Investment VI FINC 404 Company Valuation
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Transcript of Investment VI FINC 404 Company Valuation
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Investment VI
Company valuation
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Company Valuationhistorical financial statementsforecast period
opportunity costs of capital
market value weight
make assumptions for continuation valueuse formula to get value
check different scenarios
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Statements
Balance sheetIncome statementStatement of cash flows
Historical Financial
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Income Statement
2010 2011Sales 3,432,000 5,834,400 COGS 2,864,000 4,980,000 Other expenses 340,000 720,000 Deprec. 18,900 116,960 Tot. op. costs 3,222,900 5,816,960 EBIT 209,100 17,440 Int. expense 62,500 176,000 EBT 146,600 (158,560)Taxes (40%) 58,640 (63,424)Net income 87,960 (95,136)
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Balance Sheet: Assets
2010 2011Cash 9,000 7,282 S-T invest. 48,600 20,000 AR 351,200 632,160 Inventories 715,200 1,287,360 Total CA 1,124,000 1,946,802 Gross FA 491,000 1,202,950 Less: Depr. 146,200 263,160 Net FA 344,800 939,790 Total assets 1,468,800 2,886,592
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Statement of Retained Earnings: 2011
Balance of ret. earnings,
12/31/2002 203,768
Add: Net income, 2003 (95,136)
Less: Dividends paid, 2003 (11,000)
Balance of ret. earnings,
12/31/2003 97,632
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Balance Sheet: Liabilities & Equity
2010 2011Accts. payable 145,600 324,000 Notes payable 200,000 720,000 Accruals 136,000 284,960 Total CL 481,600 1,328,960 Long-term debt 323,432 1,000,000 Common stock 460,000 460,000 Ret. earnings 203,768 97,632 Total equity 663,768 557,632 Total L&E 1,468,800 2,886,592
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Statement of Cash Flows: 2011
Operating ActivitiesNet Income (95,136)Adjustments: Depreciation 116,960 Change in AR (280,960) Change in inventories (572,160) Change in AP 178,400 Change in accruals 148,960 Net cash provided by ops. (503,936)
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Long-Term Investing Activities
Cash used to acquire FA (711,950)
Financing Activities
Change in S-T invest. 28,600
Change in notes payable 520,000
Change in long-term debt 676,568
Payment of cash dividends (11,000)
Net cash provided by fin. act. 1,214,168
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Summary of Statement of CF
Net cash provided by ops. (503,936)
Net cash to acquire FA (711,950)
Net cash provided by fin. act. 1,214,168
Net change in cash (1,718)
Cash at beginning of year 9,000
Cash at end of year 7,282
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What are operating current assets?
Operating current assets are the CA needed to support operations.Op CA include: cash, inventory,
receivables.Op CA exclude: short-term
investments, because these are not a part of operations.
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What are operating current liabilities?
Operating current liabilities are the CL resulting as a normal part of operations.Op CL include: accounts payable
and accruals.Op CA exclude: notes payable,
because this is a source of financing, not a part of operations.
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What effect did the expansion have on net operating working capital (NOWC)?
NOWC11 = ($7,282 + $632,160 + $1,287,360)
- ($324,000 + $284,960)
= $1,317,842.
NOWC10 = $793,800.
= -Operating
CAOperating
CLNOWC
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What effect did the expansion have on total net operating capital (also just called
operating capital)?
= NOWC + Net fixed assets.
= $1,317,842 + $939,790
= $2,257,632.
= $1,138,600.
Operatingcapital11
Operatingcapital10
Operatingcapital
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Did the expansion create additional net operating profit after taxes (NOPAT)?
NOPAT = EBIT(1 - Tax rate)
NOPAT11 = $17,440(1 - 0.4)
= $10,464.
NOPAT10 = $125,460.
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What was the free cash flow (FCF)for 2011?
FCF = NOPAT - Net investment in
operating capital
= $10,464 - ($2,257,632 - $1,138,600)
= $10,464 - $1,119,032
= -$1,108,568.
