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# Corporate Valuation

Valuation Methodologies, DCF, EP, APV

by

Tweet## Silvio Altmann

on 7 July 2014#### 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)

KeU-g

(1+Keu) n ( ) TS · (1+g)

Tax-g

(1+Tax) n n n PV forecasted period PV Continuing Value (CV) WACC = · Kd · (1-Tax) + · KeL D

D+E E

D+E Share

of Debt ROIC = NOPLAT

IC IC = NOPLAT

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

FCF = NOPLAT

- 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

Value

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

Return

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

EBIT EV / EBIT x

x

x EV/

EBIT

of peers ø · EBIT of Corp. = EV EV/EBIT EV/sales = mrkt cap + NFP

sales o. revenue EV / sales x

x

x EV/

sales

of peers ø · sales of Corp. = EV EV/sales E/P mrkt cap

earning o. profit income Earnings/Price x

x

x Earning/

Price

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

Full transcriptWACC-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)

KeU-g

(1+Keu) n ( ) TS · (1+g)

Tax-g

(1+Tax) n n n PV forecasted period PV Continuing Value (CV) WACC = · Kd · (1-Tax) + · KeL D

D+E E

D+E Share

of Debt ROIC = NOPLAT

IC IC = NOPLAT

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

FCF = NOPLAT

- 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

Value

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

Return

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

EBIT EV / EBIT x

x

x EV/

EBIT

of peers ø · EBIT of Corp. = EV EV/EBIT EV/sales = mrkt cap + NFP

sales o. revenue EV / sales x

x

x EV/

sales

of peers ø · sales of Corp. = EV EV/sales E/P mrkt cap

earning o. profit income Earnings/Price x

x

x Earning/

Price

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