Presentation template

1
????? ??????
Week 5
2
?????? (Valuation)
Week 5

• Why value the Value
• What is DCF
• DCF Case Study

3
Valuation _ Why value the Value?

• Why value the Value ? Broadened acceptance of
  Shareholder Value
• The continuing debate on importance of
  shareholder value vs. other measures (employment,
  social responsibility, and the environment)
• UK US ? shareholders are the owner of the
  corporation ? BOD is the representative of
  shareholders and elected by them? objective
  function of corporation is to maximize
  shareholder value
• Continental Europe ? For instance, under Dutch
  law, the board of a Structural N.V. ( a large
  corporation) is mandated to ensure the continuity
  of the business, not to represent shareholders in
  pursuit of value maximization ? Similar to
  Germany France
• Case of Vodafone AirTouchs hostile acquisition
  of Mannesmann the German conglomerate in 2000,
  broadened the acceptance of shareholder value in
  Europe ( McKinsey Report)
• Vodafone ? 1985 ? ???? ??? ??? ?? ???? ?????
• Mannesmann ? 1890 ? ???? ??? ????? ???, ????,
  ????, ??, ?? ?? ????
• The broadened acceptance of shareholder value ?
  motivated to value the Value ? triggered various
  valuation methods (Multiple ? DCF ? Real Option)
• Did the currency crisis in late 90s in Korea
  similarly broaden the acceptance of shareholder
  value and valuation methodology ? ? Please recall
  when the concept of PER was introduced to Korean
  stock market

4
Valuation _ Why value the Value?

• Factors of ascendancy of
  shareholder value in US market
• 1. The increased role of stock option
• 1970s concern on divergence between managers
  and shareholders interest ? agency problem
• 1980s US economys recover from 70s high
  inflation and low growth ? the emergency of LBO,
  especially management buyout and Feds new
  program to drastically reduce inflation ? rise in
  equity value ? increased role of stock option ?
  more importance of valuing equity
• 2. Pension insolvency
• Pay-as-you-go system ? workers today pay for
  retirement of current retirees ? Problem as less
  workers and more retirees ? pension crisis
  without easy fixes
• Investment fund needs to generate good return
  covering the future shortfall ? to reduce the
  burden to a level where political consensus
  becomes feasible such as gradually increasing the
  retirement age ? more equity investment ? more
  importance of valuing equity
• What does it imply to Korean Pension system ?
  ?????? ?? vs ????? ??

5
Valuation _ Why value the Value?
Factors of ascendancy of shareholder
value in US market (continued) 3. Popularization
of Equity

• Direct share ownership
• Indirect share ownership
• Mutual funds
• Retirement account..
• What does this imply to Korean market ?

6
Valuation _ What is DCF (Discount Cash Flow, ????
???)

• Discount Cash Flow
• Valuation Methodology
• Snapshot on Interest rate
• Valuation of Bond
• Applying bond valuation to equity valuation ? DCF

7
Valuation _ DCF _Various Valuation Methodology
8
Valuation _ DCF_ Snapshot on Interest rate

• Why pay Interest
• ??? ?? ?? (Liquidity Preference)
• ?? ?? ??? ??? ??, ??? ??? ?? ? ??? ???? ??
• ??? ??? ??
• ????(Time value of money) ? ????? ?????? ? ??
• ??? ???(productivity) ? ??? ??? ?? ???? ??
• ?? ??(Inflation) ? Inflation?? ?? ?? ???? ?? ???
• ?? ???? (Uncertainty) ??? ?????? ?? ??? ??
• ??? ???? ??
• Longer maturity (time) ? Higher Risk ? Higher
  interest rate
• Lower Credit ? Higher Risk ? Higher interest rate

9
Valuation _DCF_ Snap shot on Interest rate

• Type of Interest
• Simple interest rate
• Interest amount of 5 year at 10 for 100 ? 100
  X 0.1 X 5 (yrs) 50
• Compounding interest rate ? DCF ??
• Interest amount of 5 year at 10 for 100 ? 100
  X (1 0.1) 5 - 100 61
• FV PV (1 r ) n ? PV FV / (1 r ) n
• Interest rate (???)
• Future Value Present Value X interest rate
• Discount rate ( ???)
• Present Value Future Value / Discount
  rate