How do you suppose investors reacted?
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Stock Price and Other Data
2010 2010
Stock price $8.50 $2.25
# of shares 100,000 100,000
EPS $0.88 -$0.95
DPS $0.22 $0.11
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Forecasting FCF
Method:Sales forecastsPercent of sales method
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Steps in Financial Forecasting
Forecast salesProject the assets needed to support
salesProject internally generated fundsProject outside funds neededDecide how to raise fundsSee effects of plan on ratios and stock
price
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2011 Balance Sheet(Millions of $)
Cash. $ 20 Accts. pay. &accruals $ 100
Accounts rec. 240 Notes payable 100Inventories 240 Total CL $ 200 Total CA $ 500 L-T debt 100
Common stk 500Net fixedassets
Retainedearnings 200
Total assets $1,000 Total claims $1,000 500
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2003 Income Statement(Millions of $)
Sales $2,000.00Less: COGS (60%) 1,200.00 Other costs 700.00 EBIT $ 100.00Interest 10.00 EBT $ 90.00Taxes (40%) 36.00Net income $ 54.00
Dividends (40%) $21.60Add’n to RE $32.40
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AFN (Additional Funds Needed):Key Assumptions
Operating at full capacity in 2011.Each type of asset grows proportionally with
sales.Payables and accruals grow proportionally
with sales.2011 profit margin ($54/$2,000 = 2.70%) and
payout (40%) will be maintained.Sales are expected to increase by $500
million.
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Projecting Pro Forma Statements with the Percent of Sales Method
Project sales based on forecasted growth rate in sales
Forecast some items as a percent of the forecasted salesCostsCashAccounts receivable
(More...)
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Items as percent of sales (Continued...)
InventoriesNet fixed assetsAccounts payable and accruals
Choose other itemsDebtDividend policy (which determines
retained earnings)Common stock
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Implications of AFN
If AFN is positive, then you must secure additional financing.
If AFN is negative, then you have more financing than is needed.Pay off debt.Buy back stock.Buy short-term investments.
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Percent of Sales: Inputs
COGS/Sales 60% 60%SGA/Sales 35% 35%Cash/Sales 1% 1%Acct. rec./Sales 12% 12%Inv./Sales 12% 12%Net FA/Sales 25% 25%AP & accr./Sales 5% 5%
2011 2012Actual Proj.
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Other Inputs
Percent growth in sales 25%
Growth factor in sales (g) 1.25
Interest rate on debt 10%
Tax rate 40%
Dividend payout rate 40%
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2004 Forecasted Income Statement
2011 Factor2012
1st PassSales $2,000 g=1.25 $2,500.0
Less: COGS Pct=60% 1,500.0 SGA Pct=35% 875.0 EBIT $125.0Interest 0.1(Debt03) 20.0 EBT $105.0Taxes (40%) 42.0Net. income $63.0
Div. (40%) $25.2Add. to RE $37.8
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2004 Balance Sheet (Assets)
Forecasted assets are a percent of forecasted sales.
Factor 2004
Cash
Pct= 1% $25.0Accts. rec. Pct=12% 300.0
Pct=12% 300.0
Total CA
$625.0Net FA Pct=25% 625.0Total assets $1,250.0
2004 Sales = $2,500
Inventories
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2004 Preliminary Balance Sheet (Claims)
*From forecasted income statement.
2011 Factor Without AFN
AP/accruals Pct=5% $125.0Notes payable 100 100.0
Total CL $225.0L-T debt 100 100.0Common stk. 500 500.0Ret. earnings 200 +37.8* 237.8Total claims $1,062.8
20122012 Sales = $2,500
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Required assets = $1,250.0Specified sources of fin. = $1,062.8Forecast AFN = $ 187.2
What are the additional funds needed (AFN)?
The company must have the assets to make forecasted sales, and so it needs an equal amount of financing. So, we must secure another $187.2 of financing.
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Assumptions about How AFN Will Be Raised
No new common stock will be issued.
