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Value of firm = PV of all future cash flows

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1) Discount explicit forecast period CF. 2) Capitalize continuing value ... Exhibits 8.3 8.6. Fin 4201/8001. 3. ROIC = NOPLAT/Invested Capital ... – PowerPoint PPT presentation

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Title: Value of firm = PV of all future cash flows


1
Valuation - The Numbers
  • Value of firm PV of all future cash flows
  • 1) Discount explicit forecast period CF
  • 2) Capitalize continuing value
  • Add 1 2 for value of firm

2
Exhibits 8.3 8.6
  • Start with value of operations (8.4)
  • Next consider financing flows (8.4)
  • After tax interest expense
  • ? debt
  • Dividends or share repurchase
  • Determine WACC (8.5)
  • Continuing value (8.6)
  • Put it all together (8.3)

3
What Drives Cash Flow and Value
  • ROIC NOPLAT/Invested Capital
  • NOPLAT net operating profit less adjusted taxes
  • Invested Capital Working capital Net PPE
    other assets
  • ROIC is a rate of return
  • Also need economic profit to reveal dollar
    amount

4
Whats the process? Look at spread sheet
  • Reorganize the financials to estimate ROIC
  • Make sure you account for everything in
    statements (lines 1-29 Income and 36-70 BS)
  • Invested capital (denominator) lines 71-98
  • NOPLAT (numerator) lines 106-138
  • ROIC 140-155 couple of calculation methods
  • Economic profit (175-195) reflects spread
    (ROIC-WACC)
  • FCF (210-240)
  • Put it all together for firm value (249-271)

5
Implications of the numbers
  • Economic profit Inv.capital (ROIC WACC)
    NOPLAT capital charge NOPLAT (invested
    capitalWACC)
  • EP does not have to translate into ? market value
  • FCF shows how firm generates or uses cash
  • Once you have done all of this have the elements
    to do ratio analysis

6
Estimating Cost of Capital WACC
  • You can build your own
  • Look at in a minute
  • Can just look it up
  • Discounts FCF to PV for all investors
  • Is after tax since FCF is after tax and is
    nominal
  • Need to use market value (not BV)
  • Can be subject to change due to changes in
    inflation, risk, or capital structure

7
Estimating Cost of Capital WACC
  • WACC kb(1-T)(B/V) kp(P/V) ks(S/V) wherekb
    pretax YTM on non-callable, nonconvertible
    debtT marginal tax rateB mkt value of
    debtVmarket value of enterprise
    (BPS)kpafter tax cost of preferred
    stockPmkt value of preferredksopportunity
    cost of equity capitalS mkt vlue of equit

8
Complications
  • capital structure may be complicated
  • Convertibles or callables
  • Warrants
  • Executive stock options
  • How to do it 3 Steps
  • Develop market weights - discover trends
  • Estimate cost of non-equity financing
  • Estimate cost of equity financing

9
Forecasting Performance
  • Detailed forecast near term summary forecast
    long term.
  • Take strategic perspective and account for
    competitive advantage
  • You could sayDemand is increasing rapidly
    because of changing demographics, yet prices will
    remain stable because of the competitive
    structure of the industry. Given the companys
    competitive position, it should be able to
    increase market share somewhat, although
    profitability will remain constant.
  • Franchise, commodity, efficient use of capital,
    bargaining power

10
Translate vision into numbers
  • Incorporate opinions into FCF.
  • Look at ratios reality check
  • Six steps
  • Revenue forecast volume growth price changes
  • Fore cast operational items
  • Project non-operating items (investments or
    interest exp)
  • Project equity accounts (old NI
    divrepurchases)
  • Balance cashflows and balance sheet
  • Calc ROIC, key ratios, and pull together

11
Use the continuing value
  • Needs to be high quality since may be over half
    the valuation
  • Plug into
  • Know assumptions
  • Constant margins, returns on new investment, and
    capital turnover
  • What about changes over time (horizon)?
  • Sensitivity analysis
  • Make sure reasonable
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