10
Valuation _ DCF _ Valuation of Bond

• ??? ????? ????
• PV Present Value
• CPN Coupon payment by coupon rate
• FV Face Value (Future Value, Maturity amount)
• r discount rate

• FV

• Coupon

• Coupon

• Coupon

• Coupon

• Coupon

• PV

11
Valuation _ DCF _ Valuation of Bond

• ??? ????? ???? ? Case Study

12
Valuation _ DCF _ Valuation of Bond DCF
Valuation
Similarity of Bond Valuation and DCF Valuation
13
Valuation _ DCF _ Valuation of Bond DCF
Valuation

• ??? ????? DCF ? ???
• FCF Free Cash Flow
• TV Terminal Value
• WACC discount rate
• EV Enterprise Value

• TV

• FCF

• FCF

• FCF

• FCF

• FCF

• EV

• EV Net debt Equity Value

14
Valuation _ DCF _ TV (Terminal Value)
Perpetuity Terminal Value

• Perpetuity (????) ??? ??? ??? ????? ??? ???? ??
  (??? ????)
• Present value of Perpetuity PV
  C/r (? r C/PV )
• Present value of growing perpetuity PV C /(r
  - g)
• Terminal Value ??? Free cash flow ???
  perpetuity ? ??
• Terminal Value TV Final FCF X ( 1 g
  ) / (r g)
• ?, TV ? ??? FCF????? ??????, PV of growing
  perpetuity ?? ??
• PV of TV PV of TV TV /
  (1 r ) n
• DCF Valuation ?? TV ?? ?? FCF ? ??, ??(PV)? ????
  ? ???? (EV)? ??

15
Valuation _ DCF _ TV (Terminal Value)
Diagram of Terminal Value
Perpetuity 1 PV C/ (r g)
Final FCF
Time Line
Perpetuity 2
PV of TV TV / (1r)n
Perpetuity 2 TV FCF (1 g) /(r-g)
16
Valuation _ DCF _Discount Cash Flow

• Key Words of DCF
• Revenue
• COGS
• SGA
• Depreciation
• Capital Expenditure
• Net working Capital
• Free Cash Flow

• Enterprise value (or Firm Value)
• Net debt
• Equity Value

• Beta
• Cost of equity
• Cost of debt
• WACC
• Perpetual Growth Rate
• Terminal Value
• Country risk premium

17
Valuation _ DCF _ Case Study

• Case Study of DCF
• Koryo Tanning
• Private Company
• Valuation as of 1st Jan 2005
• Projection for the next 3 years time

18
Valuation _ DCF (Discount Cash Flow, ???? ???)

• Revenue
• COGS
• SGA
• Depreciation
• Capital Expenditure
• Net working Capital
• Free Cash Flow
• DCF valuation

19
Valuation _ DCF (Discount Cash Flow, ???? ???)

• Revenue
• COGS
• SGA
• Depreciation
• Capital Expenditure
• Net working Capital
• Free Cash Flow
• DCF valuation

20
Valuation _ DCF (Discount Cash Flow, ???? ???)

• Revenue
• COGS
• SGA
• Depreciation
• Capital Expenditure
• Net working Capital
• Free Cash Flow
• DCF valuation

21
Valuation _ DCF (Discount Cash Flow, ???? ???)

• Revenue
• COGS
• SGA
• Depreciation
• Capital Expenditure
• Net working Capital
• Free Cash Flow
• DCF valuation

22
Valuation _ DCF (Discount Cash Flow, ???? ???)

• Revenue
• COGS
• SGA
• Depreciation
• Capital Expenditure
• Net working Capital
• Free Cash Flow
• DCF valuation

23
Valuation _ DCF (Discount Cash Flow, ???? ???)

• Revenue
• COGS
• SGA
• Depreciation
• Capital Expenditure
• Net working Capital
• Free Cash Flow
• DCF valuation

24
Valuation _ DCF (Discount Cash Flow, ???? ???)

• Revenue
• COGS
• SGA
• Depreciation
• Capital Expenditure
• Net working Capital
• Free Cash Flow
• DCF valuation

25
Valuation _ DCF _Discount Cash Flow

• Please Recall Key Words of DCF
• Revenue
• COGS
• SGA
• Depreciation
• Capital Expenditure
• Net working Capital
• Free Cash Flow

