VALUATION: CLOSING THOUGHTSpeople.stern.nyu.edu/adamodar/pdfiles/eqnotes/valcloses... ·...
Transcript of VALUATION: CLOSING THOUGHTSpeople.stern.nyu.edu/adamodar/pdfiles/eqnotes/valcloses... ·...
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VALUATION:CLOSINGTHOUGHTSSpring2017“Itain’t overtillitsover”
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Backtotheverybeginning:ApproachestoValuation
¨ DiscountedCashflowValuation,wherewetry(sometimesdesperately)toestimatetheintrinsicvalueofanassetbyusingamixoftheory,guessworkandprayer.
¨ Relativevaluation,wherewepickagroupofassets,attachthename“comparable” tothemandtellastory.
¨ Contingentclaimvaluation,wherewetakethevaluationthatwedidintheDCFvaluationanddivvyitupbetweenthepotentialthieves(equity)andthevictimsofthiscrime(lenders)
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IntrinsicValuation:Thesetup
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DantemeetsDCF:Ninelayersofvaluationhell..Andabonuslayer..
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
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Layer1:BaseYearfixation….
¨ YouarevaluingExxonMobil,usingthefinancialstatementsofthefirmfrom2008.Thefollowingprovidesthekeynumbers:Revenues $477billionEBIT(1-t) $58billionNetCapEx $3billionChg WC $1billionFCFF $54billion
¨ Thecostofcapitalforthefirmis8%andyouuseaveryconservativestablegrowthrateof2%tovaluethefirm.Themarketcapforthefirmis$373billionandithas$10billionindebtoutstanding.a.Howunderorovervaluedistheequityinthefirm?b.Wouldyoubuythestockbasedonthisvaluation?Whyorwhynot?
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
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Layer2:TaxesandValue
¨ Assumethatyouhavebeenaskedtovalueacompanyandhavebeenprovidedwiththemostrecentyear’sfinancialstatements:
¨ EBITDA 140¨ - DA 40¨ EBIT 100¨ Interestexp 20¨ Taxableincome 80¨ Taxes 32¨ NetIncome 48¨ Assumealsothatcashflowswillbeconstantandthatthereisnogrowthinperpetuity.Whatisthe
freecashflowtothefirm?a. 88million(Netincome+Depreciation)b. 108million(EBIT– taxes+Depreciation)c. 100million(EBIT(1-taxrate)+Depreciation)d. 60million(EBIT(1- taxrate))e. 48million(NetIncome)f. 68million(EBIT– Taxes)
Free Cash flow to firmEBIT (1- tax rate)-(Cap Ex – Depreciation)- Change in non-cash WC=FCFF
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
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Layer3:HighGrowthforhowlong…
¨ Assumethatyouarevaluingayoung,highgrowthfirmwithgreatpotential,justafteritsinitialpublicoffering.Howlongwouldyousetyourhighgrowthperiod?
¨ <5years¨ 5years¨ 10years¨ >10years
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
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Layer4:TheCostofCapital
¨ ThecostofcapitalforChippewaTechnologies,aUStechnologyfirmwith20%ofitsrevenuesfromBrazil,hasbeencomputedusingthefollowinginputs:
Cost of equity = Riskfree Rate + Beta (ERP) + Small firm premium = 5% + 1.20 (5%) + 3% = 14%
Replaced current T.Bond rate of 3% with normalized rate of 5%
“Adjusted” Beta from Bloomberg
Both from Ibbotson data base, derived from 1926-2008 dataERP: Stocks - T.Bonds (Arithmetic average)Small firm: Smal stocks - Overall market
Cost of capital = Cost of equity (Equity/ (Debt + Equity)) + Cost of debt (1- tax rate) (Debt/ (Debt + Equity)= 14% (1000/2000) + 3% (1-.30) (1000/2000) = 8.05%
From above
Used market value of equity
Company is not rated and has no bonds. Used book interest rate = Int exp/ BV of debt
Used effective tax rate of 30%
To be conservative, counted all liabilities, other than equity, as debt and used book value.
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
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TheCorrectCostofCapitalforChippewa
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Layer5:Thepriceofgrowth..
¨ Youarelookingattheprojectedcashflowsprovidedbythemanagementofthefirm,foruseinvaluation
¨ Whatquestionswouldyouraiseabouttheforecasts?
