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Chapter 2: Valuation overview

What are we valuing?
Enterprise value (EV): valuing the company’s productive activities
Equity: valuing the shares
Debt: valuing the obligations of the company
Other: options, minority interest, preferred stock, etc.

Enterprise value
Value of the company’s core business activities
Calculated as PV of its future free cash flows (FCF)

Methods of measuring Enterprise Value (EV)
Accounting approach uses book values
Efficient market approach: replace accounting items with their market values
Discounted cash flow (DCF) approach: EV = PV(future FCFs)
3. Simplified DCF (Chapter 4)
4. DCF via pro forma simulation (Chapter 5)

1. Accounting Approach
Step 1: separate operational vs liquid financial assets (cash + marketable securities) in short-term assets and short-term liabilities
Step 2: Move operational current assets to left-side of balance sheet
Step 3: Combine short- and long-term debt items into single financial debt item
Step 4: Calculate net financial debt = financial debt – liquid financial assets
Step 5: Left-hand side of resulting balance sheet is firm’s Enterprise Value

1. Accounting approach

2. Efficient markets approach
Step 1: Like the accounting approach, move productive assets on the left, financial assets on the right
Step 2: To the extent possible, replace accounting book values with market values

2. Efficient markets approach

Discounted Cash Flow approaches
Discounted cash flow (DCF) approaches
Simplified DCF approach: quick, useful, enlightening
Full pro forma approach: model future financial statements
What is Free Cash Flow (FCF)? Cash from firm’s core business activities
Profit after tax + Depreciation – Current assets + Current liabilities – CapEx + (1 – tax rate) * Net interest
EBITDA * (1 – tax rate)+Depreciation*tax rate – Current assets + Current liabilities – CapEx
CF Operations – CapEx + (1 – tax rate) * Net interest (from Chapter 4)

Discounted Cash Flow approaches

For all cash flow approaches:

Discounted Cash Flow approaches

Two adjustment to formula:
Terminal value: The PV of cash flows from year N onwards
Mid-year discounting: Cash flows occur at mid-year, not at end-year

Discounted Cash Flow approaches

Most common terminal value model

3. Simplified Approach to DCF valuation
Covered in Chapter 4
Only 4 parameters
Current free cash flow, FCF
Derive from Consolidated Statement of Cash Flows
Weighted average cost of capital, WACC
Short-term FCF growth
Long-term FCF growth

3. Simplified Approach to DCF valuation

4. DCF via Pro Forma model
Model relevant items of the Balance Sheet, Income Statement
Derive free cash flows (FCF)
Covered in Chapter 5

4. DCF via Pro Forma model

4. DCF via Pro Forma model – valuation

Assets Liabilities and equity
Short-term assets Short-term liabilities
Cash 1,000Accounts payable 1,500
Marketable securities 1,500Taxes payable 200
Inventories 1,500Current portion of long-term debt 1,000
Accounts receivable 3,000Short-term debt 500
Fixed assets Long-term debt 1,500
Land 150Pension liabilities 800
Plant, property and equipment at
Minus accumulated depreciation -700Preferred stock 200
Net fixed assets Minority interest 100
Goodwill 1,000Stock at par 1,000
Accumulated retained earnings 3,500
Stock repurchases -350
Total assets 9,950Total liabilities and equity 9,950
XYZ CORP BALANCE SHEET

