corporate valuation 2001-4 institut for regnskab, ic pontoppidan agenda exam date ?? last session...

Corporate Valuation 2001-4Corporate Valuation 2001-4

Institut for Regnskab, IC Pontoppidan

Agenda• Exam DATE ??• Last session• this lecture• next

– who presents ?– Mid stage report: 1A4

“Valuation depends mainly on understanding the business, its industry, and the general economic environment, and then doing a prudent job of forecasting. Correct methodology is only a small, but necessary, part of the valuation process” p.292



CMK 8 Framework for valuation• Models

– DCF enterprice– Economic Profit (EP)– APV (changing cap.structure)– DCF equity (fin.institutions)

• add on’s– options– nominal vs. real– pre-post tax– formulae instead of explicit forecast



Framework for valuationDCF enterpricemodel• value of operations based on forecast• less value of debt• discounted back with riskadjusted rate• regulated for non-operating assets/liabilitiesThe discount rate reflects the opportunity cost

of all capital (WACC, tax shield))Forecast for 100 years OR utilize a formula for

the last 90 years - giving the continuing value, whose

formula is composed of NOPLAT, growth, ROIC - and WACC p.136



Framework for valuationGrowth rate = ROnewIC # investment rate

Key drivers of value are ROIC (relative to WACC) and growth p.140

ECONOMIC PROFIT MODEL

V = capital invested + PVvalue created in the future

• economic profit = invested capital#(ROIC-WACC) or NOPLAT-(inv.cap.#WACC)



Framework for valuationADJUSTED PV MODEL (APV)

• values based only on cost of equity and then adds value of tax benefit of debt

DCFequity MODEL

• values the equity DIRECTLY based on cost of equity

• BUT get the leverage right !

5 STEP “how to do” in ch.9-13



Step 1 (ch.9) Analyzing Historical Performance

• Focus on key value drivers i.e. ROIC and growth

• break them down into their component drivers i.e. ROIC into cap.turnover and profit margin

• how is the liquidity balance (Donaldson)

• destinguish operating from non-operating

• ending with consistency between NOPLAT and operating invested capital



Analyzing Historical Performance• Convert tax to cash basis as tax expensed on

operating profit• add quasi-equity (reserves,provisions, deferred

income tax)• exclude extraordinary items and add goodwill

amortizations • capitalize expensed investments

(R&D,marketing)• FCF = NOPLAT - Net investments• check the investment rate• FX translation effects are treated as non-

operating cash flow • look for trends and compare with industry



Analyzing Historical Performance• Do not correct for inflation effect unless in

a high inflation environment

• IF lumpy investments - spread it out or utilyze CFROI Valuation



Step 2 (ch.10) Cost of CapitalWACC• market weights• target capital structure• only systematic risk• look out for changes in inflation, systematic

risk, capital structure, and market weights• FX is valued with FX interest rates and

converted at spot rate• market risk premium 2 -5 % US• check your beta ! And leverage it correct

p.309



Step 3 (ch.11) Forecast performanceHow the company may develop• length and level of detail

– steady state– full cycle– perhaps two periods

• what about terminal period (see ch. 12)• have a strategy model e.g.strategic perspective

considering the industry (Ghemawat) and competitive position (e.g. 2#Porter)

• what drives the forecast (demand, technology, ?)

• alternative scenarios• check for consistency



Step 4 (ch.12) Continuing Value• PV of cash flow after the explicit forecast

period• simplified assumptions makes formulas do

the impossible job• different formulas for different approaches• for DCFenterprise the value-driver formula =

NOPLAT t+1(1-g/ROIC)/ WACC-g• also non-cash flow based approaches in

special situations (PtB, PtE, liquidation value, replacement cost)

• p.277 Where is value created !



Step 5 (ch.13) Calculating and interpreting the results

• Discount FCF using WACC• discount continuing value using WACC• add value of nonoperating assets• subtract value of debt• check for consistence with forecast• compare with present market value• evaluate debt-equity forecast• compare the scenarios and assess the

likelihood• define your margin of error/ test sensitivity



Aggarwal 16 Justifying strategic investments

Has the manufacturing setup an impact on value ?

• Different types of man.systems -fig.16-1

• optimality of man.setup -fig.16-2

• Exit NPV assesses the risk of loss due to uncertain events

corporate valuation 2001-4 institut for regnskab, ic pontoppidan agenda exam date ?? last session...

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