Seminar M&A perspectives Types of Investors Definition & Investment Criteria Examples 1. Strategic Investor Long-term business plan Enhance existing operations Willing to pay for readily realizable synergies 2. Financial Investor Interested in Return Well-managed company with a history of consistent earning Private equity funds and Venture capital funds

Good Deals but Poor Implementation 4. Share Key Info. from Seminar Only about 30-40% of the world’s M&As are value accretive. M&A Bad Deals M&A Successful Deals Weak strategic fit Unrealistic synergies Price too high Disciplined transaction process Clear deal strategy Excel in post-deal execution with adequate resources to manage the Post-Integration Good Deals but Poor Implementation Poor integration Customer losses Loss of key staff Source: Mckinsey

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