VALUATION MEASURING AND MANAGING THE VALUE OF COMPANIES - PowerPoint PPT Presentation

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VALUATION MEASURING AND MANAGING THE VALUE OF COMPANIES

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Can the company manage all the investment it is ... Industry average ROICs and growth rate are linked to economic fundamentals. ... VALUATION MEASURING AND MANAGING ... – PowerPoint PPT presentation

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Title: VALUATION MEASURING AND MANAGING THE VALUE OF COMPANIES


1
VALUATIONMEASURING AND MANAGING THE VALUE OF
COMPANIES
FORECASTING PERFORMANCE
PREPARED BY DAVID DAI
2
Determine Length and Detail of the Forecast
  • All continuing value approaches are based on an
    assumption of steady state performance.
  • Constant Rate of Return on all new capital
    invested during the continuing value period
  • The company earn a constant return on its base
    level of invested capital
  • The company grows at a constant rate and
    reinvests a constant proportion of its operating
    profits in the business each year.

3
- Continued
  • Recommend using a forecast period of 10 to 15
    years
  • A detailed forecast for 3 to 5 years.
  • In addition to simplifying the forecast, this
    approach also forces you to focus on the
    long-term economics of the business, not just the
    individual line items of the forecast.

4
Develop Strategic Perspective
  • - Means crafting a plausible story about the
    companys future performance.
  • What ultimately drives the value of the company
    is the assessment of whether and for how long a
    company can earn returns in excess of its
    opportunity cost of capital.
  • superior value to customer through a combination
    of price and product
  • Achieve lower costs than competitors
  • Using capital more productively than competitors.

5
Industry Structure Analysis
  • Five Force Model
  • Suppliers

- Substitute products
- Buyers
  • Entry of new competitors
  • Entry of existing competitors

6
Customer Segmentation Analysis
External Shock
Structure
Conduct
Performance
Feedback
  • Macroeconomics
  • Technology
  • Regulation
  • Customer Preference/Demographics

7
Competitive Business System Analysis
Product design and development
Procurement
Manufacturing
Marketing
Sales and Distribution
Product attributes quality Time to market
Technology
Pricing Advertising Promotion Packaging Brands
Access to Sources cost Outsourcing
Sales Effective Costs Channels
Costs Cycle Time Quality
8
Translate the Strategic Perspective into
Financial Forecast
  • Build the revenue forecast
  • Forecast operational items, such as operating
    cost.
  • Project non-operating items.
  • Project the equity accounts.
  • Use the cash and/or debt accounts to balance the
    cash flows and balance sheet.
  • Calculate the ROIC tree and key ratios to pull
    the elements together and check for consistency.

Such as operating cost, working capital,
property, Plant, and equipment, by linking them
to revenues or volume
Equity should equal last years equity plus net
income And new share issues less dividends and
share repurchases.
9
Inflation
  • Expected inflation
  • (1Nominal rate)/(1 Real rate) - 1

Forecast and cost of capital could be estimated
in nominal rather than real currency uits. For
consistency, both the financial forecast and the
cost of capital must be based on the same
expected general inflation rate. This means
inflation rate built into the forecast must be
derived from an inflation rate implicit in the
cost cost of capital.
10
Develop Performance Scenarios
1228
Once the scenarios are developed, an overall
value of the Company can be estimated. This will
involve a weighted Average of the values of the
independent scenarios, Assigning probabilities
to each scenario.
11
Checking for Consistency and Alignment
  • Is performance on the value drivers consistent
    with the companys economics and the industry
    competitive dynamics?
  • Is revenue growth consistent with industry
    growth?
  • Is the return on capital consistent with the
    industrys competitive structure?
  • How will technology changes affect returns? Will
    they affect risk?
  • Can the company manage all the investment it is
    undertaking?

12
Some Data to Guide your forecast
  • Companies rarely outperform their peers for long
    periods of time.
  • Company performance varies from industry
    averages.
  • Industry average ROICs and growth rate are linked
    to economic fundamentals.

13
CASE STUDY
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