Assets Liabilities and equity
Liquid assets (cash +
marketable securities)
2,500 Financial debt
Current portion of long-
Current assets, operational Short-term debt 500
Inventories 1,500 Long-term debt 1,500
Accounts receivable 3,000 Total financial debt 3,000
Minus, current liabilities, operational
Accounts payable -1,500
Taxes payable -200 Pension liabilities 800
Net working capital 2,800
<-- =SUM(B6:B10) Preferred stock 200 Fixed assets 1,950 Minority interest 100 Goodwill 1,000 Equity 4,150 Left-hand side of rewritten balance sheet =B11+B13+B15+SUM Right-hand side of rewritten balance sheet =E7+E10+SUM( XYZ BALANCE SHEET Operational current liabilities moved to left side All financial liabilities in one account on right side Assets Liabilities and equity Net working capital 2,800 Total financial debt 3,000 Minus liquid assets -2,500 Fixed assets 1,950 Net debt 500 Goodwill 1,000 Pension liabilities 800 Preferred stock 200 Minority interest 100 Equity 4,150 Enterprise value 5,750 <-- =B3+B5+B7 Enterprise value 5,750 <-- =E5+E7+SUM(E9:E12) XYZ ENTERPRISE VALUE BALANCE SHEET Current assets Current liabilities Cash and cash equivalents 3,057,000Accounts payable 16,946,000 Short-term investments Short-term debt 9,648,000 Net receivables 19,533,000Other current liabilities 1,967,000 14,544,000Total current liabilities 28,561,000 Other current assets Total current assets 38,128,000Long-term debt 24,944,000 Other liabilities 14,539,000 Long-term investments 13,211,000 Property, plant and equipment 14,395,000Minority interest 46,000 7,080,000Total liabilities 68,090,000 Intangible assets Other assets 2,107,000Stocks, options, warrants 473,000 Deferred long-term asset charges 2,157,000Common stock 4,273,000 Retained earnings 25,219,000 Treasury stock -10,281,000 Other stockholder equity -6,328,000 Total equity 13,356,000 Total assets 81,446,000Total equity and liabilities 81,446,000 CATERPILLAR CORP., BALANCE SHEET 31 December 2011 Net working capital 16,158,000<-- =19533000+1454 4000+994000- Net financial debt 31,535,000<-- =9648000+24944000- Long-term investments 13,211,000 Other liabilities 14,539,000 Property, plant and equipment 14,395,000 Goodwill 7,080,000 Minority interest 46,000 Intangible assets 4,368,000 Other assets 2,107,000 Equity 13,356,000 Deferred long-term asset charges 2,157,000 Enterprise value 59,476,000 <-- =SUM(B2:B8) Enterprise value 59,476,000 <-- =SUM(E2:E7) CATERPILLAR CORP., 2011 ENTERPRISE VALUE BALANCE SHEET Book values Net working capital 16,158,000<-- =19533000+1454 4000+994000- Net financial debt 31,535,000<-- =9648000+24944000- Long-term investments 13,211,000 Other liabilities 14,539,000 Property, plant and equipment 14,395,000 Goodwill 7,080,000 Minority interest 46,000 Intangible assets 4,368,000 Other assets 2,107,000 Equity 56,599,878 <-- Market cap Deferred long-term asset charges 2,157,000 Enterprise value 59,476,000 <-- =SUM(B2:B8) Enterprise value 102,719,878 <-- =SUM(E2:E7) CATERPILLAR CORP., 2011 ENTERPRISE VALUE BALANCE SHEET Replace equity book value with equity market value Number of shares outstanding 624,722.72 <-- thousand shares Price per share 90.60 <-- 30dec2011 Equity value ("Market Cap") 56,599,878 <-- =B2*B3, thousand $ Cash and cash equivalents 3,057,000 Short-term debt and current portion of long-term debt Long-term debt 24,944,000 Net debt 31,535,000 <-- =SUM(B7:B8)-B6 Other liabilities 14,539,000 Minority interest 46,000 Preferred stock 0 Enterprise value: Equity + Net debt + Minority Interest + Preferred 102,719,878<-- =SUM(B4,B9,B11,B13) CATERPILLAR VALUATION OF EQUITY AND FINANCIAL LIABILITIES: EFFICIENT MARKETS APPROACH Most figures in thousand $ Net working capital 16,158,000<-- =19533000+1454 4000+994000- Net financial debt 31,535,000<-- =9648000+24944000- Long-term