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Corporate Valuation

Valuation Methodologies, DCF, EP, APV

Silvio Altmann

on 7 July 2014

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Transcript of Corporate Valuation

EV= + + ... + + ( ) EV: Discounted Cash Flow NOPLAT · (1-IR)
WACC-g EV= EV: Discounted Economic Profit IC · (ROIC - WACC)
WACC-g EV= IC + EV: Adjusted Present Value FCFx
(1+KeU) TSx
(1+Tax) FCF · (1+g)
(1+Keu) n ( ) TS · (1+g)
(1+Tax) n n n PV forecasted period PV Continuing Value (CV) WACC = · Kd · (1-Tax) + · KeL D
D+E Share
ROIC IC = WC + NetPP&E NOPLAT = EBITA - Op Taxes NOPLAT = Op Profit - Op Taxes IR = g
ROIC g = IR · ROIC Op Taxes = Reported Taxes + TS
Op Taxes = Operating Profit · Tax FCF = NOPLAT · (1-IR) - ΔWC
+ Depreciation
- CAPEX WC = current
+ account
+ inventory
+ op cash CAPEX = Investment + Depreciation
CAPEX = Investment + Divestitures
CAPEX = Δtang fixed assets + Depreciation EP, Economic Profit Working Capital Free Cash Flow Invested Capital Net Operating Profit Less Adjusted Taxes Operating Taxes Return On Invested Capital Investment Rate Growth Rate Weighted Average Cost of Capital KeL = KeU + · (KeU-Kd) · (1-Tax) D
E Unlevered
Cost of Eq Levered Cost of Equity Rate
of Debt additional Cost of Debt over KeU benefit from Tax Shield KeU = Rf + øßu · MRP Risk free
rate systematic
risk return over alternative Unlevered Cost of Equity ßu = ßL
1+ (1-Tax) · D
E Beta Unlevered MRP = Rf-ROIC Market Risk Premium created return over risk-free alternative risk of investment in this industry risk & return of investment Rate of
Creation Cost of Financing the Investment with Debt Cost
of Debt Benefit from TS Share
of Equity Levered Cost of Equity Created Value by Investment K: Cost of Capital Cash Flow
Profit, Earning, Income
NOPLAT, FCF Discount Rate Investment
Growth Key Value Driver Formula economic-profit derivation from Key Value Driver Formula EV = Enterprise Value Levered o. gross enterprise value
EV = EVu + TS
EV Equity = EV - D

E = market capitalization o. value of equity
D = Net Financial Position (NFP)
D= + debt + bond - securities - excess cash Investment = ΔNet Tangible Assets Key Value Driver g, ROIC, Tax, WACC EV: Multiples comparing a company's multiples
with those of similar companies test the plausibility of cash flow forecasts
explain mismatches between a company's performance and those of its competitors
support useful discussions about strategical position It is useful to: Use the right multiple
Calculate the multiple in a consistent manner
Use the right peer group Requirements: base the numerator (Value) and
denominator (Earnings) on the same underlying assets.
e.G. if you exclude excess cash from value,
exclude interest income from the earnings in same industry, sell similar products and similar production methodology
rely on similar business model
similar Key Value Driver - g, ROIC EV/EBITA: 4 Key driving factors are included
E/P: affected by D/E, cap. structure - not just operating
calculated after non-operating items such as
amortization, one-time gains and -losses
Amortization - accounting artifact from past acquisitions,
not tied to future cash flows
Depreciation - non cash expense, reflecting sunk costs,
no future investments EV/EBIT = mrkt cap + NFP
x EV/
of peers ø · EBIT of Corp. = EV EV/EBIT EV/sales = mrkt cap + NFP
sales o. revenue EV / sales x
x EV/
of peers ø · sales of Corp. = EV EV/sales E/P mrkt cap
earning o. profit income Earnings/Price x
x Earning/
of peers ø · earning + Debt = EV E/P Key Value Driver ROIC, WACC discounts free cash flow, meaning the cash flow available to all investors (equity holders, debt holders, non equity investors)
relies solely on flow of cash in and out the company, rather than on accounting-based earnings
Works best for projects, business units and companies that manage their capital structure to a target level close link to economic theory and competitive strategy
Explicitly highlights when a company creates value Corporate Valuation Risk-free rate - return on a portfolio without covariance with the market
government default-free bonds with same maturity as projected cash flow historical MRP: measuring and extrapolating historical returns
current financial ratios: Using regression analysis to link current market variables
Forward-looking models: DCF valuation, along with estimates of ROIC and g, to reverse engineer the market's cost of capital Methods to Estimate MRP: Definition of Rf: Measurement of Value Creation by a Corporation Value creation, operating performance A company's value is driven by its ability to earn a healthy return on invested capital (ROIC) and by its ability to grow.
value of operations = discounted value of future FCF. expected changes in debt-to-value ratio are better to apply Free Cash Flow Cash Flow, available to all investors - equity holders, debt holders and any other non-equity investors = independent of capital structure
FCF = Cash Flow generated by company's operations, less any reinvestment back into business represents rate of return, required by the company's debt and equity holders blended together represents the investor capital, required to fund operations
without distinguishing how the capital is financed total after-tax operating income generated by the company's invested capital, available to all financial investors. with growth
and ROIC based on cash flow links it created value above WACC hurdle rate book value plus, with invested capital Enterprise Value as if
the company was
all-equity financed Present Value of
Tax Shields
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