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Laura Martin:
Valuations
Doris Li (3220413)
Carmen Chan (3219451)
Nick Tatarchuk ()
Topic Areas: Introduction
Background Information
Multiple Analysis Regression model Assumptions
Discounted Cash Flow Assumption
Real Options Assumptions Stealth Tier
Conclusion Flowchart
Introduction
- Changes in the Cable Industry
- Laura Martin demonstrates the drivers of value in the Cable Industry
- Evaluation of the Multiple Analysis, DCF Analysis and the Real Options
Topic Areas: Introduction
Background Information
Multiple Analysis Regression model Assumptions
Discounted Cash Flow Assumption
Real Options Assumptions Stealth Tier
Conclusion Flowchart
Multiple Analysis
Multiple Valuation involve the following steps:
1. Define the multiple2. Describe the multiple3. Analyze the multiple4. Apply the Multiple
Multiple Analysis
Advantages:
- Simple and Cheap- Does not rely on forecasting- Relevant
• Disadvantages:
- EBITDA inflates earnings- Historical Data- Subjective
Multiple Assumptions
Exhibit 2 shows the summary of financial
data for selected comparable companies
Multiple Assumptions
R2 is the coefficient of determination which shows the strength in relationship between the two variables
Firms are similar in size, growth and return
Multiple Assumptions
- EBITDA is calculated at the same period
- EBITDA only focuses on earnings and excludes interest, tax, depreciation and amortization which could have significant impacts on a company
Regression Vs. Traditional Multiple Analysis
Traditional Multiple Analysis
Uses the average of companies multiples
Regression
Plots results on a graph and a line of best fit is drawn
Topic Areas: Introduction
Background Information
Multiple Analysis Regression model Assumptions
Discounted Cash Flow Assumption
Real Options Assumptions Stealth Tier
Conclusion Flowchart
DCF Analysis
DCF Analysis involve the following steps:
1. Forecasting the expected cash flows2. Estimating the discount rate (WACC)3. Calculating the value of the corporation
DCF Analysis
Advantages:
- Clear, consistent decision criteria for all projects
- Quantitative, decent level of precision
- Not as vulnerable to accounting conventions
- Time value of money
Disadvantages:
- Future rates = Unknown- Lacks in Accuracy –
Decision made now- Use of FCF - Unknown, intangible factors
are valued as zero
DCF Assumptions
Assumptions:
- WACC of 9.3%: unrealistic changes in market conditions and beta
- Terminal multiple value of 13: realistic conservative in comparison to Exhibit 6
- EBITDA: unrealistic Income statement shows fluctuating figures but forecasted EBITDA shows growing at constant rate
- Asset Intensity ignores ‘stealth tier’
Topic Areas: Introduction
Background Information
Multiple Analysis Regression model Assumptions
Discounted Cash Flow Assumption
Real Options Assumptions Stealth Tier
Conclusion Flowchart
Real Options
- 102 MHz, 17 Empty Channels - 100% Capital Spending but < 100% Return- Black Scholes Model (Refer to later slides)
- Flexibility in Real Options
Black and Scholes Model
- The Current Stock Price of $23.15 Yes
- The Strike Price Difficult to estimate
- The Volatility of 50% Yes
- The Option Period of 10 years Yes
- The Interest Rate of 5.25% No
Black and Scholes Model
Applicability
The ‘Stealth Tier’Call Option
The holder of a call option has the right to buy within a specific date at a specified price.
$1.22
$22.45
$23.67
Profit
Loss
Market Price of Asset
Cox’s Call Option
- Opportunity cost of 1.22
- Exercise/Strike Price of $22.45
The ‘Stealth Tier’
DCF
- Calculate an approximate value for the ‘stealth tier’
Multiples
- Compare multiples of companies who have incorporated the ‘stealth tier’
Topic Areas: Introduction
Background Information
Multiple Analysis Regression model Assumptions
Discounted Cash Flow Assumption
Real Options Assumptions Stealth Tier
Conclusion Flowchart
Conclusion
Real Options
DCF
Multiples
Valuations
Multiples
- Comparable to industries- Subjective
- Historical Data- Size, Growth Return
Conclusion
Real Options
DCF
Valuations
Conclusion
DCF
- Clear decision rule- Quantitative precision- Time value of money
- Future rates- Lack of Accuracy- Intangible factors
Conclusion
Conclusion
Real Options
Valuations
Real Options
- Overcomes problem of ‘Stealth Tier’- Focus on changes in Technology
Conclusion