1. DES Chapter 11 Corporate Valuation: A Guide for Managers and Investors Phillip R. Daves Michael C. Ehrhardt Ronald E. Shrieves University of Tennessee (c) 2004

2. DES Chapter 12 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

3. DES Chapter 13 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

4. DES Chapter 14 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

5. DES Chapter 15 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.

6. DES Chapter 16 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

7. DES Chapter 17 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)

8. DES Chapter 18 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.

9. DES Chapter 19 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.

10. DES Chapter 110 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.