1. VALORACION ECONOMICA DE EMPRESAS Manuel Carreño 2010 ®

2. Financing and Valuation Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin

3. Capital Project Adjustments 1.Adjust the Discount Rate  Modify the discount rate to reflect capital structure, bankruptcy risk, and other factors. 2.Adjust the Present Value  Assume an all equity financed firm and then make adjustments to value based on financing.

4. After Tax WACC Tax Adjusted Formula

5. After Tax WACC Example - Sangria Corporation The firm has a marginal tax rate of 35%. The cost of equity is 12.4% and the pretax cost of debt is 6%. Given the book and market value balance sheets, what is the tax adjusted WACC?

6. After Tax WACC Example - Sangria Corporation - continued

7. After Tax WACC Example - Sangria Corporation - continued

8. After Tax WACC Example - Sangria Corporation - continued Debt ratio = (D/V) = 500/1,250 =.4 or 40% Equity ratio = (E/V) = 750/1,250 =.6 or 60%

9. After Tax WACC Example - Sangria Corporation - continued

10. After Tax WACC Example - Sangria Corporation - continued The company would like to invest in a perpetual crushing machine with cash flows of $1.731 million per year pre-tax. Given an initial investment of $12.5 million, what is the value of the machine?

11. After Tax WACC Example - Sangria Corporation - continued The company would like to invest in a perpetual crushing machine with cash flows of $1.731 million per year pre-tax. Given an initial investment of $12.5 million, what is the value of the machine?

12. After Tax WACC Example - Sangria Corporation - continued The company would like to invest in a perpetual crushing machine with cash flows of $1.731 million per year pre-tax. Given an initial investment of $12.5 million, what is the value of the machine?

13. After Tax WACC Example - Sangria Corporation – continued Perpetual Crusher project

14. After Tax WACC Example - Sangria Corporation – continued Perpetual Crusher project

15. After Tax WACC Example - Sangria Corporation – continued Perpetual Crusher project

16. Capital Budgeting Valuing a Business or Project The value of a business or Project is usually computed as the discounted value of FCF out to a valuation horizon (H). The valuation horizon is sometimes called the terminal value.

17. Capital Budgeting Valuing a Business or Project PV (free cash flows)PV (horizon value) In this case r = wacc

18. Valuing a Business Example: Rio Corporation

19. Valuing a Business Example: Rio Corporation – continued - assumptions

20. Valuing a Business Example: Rio Corporation – continued FCF = Profit after tax + depreciation + investment in fixed assets + investment in working capital FCF = 8.7 + 9.9 – (109.6 - 95.0) – (11.6 - 11.1) = $3.5 million

21. Valuing a Business Example: Rio Corporation – continued

22. Valuing a Business Example: Rio Corporation – continued

23. Valuing a Business Example: Rio Corporation – continued

24. WACC & Debt Ratios Example continued: Sangria and the Perpetual Crusher project at 20% D/V Step 1 – r at current debt of 40% Step 2 – D/V changes to 20% Step 3 – New WACC

25. Adjusted Present Value APV = Base Case NPV + PV Impact Base Case = All equity finance firm NPV PV Impact = all costs/benefits directly resulting from project

26. Example: Project A has an NPV of $150,000. In order to finance the project we must issue stock, with a brokerage cost of $200,000. Adjusted Present Value

27. Example: Project A has an NPV of $150,000. In order to finance the project we must issue stock, with a brokerage cost of $200,000. Project NPV = 150,000 Stock issue cost =-200,000 Adjusted NPV- 50,000 don’t do the project Adjusted Present Value

28. Example: Project B has a NPV of -$20,000. We can issue debt at 8% to finance the project. The new debt has a PV Tax Shield of $60,000. Assume that Project B is your only option. Adjusted Present Value

29. Example: Project B has a NPV of -$20,000. We can issue debt at 8% to finance the project. The new debt has a PV Tax Shield of $60,000. Assume that Project B is your only option. Project NPV = - 20,000 Stock issue cost = 60,000 Adjusted NPV 40,000 Do the project Adjusted Present Value

30. Example – Rio Corporation APV

31. Adjusted Present Value Example – Rio Corporation APV - continued