Any external funds needed will be raised as debt, 50% notes payable, and 50% L-T debt.
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How will the AFN be financed?
Additional notes payable = 0.5 ($187.2) = $93.6.
Additional L-T debt = 0.5 ($187.2) = $93.6.
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2012 Balance Sheet (Claims)
w/o AFN AFN With AFNAP/accruals $ 125.0 $ 125.0 Notes payable 100.0 +93.6 193.6 Total CL $ 225.0 $ 318.6 L-T debt 100.0 +93.6 193.6 Common stk. 500.0 500.0Ret. earnings 237.8 237.8 Total claims $1,071.0 $1,250.0
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What are the forecasted free cash flow and ROIC?
2003 2004(E)Net operating WC $400 $500 (CA - AP & accruals)Total operating capital $900 $1,125 (Net op. WC + net FA)NOPAT (EBITx(1-T)) $60 $75 Less Inv. in op. capital $225
Free cash flow -$150ROIC (NOPAT/Capital) 6.7%
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Value of Operations
1tt
tOp )WACC1(
FCFV
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Nonoperating Assets
Marketable securitiesOwnership of non-controlling
interest in another companyValue of nonoperating assets usually
is very close to figure that is reported on balance sheets.
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Total Corporate Value
Total corporate value is sum of:Value of operationsValue of nonoperating assets
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Claims on Corporate Value
Debtholders have first claim.Preferred stockholders have the next
claim.Any remaining value belongs to
stockholders.
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Applying the Corporate Valuation Model
Forecast the financial statements, as shown.
Calculate the projected free cash flows.Model can be applied to a company that
does not pay dividends, a privately held company, or a division of a company, since FCF can be calculated for each of these situations.
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Data for Valuation
FCF0 = $20 million
WACC = 10%g = 5%Marketable securities = $100 millionDebt = $200 millionPreferred stock = $50 millionBook value of equity = $210 million
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Value of Operations: Constant Growth
Suppose FCF grows at constant rate g.
1tt
t0
1tt
tOp
WACC1
)g1(FCF
WACC1
FCFV
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Constant Growth Formula
Notice that the term in parentheses is less than one and gets smaller as t gets larger. As t gets very large, term approaches zero.
1t
t
0Op WACC1
g1FCFV
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Constant Growth Formula (Cont.)
The summation can be replaced by a single formula:
gWACC
)g1(FCF
gWACC
FCFV
0
1Op
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Find Value of Operations
42005.010.0
)05.01(20V
gWACC
)g1(FCFV
Op
0Op
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Value of Equity
Sources of Corporate ValueValue of operations = $420Value of non-operating assets = $100
Claims on Corporate ValueValue of Debt = $200Value of Preferred Stock = $50Value of Equity = ?
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Value of Equity
Total corporate value = VOp + Mkt. Sec.
= $420 + $100
= $520 million
Value of equity = Total - Debt - Pref.
= $520 - $200 - $50
= $270 million
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Expansion Plan: Nonconstant Growth
Finance expansion by borrowing $40 million and halting dividends.
Projected free cash flows (FCF):Year 1 FCF = -$5 million.Year 2 FCF = $10 million.Year 3 FCF = $20 millionFCF grows at constant rate of 6%
after year 3.(More…)
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The weighted average cost of capital, rc, is 10%.
The company has 10 million shares of stock.
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Horizon Value Formula
Horizon value is also called terminal value, or continuing value.
gWACC
)g1(FCFVHV t
ttimeatOp
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Vop at 3
Find the value of operations by discounting the free cash flows at the cost of capital.
0
-4.545
8.264
15.026
398.197
1 2 3 4rc=10%
416.942 = Vop
g = 6%
FCF= -5.00 10.00 20.00 21.2
$21.2. .
$530.10 0 06
0
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Find the price per share of common stock.
Value of equity = Value of operations
- Value of debt
= $416.94 - $40
= $376.94 million.
Price per share = $376.94 /10 = $37.69.