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
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Layer6:The“fixeddebtratio” assumption
¨ YouhavebeenaskedtovalueHormelFoods,afirmwhichcurrentlyhasthefollowingcostofcapital:¤ Costofcapital=7.31%(.9)+2.36%(.1)=6.8%
¨ Youbelievethatthetargetdebtratioforthisfirmshouldbe30%.Whatwillthecostofcapitalbeatthetargetdebtratio?
¨ Whichdebtratio(andcostofcapital)shouldyouuseinvaluingthiscompany?
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
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Layer7:TheTerminalValue
¨ Thebestwaytocomputeterminalvalueistoa. Useastablegrowthmodelandassumecashflowsgrowatafixed
rateforeverb. UseamultipleofEBITDAorrevenuesintheterminalyearc. Usetheestimatedliquidationvalueoftheassets¨ Youhavebeenaskedtovalueabusiness.Thebusinessexpectsto$
120millioninafter-taxearnings(andcashflow)nextyearandtocontinuegeneratingtheseearningsinperpetuity.Thefirmisallequityfundedandthecostofequityis10%;theriskfreerateis3%andtheERPis7%.Whatisthevalueofthebusiness?
¨ Assumenowthatyouweretoldthatthefirmcangrowearningsat2%ayearforever.Estimatethevalueofthebusiness.
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
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Layer8.Fromfirmvaluetoequityvalue:TheGarnishingEffect…
¨ Forafirmwithconsolidatedfinancialstatements,youhavediscountedfreecashflows tothefirmatthecostofcapitaltoarriveatafirmvalueof$100million.Thefirmhas¤ Acashbalanceof$15million¤ Debtoutstandingof$20million¤ A5%holdinginanothercompany:thebookvalueofthisholdingis$5
million.(Marketvalueofequityinthiscompanyis$200million)¤ Minorityinterestsof$10milliononthebalancesheet
¨ Whatisthevalueofequityinthisfirm?
¨ Howwouldyouranswerchangeifyouknewthatthefirmwasthetargetofalawsuititislikelytowinbutwherethepotentialpayoutcouldbe$100millionifitloses?
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
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Layer9.Fromequityvaluetoequityvaluepershare
¨ Youhavevaluedtheequityinafirmat$200million.Estimatethevalueofequitypershareifthereare10millionsharesoutstanding..
¨ Howwouldyouranswerchangeifyouweretoldthatthereare2millionemployeeoptionsoutstanding,withastrikepriceof$20ashareand5yearslefttoexpiration?
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
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Layer10.Thefinalcircleofhell…
Cost of Equity Cost of Capital
Kennecott Corp (Acquirer) 13.0% 10.5%
Carborandum (Target) 16.5% 12.5%
Base year and accounitng fixaiton
Death and taxes
High growth for how long?
Whatʼs in your disocunt rate?
The terminal value: Itʼs not an ATM
Are you paying for growth?
Debt ratios change, donʼt they?
No garnishing allowed!!
From aggregate to per share value?
The Wasserstein-Perella bonus layer
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YOURNUMBERS/FINDINGS
“Thetruthshallsetyoufree”.
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TheModelsYouUsedinDCFValuation
DividendDiscount5% FCFE
5%
FCFF
90%
Modelused
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TheMostValuedCompany(Companies)..
1. Twitter(4)2. Square(5)3. UnderArmour (7)4. Yelp(9)5. Tesla(9)
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Andhereiswhyyoudoit..
CompanyName Price DCFModel DCFValue Multipleused RelativeValue Recommendation
Yelp $32.48 FCFF $43.52 EV/S $59.28 Buy
Yelp $35.68 FCFF $44.93 EV/Sales $58.98 Buy
Yelp $35.30 FCFF $50.77 EV/Sales $44.30 Buy
Yelp $35.68 FCFF $30.09 EV/Sales $47.54 Sell
Yelp $35.68 FCFF $39.95 EV/Sales $43.52 Buy
Yelp $35.68 FCFF2-stage $32.55 EV/Sales $35.45 Sell
YelpInc $35.37 FCFF $36.73 EV/Sales $55.13 Buy
YelpInc. $35.68 FCFF $37.39 ForwardPE $40.50 Buy
Yelp,Inc $35.50 FCFF $44.55 PEG $55.32 Buy
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Whatyoufound…
0.
10.
20.
30.
40.
50.
60.
