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Chapter 4: Valuation Based on Consolidated Statement of Cash Flows
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Basic corporate valuation
Enterprise value: value of the firm’s operational activities (no financing included)
Free cash flow (FCF): cash flow due to operations
Profit after tax + Depreciation – Net working capital – Capex + After-tax net interest
Basic corporate valuation applied…
Discount only small number of FCFs, using terminal value and mid-year discounting
Using short- and long-term growth:
Valuation in a Balance Sheet paradigm
Cash and marketable securities
Enterprise value = PV(FCF)
Liabilities and equity
Other obligations
Where do the numbers come from?
Free cash flow
Pro forma model
Projects future firm performance based on accounting model
Very flexible, complicated
In this presentation: (Consolidated) Statement of Cash Flow (SCF)
Weighted average cost of capital (WACC)
Basic template
Only four parameters
Current free cash flow: FCF0 get from Consolidated Statement of Cash Flows
Short-term growth rate
Long-term growth rate
Weighted average cost of capital (WACC)
Valuing Starbucks
Consolidated Statement of Cash Flows
Not the same as Free Cash Flow
Data table: Share value as function of WACC and Long-Term Growth
Why all the strange numbers?
Terminal value equation assumes that WACC > LT growth
Fix up Data Table: LT growth must be < WACC
Put IF in top left-hand corner of Data Table to specify WACC > Ltgrowth.
Use Conditional Formatting to identify valuations +/- 20% of current share price
EnterprisevalueEVPVFCFWACC
EnterprisevalueEVPVFCFWACC
FCFLTgrowth
WACCLTgrowth
FCFSTgrowth
FCFLTgrowth
WACCLTgrowth
Current free cash flow (FCF) 1,000
Growth rate of FCF, years 1-5 8.00%
Long-term FCF growth rate 5.00%
Weighted average cost of capital (WACC) 11.00%
Year 012345
Future FCFs 1,0801,1661,2601,3601,469<-- =F8*(1+$B$3)
Terminal value 25,713<-- =G8*(1+B4)/(B5-B4)
Total 1,0801,1661,2601,36027,183<-- =G8+G9
Enterprise value 20,933<-- =NPV(B5,C10:G10)*(1+B5)^0.5
Add back initial cash 2,000<-- From current balance sheet
Subtract out debt 10,000<-- From current balance sheet
Equity value 12,933<-- =B12+B13-B14
Per share (1,000 shares) 12.93<-- =B15/1000
BASIC CASH FLOW VALUATION TEMPLATE
Period Ending 29-Sep-1330-Sep-1202-Oct-11
Net Income 8,3001,383,8001,245,700
Operating Activities, Cash Flows Provided By or Used In
Depreciation 655,600580,600550,000
Adjustments To Net Income 1,767,200189,000166,400
Changes In Accounts Receivables -68,300-90,300-88,700
Changes In Liabilities 316,200-20,700181,500
Changes In Inventories 152,500-273,300-422,300
Changes In Other Operating Activities 76,300-19,700-22,500
Total Cash Flow From Operating Activities 2,907,8001,749,4001,610,100<-- =SUM(D3:D11)
Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures -1,151,200-856,200-531,900
Investments <-- Financial, not operations
Other Cash flows from Investing Activities -622,300-165,60048,400<-- Needs further exploration
Total Cash Flows From Investing Activities -1,773,500-1,021,800-483,500<-- =SUM(D15:D17)
Financing Activities, Cash Flows Provided By or Used In
