1. Business Valuation What’s an apple tree worth?

3. “Old Man and Apple Tree” Consider the following valuations: Salvage Current production Future production Market price Book value Balance Sheet

4. Time value of money What is the value of $1?

5. Time value of money Let’s say I offer you either $500 today or $800 in three years. Which is better?

6. Time value of money $800 in 3 years is better than $500 today (assuming a 10% rate for money) Invest $50010%Balance Year 1 Year 2 Year 3 $50.00 $55.00 $60.50 $550.00 $605.00 $665.50

7. Time value of money $500 today is better than $800 in 3 years (assuming a 20% rate for money) Invest $50020%Balance Year 1 Year 2 Year 3 $100.00 $120.00 $144.00 $600.00 $720.00 $864.00

8. Time value of money Mathematically $500 * (1+.20) 3 = $864

9. Time value of money What if somebody offers you $864 in three years. Or $1000. What is it worth to you?

10. Time value of money $864 (discounted at 20% rate) = $500 Discount $864 End of year20%Start of year (divide by 1.20) Year 3 Year 2 Year 1 $864 $720 $600 $144 $120 $100 $720 $600 $500

11. Time value of money $1000 (discounted at 20% rate) = $579 Discount $1000 End of year20%Start of year (divide by 1.20) Year 3 Year 2 Year 1 $1000 $833 $694 $167 $139 $115 $833 $694 $579

12. Time value of money Mathematically $1000 / (1+.20) 3 = $578.70

13. “Old Man and Apple Tree” Value of cash flows? (from Class Notes)

14. Precision Tools Net income $390,000 Depreciation$250,000 Bonuses $120,000 Net cash flow$760,000 Adjusted CF$500,000 Discount rate33% Growth rate 8% Capitalization rate25% (discount minus growth) Cap multiplier 4 DCF $2,000,000

15. Precision Tools Comparables Method Company X Price = $4,000,000 Adj Earnings = $520,000 Precision Tools Price = ?? Adj Earnings = $760,000 4000 PT Price 520 = 760 PT Price = $5,850,000 Use P/E ratio Company X Price = $4,000,000 Adj Earnings = $520,000 P/E = 7.7 Precision Tools Price = P/E * Earnings Adj Earnings = $760,000 7.7*$760,000 = $5,850,000

16. Price-earnings ratio Precision Tools Price = $2,000,000 Earnings = $390,000 P/E = 5.13 U.S. stock market (average stock) Price = $36 Earnings = $1.80 P/E = 20 Irrationally exuberant?

17. Precision Tools