70.
Undervaluedmorethan50%
Undervalued33-50%
Undervalued10-33%
Undervalued0-10%
Overvalued0-10%
Overvalued10-50%
Overvalued50-100%
Overvaluedmorethan100%
AxisTitle
AxisTitle
DCFValuevsMarketPrice
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Themostundervaluedstocks…
CompanyName Price DCFModel DCFValue Recommendation %UnderoroverPetrobras $9.32 FCFF $28.67 BUY -67.49% ThomasCook $0.93 FCFF £2.08 Buy -55.22% CEMEXS.A.B.deC.V.(BMV) $8.83 FCFF 16.44 Buy -46.29% AllyFinancial $19.71 Dividends $36.69 Buy -46.28% JetBlue $21.58 FCFF 39.57 Buy -45.46% SpiritAIrlines $59.19 FCFF2-Stage 104.88 BUY -43.56% AmericanAirlines $44.51 FCFF 78.12 Buy -43.02% FiatChrysler $10.28 FCFF €17.48 Buy -41.19% GrupoBimbo $44.85 FCFF $75.76 Buy -40.80% Geely $10.26 FCFF 17.14 Buy -40.14% MeetMe,Inc. $6.09 FCFF $10.00 Buy -39.10% PT.AdiSaranaArmadaTbk $260.00 FCFF 419.27 BUY -37.99% SKHynix 55,900.00 FCFF 86,534.32 Buy -35.40% SanchezOilCorporation $7.38 FCFF $11.35 Buy -34.98% Angie'sList $10.71 FCFF $16.42 Buy -34.77% CVSHealth $82.59 FCFF 124.47 Buy -33.65% SnapInc. $23.19 FCFF $34.88 Buy -33.51%
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TheMostOvervaluedstocksare...
CompanyName Price DCFModel DCFValue Recommendation %UnderoroverTwitter $18.69 FCFF $1.87 Sell 901.71% AMD $10.19 FCFF $1.73 Sell 489.02%Twitter $15.08 FCFF $2.92 Sell 416.44% CaesarsEntertainmentGroup $11.05 FCFF $2.21 Sell 400.00% Twitter $18.65 FCFF3-Stage $4.49 SELL 315.37% Schlumberger $71.97 FCFF $22.81 Hold 215.52%GrubHub(GRUB) $45.72 FCFF $14.93 Sell 206.23%JetAirways $529.00 FCFF $175.37 Sell 201.65%Trupanion $17.40 FCFF $5.88 Sell 195.92% BoingoWireless,Inc. $12.40 FCFF $4.25 Sell 191.76% AdvancedMicroDevices $10.19 FCFF $3.78 Sell 169.58% RedLionHotelsCorporation $6.40 FCFF $2.52 Sell 153.97% ShakeShack $34.03 FCFF $16.20 Sell 110.06% NintendoCo $28,355.00 FCFF $13,521.91 Sell 109.70% Meitu,Inc. $9.76 FCFF $4.92 Sell 98.37% BuffaloWildWings $160.35 FCFF $81.07 Sell 97.79% Tiffany&Co. $92.40 FCFF $47.08 Buy 96.26%
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Theultimatetest…Didundervaluedstocksmakemoney?
!5.00%&
0.00%&
5.00%&
10.00%&
15.00%&
20.00%&
Spring&1995& Spring&1997& Spring&1999& Spring&2001& Spring&2003& Spring&2005&
Performance*of**Recommenda-ons*
Buy&&
S&P&500&
Sell&
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Moreonthewinners...
¨ Onaverage,right:About60%ofallbuyrecommendationsmakemoney;about45%ofsellrecommendationsbeatthemarket.Theaveragereturnonbuyrecommendationswasabout4%higher,onanannualizedbasis,thantheaveragereturnonsellrecommendations.
¨ Moresoonsome:Theexcessreturnsonbuyrecommendationsonsmallcapandemergingmarketcompaniesishigherthantheexcessreturnsonlargemarketcapcompanies,withhighermistakesinbothdirectionsontheformer.
¨ Skewedpayoffs:Therearetwoorthreebigwinnersineachperiod,butthepayoffwasnotalwaysimmediate.BuyingApplein1999wouldhaveledtonegativereturnsforayearormore,beforetheturnaroundoccurred.
