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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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