Dividends Paid
Sale Purchase of Stock
Net Borrowings
Other Cash Flows from Financing Activities
Free cash flow before interest adjustment 1,134,300727,6001,126,600<-- =D12+D19
Interest expense 28,10032,70033,300<-- =Income!E29
Tax rate 1.0382780.3275220.310916<-- =Income!E31/Income!E30
Free cash flow 1,153,197749,5901,148,994<-- =D27+(1-$C$29)*D28
STARBUCKS, FREE CASH FLOW
All of these are financial and
not part of the free cash flow,
which reflects cash produced
by operations
A BCDEFGHH
Current free cash flow (FCF) 1,153,197
Growth rate of FCF, years 1-5
Long-term FCF growth rate
Weighted average cost of capital (WACC) 6.70%<-- ='Starbucks WACC'!B21
Year 012345
Future FCFs 1,222,3881,295,7321,373,4761,455,8841,543,237<-- =F8*(1+$B$3)
Terminal value 42,943,915<-- =G8*(1+B4)/(B5-B4)
Total 1,222,3881,295,7321,373,4761,455,88444,487,152<-- =G8+G9
Enterprise value ($1000) 37,912,334<-- =NPV(B5,C10:G10)*(1+B5)^0.5
Add back initial cash ($1000) 2,575,700<-- From current balance sheet
Subtract out debt ($1000) -1,299,400<-- From current balance sheet
Subtract other liabilities -357,700
Subtract minority interest -2,100
Equity value ($1000) 38,828,834<-- =SUM(B12:B16)
Number of shares 753,600,000
Share value
<-- =B17*1000/B18
Current market price 81.46
TEMPLATE APPLIED TO STARBUCKS
<-- Currently
madeup and critical!
A BCDEFGHIJK
Enterprise value ($1000) 37,912,334<-- =NPV(B5,C10:G10)*(1+B5)^0.5
Add back initial cash ($1000) 2,575,700<-- From current balance sheet
Subtract out debt ($1000) -1,299,400<-- From current balance sheet
Subtract other liabilities -357,700<-- =-Balance!B32
Subtract minority interest -2,100<-- =-Balance!B34
Equity value ($1000) 38,828,834<-- =SUM(B12:B16)
Number of shares 753,600,000
Share value
<-- =B17*1000/B18
Current market price 81.46
=B19 -->51.520%1%2%3%4%5%6%7%8%
4%52.3967.2797.02186.28#DIV/0!-170.75-81.49-51.74-36.86
5%42.1750.8065.1893.96180.27#DIV/0!-165.00-78.68-49.91
WACC–>6%35.3540.9249.2763.1991.02174.52#DIV/0!-159.48-75.98
7%30.4934.3339.7247.8061.2788.20169.00#DIV/0!-154.20
8%26.8429.6333.3638.5746.3959.4385.50163.71#DIV/0!
9%24.0126.1128.8232.4237.4745.0457.6782.91158.64
10%21.7423.3725.4128.0331.5236.4143.7555.9780.42
Long-term growth ↓
Data table: Share value as function of WACC and Long-Term Growth
WACCL WACCLTgrowth
A BCDEFGHIJK
Enterprise value ($1000) 37,912,334<-- =NPV(B5,C10:G10)*(1+B5)^0.5
Add back initial cash ($1000) 2,575,700<-- From current balance sheet
Subtract out debt ($1000) -1,299,400<-- From current balance sheet
Equity value ($1000) 41,787,434<-- =B12+B13-B14
Number of shares 753,600,000
Share value
<-- =B15*1000/B16
Current market price 81.46
=IF(B5>B4,B17,”nmf”) –> 55.450%1%2%3%4%5%6%7%8%
4%56.3271.20100.95190.21nmfnmfnmfnmfnmf
5%46.0954.7269.1197.88184.20nmfnmfnmfnmf
WACC–>6%39.2844.8453.1967.1194.94178.45nmfnmfnmf
7%34.4138.2643.6551.7365.1992.13172.93nmfnmf
8%30.7733.5637.2942.5050.3263.3689.43167.64nmf
9%27.9330.0432.7436.3541.4048.9761.5986.84162.57
10%25.6727.3029.3431.9635.4540.3447.6759.9084.35
Long-term growth ↓
Data table: Share value as function of WACC and Long-Term Growth
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