¨ Doublewhammy:StocksthatareundervaluedonbothaDCFandrelativevaluationbasisdobetterthanstocksthatareundervaluedononlyoneapproach.
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RelativeValuation:TheFourStepstoUnderstandingMultiples
¨ AnnaKournikovaknowsPE….Ordoesshe?¤ Inuse,thesamemultiplecanbedefinedindifferentwaysbydifferent
users.Whencomparingandusingmultiples,estimatedbysomeoneelse,itiscriticalthatweunderstandhowthemultipleshavebeenestimated
¨ 8timesEBITDAisnotalwayscheap…¤ Toomanypeoplewhouseamultiplehavenoideawhatitscrosssectional
distributionis.Ifyoudonotknowwhatthecrosssectionaldistributionofamultipleis,itisdifficulttolookatanumberandpassjudgmentonwhetheritistoohighorlow.
¨ Youcannotgetawaywithoutmakingassumptions¤ Itiscriticalthatweunderstandthefundamentalsthatdriveeachmultiple,
andthenatureoftherelationshipbetweenthemultipleandeachvariable.¨ Therearenoperfectcomparables
¤ Definingthecomparableuniverseandcontrollingfordifferencesisfarmoredifficultinpracticethanitisintheory.
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Value of Stock = DPS 1/(ke - g)
PE=Payout Ratio (1+g)/(r-g)
PEG=Payout ratio (1+g)/g(r-g)
PBV=ROE (Payout ratio) (1+g)/(r-g)
PS= Net Margin (Payout ratio)(1+g)/(r-g)
Value of Firm = FCFF 1/(WACC -g)
Value/FCFF=(1+g)/(WACC-g)
Value/EBIT(1-t) = (1+g) (1- RIR)/(WACC-g)
Value/EBIT=(1+g)(1-RiR)/(1-t)(WACC-g)
VS= Oper Margin (1-RIR) (1+g)/(WACC-g)
Equity Multiples
Firm Multiples
PE=f(g, payout, risk) PEG=f(g, payout, risk) PBV=f(ROE,payout, g, risk) PS=f(Net Mgn, payout, g, risk)
V/FCFF=f(g, WACC) V/EBIT(1-t)=f(g, RIR, WACC) V/EBIT=f(g, RIR, WACC, t) VS=f(Oper Mgn, RIR, g, WACC)
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TheMultiplesyouusedwere...
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DCFvsRelativeValuation
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<50% 50-67% 67-90% 90%-100% 100-110% 110%-150% 150-200% >200% DCFasfractionofRelativeValue
DCFas%ofRelativeValue
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Mostunderpricedonarelativebasis…
CompanyName Price Multipleused RelativeValueRecommendation%UnderorOver:
RelativeVince $1.00 EV/S $9.07 Sell -88.97% Tesla $308.35 EV/Sales $1,622.99 Sell -81.00% SearsHoldingCorporation $10.76 VS $52.58 Sell -79.54% InsysTherapeutics $10.77 EV/Sales $49.04 BUY -78.04% Avon $3.69 EV/Sales $15.47 SELL -76.15% PT.AdiSaranaArmadaTbk $260.00 EV/EBIDTA $951.24 BUY -72.67% SquareEnixHoldings $3,345.00 EV/Sales $11,599.96 BUY -71.16% SKHynix $55,900 EV/EBITDA $172,783.82 Buy -67.65% VipshopHoldingsLimited $13.78 P/E $40.40 BUY -65.89% Barnes&Noble,Inc.(NYSE:BKS) $8.50 EV/EBITDA $23.33 Sell -63.57% ThomasCook $0.93 EV/EBITDA $2.55 Buy -63.47% GrupoBimbo $44.85 VS $105.40 Buy -57.45% FiatChrysler $10.28 P/E $23.19 Buy -55.68% MeetMe,Inc. $6.09 EV/Sales $12.90 Buy -52.79% ARCELIKAS $23.16 EV/EBITDA $46.50 Buy -50.19% AllyFinancial $19.71 P/TBV $39.51 Buy -50.12% Daimler $68.88 PBV $132.27 Buy -47.92%
