2. Valuation FIN 449 Michael Dimond

3. Michael Dimond School of Business Administration Valuation – The Big Picture

4. Michael Dimond School of Business Administration Start from the bottom For now, put the FCFE figures on row 250, as shown Add the appropriate labels and supporting data, then build cells to compute discounted values Complete the valuation details –Sum of PVs –Cash –Total value, per share value, market price, etc.

5. Michael Dimond School of Business Administration Create an area for sensitivity analysis The top row references the terminal growth rate in your valuation, with an incremental change on either side. The Ke figures are driven by the Rf and MRP shown, but β is replaced with the “New β” in column E. Again, this is driven with some incremental change.

6. Michael Dimond School of Business Administration How the sensitivity analysis works Each cell references the FCFE figures and discounts them, then adds the cash to the total, then divides by the number of shares. Use absolute references (such as $H$253) so you can fill the formula into the entire table. The yellow cell in the middle has this formula inside: =($H$253+$I$250/(1+$F266)^$I$249+$J$250/(1+$F266)^$J$249+$K$250/(1+$F266)^$K$249+$L$250/(1+$F266)^$L$249+ $M$250/(1+$F266)^$M$249+($M$250*(1+J$261)/($F266-J$261))/(1+$F266)^$M$249)/$H$255

7. Michael Dimond School of Business Administration The formula is not as daunting as it seems The formula in the yellow cell is easier to build with point & click than with typing… =( $H$253 +$I$250/(1+$F266)^$I$249 +$J$250/(1+$F266)^$J$249 +$K$250/(1+$F266)^$K$249 +$L$250/(1+$F266)^$L$249 +$M$250/(1+$F266)^$M$249 +($M$250*(1+J$261)/($F266-J$261))/(1+$F266)^$M$249 ) /$H$255 All of that divided by the number of shares Close the parentheses to group the total value Open parentheses to group the total value Cash FCFE 1 discounted for 1 period FCFE 2 discounted for 2 periods FCFE 3 discounted for 3 periods FCFE 4 discounted for 4 periods FCFE 5 discounted for 5 periods Terminal value discounted for 5 periods

8. Michael Dimond School of Business Administration Fill the formula into the cells in the table Your result should give the same values as the example above.

9. Michael Dimond School of Business Administration Good work! Now save your changes… The next step is to build the area which drives our FCFE & FCFF figures. This will be placed above the area you just built.

10. Michael Dimond School of Business Administration Label the rows which will detail FCFF & FCFE I used rows 190 – 240 for the details. Starting from the top of this section, my labels are as shown:

11. Michael Dimond School of Business Administration Valuation – The Big Picture