• Enterprise value (or Firm Value)
• Net debt
• Equity Value

• Beta
• Cost of equity
• Cost of debt
• WACC
• Perpetual Growth Rate
• Terminal Value
• Country risk premium

26
Valuation _ DCF (Discount Cash Flow, ???? ???)

• Beta ? ??
• The sensitivity measurement of individual
  security to the well diversified portfolio
• Ex, Samsung Electronics vs KOSPI
• Beta ? ???
• Bloomberg
• Statistical Calculation Formula of BETA
  Covariance with market / Variance of market
• ??? ???? ?Derivation of Beta from comparable
  companies ? Comparable companies leveled Beta(s)
  from market ? median unlevered equity beta
  ?implied levered equity Beta of targeted company
  0.34 ( Beta of Koryo Tanning)

• Beta
• Cost of equity
• Cost of debt
• Country risk premium
• WACC
• TV Terminal Value
• Enterprise Value
• Net Debt
• Equity Value

Beta 1
Return of ????
Beta 1/2
Return of KOSPI
27
Valuation _ DCF (Discount Cash Flow, ???? ???)

• Cost of Equity Re
• CAPM (Capital Asset Pricing Model) ? Re Rf
  Beta (Rm-Rf)
• Rf Risk Free rate 3 year government bond rate
  4.09
• Beta 0.34
• Rm The expected return on a fully diversified
  market portfolio 20 year return of KOSPI 10.7
  
• (Rm Rf) Expected market return over the
  risk-free rate 6.61
• Re 4.09 0.34 (10.7 - 4.09) 6.32
• Cost of Debt
• Rd Expected borrowing cost 7.59
• WACC Weighted Average Cost of Capital
• WACC D/V Rd (1 t) E/VRe 6.19
• WACC after country risk premium at 1 6.19
  1 7.19

• Beta
• Cost of equity
• Cost of debt
• Country risk premium
• WACC
• TV Terminal Value
• Enterprise Value
• Net Debt
• Equity Value

28
Valuation _ DCF (Discount Cash Flow, ???? ???)

• Beta
• Cost of equity
• Cost of debt
• Country risk premium
• WACC
• TV Terminal Value
• Enterprise Value
• Net Debt
• Equity Value

• TV Terminal Value
• By perpetual growth
• ? TV FCF (1 g) /(r-g)
• ? PV of TV TV / (1r)n
• TV 464 X (1 1) / ( 7.2 -1) 7,572
  (Round error ??)
• PV of TV 7,558 / (1 7.2) 3 6,148
  (Round error ??)
• By EBITDA Multiple
• ? EV / EBITDA ???? peer companies ???? ??
• ???? EV/EBITDA multiple X ????? ??? EBITDA 5.1
  X 2,551 13,054 (Round Error ??)
• Perpetual Growth Rate g ? ?? ???

29
Valuation _ DCF (Discount Cash Flow, ???? ???)

• Enterprise value (EV, or Firm Value)
• Debt ? Equity ?? ???? ? ????
• Net debt interest bearing debt (IBD) cash
• IBD (??? ??) ??
• Long Term Borrowing (????, ?? ???)
• Long Term Debt (LTD) (????, ??)
• Current Maturity of LTD (????, ??? ?? ??)
• Short Term Borrowing (????, ?? ???)
• Cash cash equivalent
• Cash
• ???? ???? ? ??? ????? ???? ???..
• Short term financial instrument ( ????,
  ??????) Available-for-Sale Securities (????,
  ??????) Held-to-Maturity Securities (????,
  ??????)
• Equity Value EV Net debt

• Beta
• Cost of equity
• Cost of debt
• Country risk premium
• WACC
• TV Terminal Value
• Enterprise Value
• Net Debt
• Equity Value

30
Valuation _ DCF (Discount Cash Flow, ???? ???)
31
Valuation _ DCF (Discount Cash Flow, ???? ???)
WACC
32
Valuation _ DCF (Discount Cash Flow, ???? ???)
33
Valuation _ DCF (Discount Cash Flow, ???? ???)

• So, what all these mean ?
• DCF Valuation ? ??
• Argument on projected cash flow
• Argument on WACC
• Too much assumptions ..
• Beta, market return
• cost of debt
• Country risk premium .
• DCF Valuation ? ??

34
??????
End of Week 5