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Mostoverpricedonarelativebasis…
CompanyName Price MultipleusedRelativeValueRecommendation%UnderorOver:
RelativeTwitter $18.69 EV/Sales $1.03 Sell 1708.96% ChinaMedicalSystem $13.33 EV/Sales $1.40 Sell 852.14% SouthwestAirlines(LUV) $58.40 P/E $8.12 Sell 619.21% Valeant $10.07 EV/EBITDA $2.16 SELL 366.20% Square,Inc.(NYSE:SQ) $19.78 EV/Sales $4.45 Sell 344.49%
AdvancedMicroDevices $10.19 EV/Inv Capital $2.78 Sell 266.55%MGMResortsInternational $30.85 VEBITDA $9.30 Sell 231.72% Tesla,Inc. $308.35 PBV $100.52 Sell 206.75%CableOne $676.00 EV/EBITDA $221.66 Sell 204.97%S.M.ENTERTAINMENT $27,000 PE $8,889.00 SELL 203.75% Exelixis $21.69 EV/Sales $7.25 SELL 199.17% Ctrip.com $52.68 Ev/Sales $17.72 Sell 197.29% SNAPInc. $23.19 PBV $7.95 Sell 191.70% Twitter $15.08 EV/S $5.20 Sell 190.00% OccidentalPetroleumCorp. $60.19 VEBITDA $22.25 Sell 170.52% PaneraBread $274.00 EV/S $105.96 Sell 158.59% UnderArmour,Inc. $20.59 PE $8.24 Sell 150.00%
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ContingentClaim(Option)Valuation
¨ Optionshaveseveralfeatures¤ Theyderivetheirvaluefromanunderlyingasset,whichhasvalue¤ Thepayoffonacall(put)optionoccursonlyifthevalueofthe
underlyingassetisgreater(lesser)thananexercisepricethatisspecifiedatthetimetheoptioniscreated.Ifthiscontingencydoesnotoccur,theoptionisworthless.
¤ Theyhaveafixedlife¨ Anysecuritythatsharesthesefeaturescanbevaluedasan
option.
¨ Numberoffirmsvaluedusingoptionmodels=12¨ MedianPercentincreaseinvalueoverDCFvalue=117.38%
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ValueEnhancement…Youtoocandoit!
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EconomicValueAdded(EVA)andCFROI
Aswath Damodaran
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¨ TheEconomicValueAdded(EVA)isameasureofsurplusvaluecreatedonaninvestment.¤ Definethereturnoncapital(ROC)tobethe“true” cashflowreturnoncapitalearnedonaninvestment.
¤ Definethecostofcapitalastheweightedaverageofthecostsofthedifferentfinancinginstrumentsusedtofinancetheinvestment.
¤ EVA=(ReturnonCapital- CostofCapital)(CapitalInvestedinProject)
¨ TheCFROIisameasureofthecashflowreturnmadeoncapital¤ ItiscomputedasanIRR,baseduponabasevalueofcapitalinvestedandthecashflowonthatcapital.
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Thebottomline…
Aswath Damodaran
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¨ Thevalueofafirmisnotgoingtochangejustbecauseyouuseadifferentmetricforvalue.Allapproachesthatarediscountedcashflowapproachesshouldyieldthesamevalueforabusiness,iftheymakeconsistentassumptions.
¨ Iftherearedifferencesinvaluefromusingdifferentapproaches,theymustbeattributabletodifferencesinassumptions,eitherexplicitorimplicit,behindthevaluation.