investments Other liabilities 14,539,000 Property, plant and equipment Goodwill Minority interest 46,000 Intangible assets Other assets Equity 56,599,878 <-- Market cap Deferred long-term asset charges Enterprise value 102,719,878 <-- =SUM(B2:B8) Enterprise value 102,719,878 <-- =SUM(E2:E7) CATERPILLAR CORP., 2011 ENTERPRISE VALUE BALANCE SHEET Right-hand side revalued at market values Left-hand side brought into balance with right-hand side by adjusting long-term assets 86,561,878<-- =E10-B2 Computed with Excel's NPV function FCFTerminalvalue FCFTerminalvalue 144444424444443 growth rate of cash flows, years N+1, N+ WACC-LTgrowth Free cash flow (FCF) year ending 31 Dec. 2012 Growth rate of FCF, years 1-5 8.00%<-- Optimistic about short-term growth Long-term FCF growth rate 5.00%<-- More pessimistic about long-term growth Weighted average cost of capital, WACC 10.70% Year 201220132014201520162017 FCF 640,738691,997747,357807,145871,717<-- =F8*(1+$B$3) Terminal value 16,057,940<-- =G8*(1+B4)/(B5-B4) Total 640,738691,997747,357807,14516,929,657<-- =G8+G9 Enterprise value 13,063,055<-- =NPV(B5,C10:G10)*(1+B5)^0.5 Add back initial cash and marketable securities 73,697<-- From current balance sheet Subtract out 2012 financial liabilities 1,379,106<-- From current balance sheet Equity value 11,757,646<-- =B12+B13-B14 Per share (1 million shares outstanding) 11.76<-- =B15/1000000 ABC CORP. VALUATION Sales growth 10% Current assets/Sales 15% Current liabilities/Sales 8% Net fixed assets/Sales 77% Costs of goods sold/Sales 50% Depreciation rate 10% Interest rate on debt 10.00% Interest paid on cash and marketable securities 8.00% Tax rate 40% Dividend payout ratio 40% Year 012345 Income statement 1,000 1,100 1,210 1,331 1,464 1,611 Costs of goods sold (500) (550) (605) (666) (732) (805) Interest payments on debt (32) (32) (32) (32) (32) (32) Interest earned on cash and marketable securities 6 9 14 20 26 33 Depreciation (100) (117) (137) (161) (189) (220) Profit before tax 374 410 450 492 538 587 (150) (164) (180) (197) (215) (235) Profit after tax 225 246 270 295 323 352 (90) (98) (108) (118) (129) (141) Retained earnings 135 148 162 177 194 211 PRO FORMA FINANCIAL MODEL Balance sheet Cash and marketable securities 80 144 213 289 371 459 Current assets 150 165 182 200 220 242 Fixed assets 1,070 1,264 1,486 1,740 2,031 2,364 Depreciation (300) (417) (554) (715) (904) (1,124) Net fixed assets 770 847 932 1,025 1,127 1,240 Total assets 1,000 1,156 1,326 1,513 1,718 1,941 Current liabilities 80 88 97 106 117 129 320 320 320 320 320 320 450 450 450 450 450 450 Accumulated retained earnings 150 298 460 637 830 1,042 Total liabilities and equity 1,000 1,156 1,326 1,513 1,718 1,941 Year 012345 Free cash flow calculation Profit after tax 246270295323352 Add back depreciation 117137161189220 Subtract increase in current assets (15)(17)(18)(20)(22) Add back increase in current liabilities 89101112 Subtract increase in fixed assets at cost (194)(222)(254)(291)(333) Add back after-tax interest on debt 1919191919 Subtract after-tax interest on cash and mkt. securities (5)(9)(12)(16)(20) Free cash flow 176188201214228 Valuing the firm Weighted average cost of capital 20% Long-term free cash flow growth rate 5% Year 012345 FCF 176188201214228 Terminal value 1,598<-- =G58*(1+B55)/(B54-B55) Total 1761882012141,826 Enterprise value, present value of row 60 1,348<-- =NPV(B54,C60:G60)*(1+B54)^0.5 Add in initial (year 0) cash and mkt. securities 80<-- =B27 Asset value in year 0 1,428<-- =B63+B62 Subtract out value of firm's debt today (320)<-- =-B36 Equity value 1,108<-- =B64+B65 Share value (100 shares) 11.08<-- =B66/100 /docProps/thumbnail.jpeg 程序代写 CS代考加微信: powcoder QQ: 1823890830 Email: powcoder@163.com

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