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FirmValueusingEVAApproach
Aswath Damodaran
35
CapitalInvestedinAssetsinPlace = $100EVAfromAssetsinPlace=(.15– .10)(100)/.10 = $50+PVofEVAfromNewInvestmentsinYear1=[(.15-– .10)(10)/.10] = $5+PVofEVAfromNewInvestmentsinYear2=[(.15-– .10)(10)/.10]/1.1= $4.55+PVofEVAfromNewInvestmentsinYear3=[(.15-– .10)(10)/.10]/1.12= $4.13+PVofEVAfromNewInvestmentsinYear4=[(.15-– .10)(10)/.10]/1.13= $3.76+PVofEVAfromNewInvestmentsinYear5=[(.15-– .10)(10)/.10]/1.14= $3.42ValueofFirm = $170.85
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FirmValueusingDCFValuation:EstimatingFCFF
Aswath Damodaran
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BaseY ear
1 2 3 4 5 Term.Y ear
EBIT (1-t) : Assets in Place $ 15.00 $ 15.00 $ 15.00 $ 15.00 $ 15.00 $ 15.00
EBIT(1-t) :Investments- Yr 1 $ 1.50 $ 1.50 $ 1.50 $ 1.50 $ 1.50
EBIT(1-t) :Investments- Yr 2 $ 1.50 $ 1.50 $ 1.50 $ 1.50
EBIT(1-t): Investments -Yr 3 $ 1.50 $ 1.50 $ 1.50
EBIT(1-t): Investments -Yr 4 $ 1.50 $ 1.50
EBIT(1-t): Investments- Yr 5 $ 1.50
Total EBIT(1-t) $ 16.50 $ 18.00 $ 19.50 $ 21.00 $ 22.50 $ 23.63
- Net Capital Expenditures $10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 11.25 $ 11.81
FCFF $ 6.50 $ 8.00 $ 9.50 $ 11.00 $ 11.25 $ 11.81
After year 5, the reinvestment rate is 50% = g/ ROC
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FirmValue:PresentValueofFCFF
Aswath Damodaran
37
Year 0 1 2 3 4 5 Term Year
FCFF $ 6.50 $ 8.00 $ 9.50 $ 11.00 $ 11.25 $ 11.81
PV of FCFF ($10) $ 5.91 $ 6.61 $ 7.14 $ 7.51 $ 6.99
Terminal Value $ 236.25
PV of Terminal Value $ 146.69
Value of Firm $170.85
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Gamingthesystem:DeliveringhighcurrentEVAwhiledestroyingvalue…
Aswath Damodaran
38
¨ TheGrowthtradeoffgame:ManagersmaygiveupvaluablegrowthopportunitiesinthefuturetodeliverhigherEVAinthecurrentyear.
¨ TheRiskgame:ManagersmaybeabletodeliverahigherdollarEVAbutinriskierbusinesses.ThevalueofthebusinessisthepresentvalueofEVAovertimeandtheriskeffectmaydominatetheincreasedEVA.
¨ TheCapitalInvestedgame:ThekeytodeliveringpositiveEVAistomakeinvestmentsthatdonotshowupaspartofcapitalinvested.Thatway,youroperatingincomewillincreasewhilecapitalinvestedwilldecrease.
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Actingonvaluation:Itisnotjustanacademicexercise
a. Iamnotsureyet:Uncertaintyisnotashieldagainstaction.Ifyouwaituntilyoufeel“certain”aboutyourvaluation,youwillneveract.
b. Allbelieversnow?Ultimately,youhavetobelieveinsomemodicumofmarketefficiency.Marketshavetocorrecttheirmistakesforyourvaluationstopayoff.
c. Thelawoflargenumbers:Assumingyourvaluationscarryheft,youarefarmorelikelytoberightacrossmanycompaniesthanonanyindividualone.
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Yourrecommendationswereto..
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Pickingyourvaluationapproach
¨ Assetcharacteristics¤ Marketability¤ Cashflowgeneratingcapacity¤ Uniqueness
¨ Yourcharacteristics¤ Timehorizon¤ Reasonsfordoingthevaluation¤ Beliefsaboutmarkets
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Whatapproachwouldworkforyou?
¨ Asaninvestor,givenyourinvestmentphilosophy,timehorizonandbeliefsaboutmarkets(thatyouwillbeinvestingin),whichofthetheapproachestovaluationwouldyouchoose?
a. DiscountedCashFlowValuationb. RelativeValuationc. Neither.Ibelievethatmarketsareefficient.
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StoryTellers?NumberCrunchers?
¨ Ifyouareastoryteller,Ihopethatyouhave¤ Moreconfidenceinyournumbercrunching¤ Moredisciplineinyourstories¤ Lessintimidation,whenconfrontedwithnumbercrunchers
¨ Ifyouareanumbercruncher,Ihopethatyouhave¤ Morewillingnesstoputstoriesbehindyournumbers¤ Moreimaginationinyournumbercrunching¤ Moreunderstanding,whenconfrontedwithstorytelling
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SomeNotVeryProfoundAdvice
1. Itsallinthefundamentals.2. Focusonthebigpicture.Don’tsweatthesmall
stuffanddon’tgetdistracted.3. Anecdotesmeanlittleandexperiencedoesnot
equalknowledge.4. Keepyourperspective.Itisonlyavaluation.5. Ininvesting,luckdominatesskillandknowledge.DonotforgettodoyourCFEs.Yourabilitytocheckyourgrade
restsonit.