p&gvaluation
TRANSCRIPT
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Company name P&G Important: Before you ru
Numbers from your base year below ( in same units) There should be a checkThis year ast year
!e"enues # $%,&&'.(( )))*perating income or EBIT # +&,$+$.(( ))) If you haveBook "alue of euity # -$,((+.(( )))
Book "alue of debt # %,(+/.(( ))) If you haveCash # %,0-$.(( #%,$0'.((
1umber of shares outstanding 2 %0/(.((Current stock price 2 # -+./&E3ecti"e tax rate 2 %%.45arginal tax rate 2 &.((4The value drivers below:Compounded annual re"enue growth rate o"er next & y /.((4 For industry average, ch
Target pre6tax operating margin 7EBIT as 4 of sales in y +'.+-4 For industry average, ch8ales to capital ratio 7for computing rein"estment9 2 (.$& For industry average, chMarket numbers!iskfree rate +.-(4Initial cost of capital 2 0.++4 For industry average, ch
ther inputs1umber of options outstanding 2 (.(("erage strike price 2 #+.&"erage maturity 2 -.%(8tandard de"iation on stock price 2 -(.((4 For industry average, ch
Default assumptions.In stable growth, I will assume that your !rm will have a cost of capital similar to that of typical ma;o you want to o"erride this assumption 2 1o Mature companies geneIf yes, enter the cost of capital after year +( 2 $4 (hough some sectors, eI will assume that your !rm will earn a return on capital e)ual to its cost of capital after year *+. I;o you want to o"erride this assumption 2 1o Mature companies !nd iIf yes, enter the return on capital you expect after year +(4 ut there are signi!cantI will assume that your !rm has no chance of failure over the foreseeable future.;o you want to o"erride this assumption 2 1o Many young, growth coIf yes, enter the probability of failure 2 %(4 (ough to estimate but a 0 ook value of capital,Enter the distress proceeds as percentage of book or fai &(4 (his can be 4ero, if theI will assume that your e5ective ta- rate will ad6ust to your marginal ta- rate by your terminal yea;o you want to o"erride this assumption 2 1oI will assume that you have no losses carried forward from prior years " N78' coming into the valu;o you want to o"erride this assumption 2 1o Check the !nancial stat If yes, enter the 1* that you are carrying o"er into yea #%&(.(( 9n N78 will shield your i
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n this spreadsheet, go into preferences in Excel and check under Calculation options
against the iteration box. If there is not, you will get circular reasoning errors.
perating leases, please use the operating lease worksheet to convert them to debt.
perating leases, please use the operating lease worksheet to convert them to debt.
!or your information" your inputs #ive the followin# $u!e"enue growth in the most recent year 2 /.&'4?re6tax operating margin in the most recent year +'.+-48ales to capital ratio in most recent year 2 (.$&
eck column C of industry average wo!eturn on in"ested capital in most recent year2 +.'(4
eck column D of industry average worksheet eck column N of industry average worksheet
eck column M of industry average worksheet
eck column of industry average worksheet
ture companies "riskfree rate # $.%&' ally see their risk levels approach the average
en in stable growth, may have higher risk.m assuming that whatever competitive advantages you have today will fade over time.
t dicult to generate returns that e-ceed the cost of capital e-ceptions among companies with long/lasting competitive advantages.
panies fail, especially if they have trouble raising cash. Many distressed companies fail, becausekey input.12 3stimated fair value for the company ssets will be worth nothing if the !rm fails.
. If you override this assumption, I will leave the ta- rate at your e5ective ta- rate.
tion. If you have a money losing company, you may want to override tis. ments.
ncome from ta-es, even after you start making money.
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rrent values for your $ompany
hey have trouble making debt payments.
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Base year 1 2 3
Revenue growth rate 4.00% 4.00% 4.00%Revenues $ 82,559.00 $ 85,861.36 $ 89,295.81 $ 92,867.65EBIT (Operating) margin 19.16% 19.16% 19.16% 19.16%EBIT (Operating income) $ 15,818.00 $ 16,450.72 $ 17,108.75 $ 17,793.10Tax rate 22.33% 22.33% 22.33% 22.33%EBIT(1-t) $ 12,285.53 $ 12,776.95 $ 13,288.03 $ 13,819.55- Reinvestment $ 3,889.88 $ 4,045.48 $ 4,207.29FCFF $ 8,887.07 $ 9,242.56 $ 9,612.26NOL $ - $ - $ - $ -
Cost of capital 7.11% 7.11% 7.11%Cumulated discount factor 0.9336 0.8716 0.8138PV(FCFF) $ 8,297.15 $ 8,056.23 $ 7,822.32
Terminal cash flow $ 10,637.77Terminal cost of capital 6.10%Terminal value $ 236,394.84PV(Terminal value) $ 122,367.51PV (CF over next 10 years $ 72,737.19Sum of PV $ 195,104.69Probability of failure = 0.00%Proceeds if firm fails = $97,552.35Value of operating assets = $ 195,104.69Debt $ 32,014.00Cash $ 2,768.00Value of equity $ 165,858.69
- Value of options $0.00Value of equity in commo $ 165,858.69Number of shares 2,740.00Estimated value /share $ 60.53Price $ 61.45Price as % of value 101.52%
Implied variables
Sales to capital ratio 0.85 0.85 0.85Invested capital $ 97,247 $ 101,137 $ 105,182 $ 109,390ROIC 12.63% 12.63% 12.63% 12.63%
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4 5 6 7 8 9
4.00% 4.00% 3.52% 3.04% 2.56% 2.08% $ 96,582.35 $ 100,445.65 $ 103,981.33 $ 107,142.37 $ 109,885.21 $ 112,170.82
19.16% 19.16% 19.16% 19.16% 19.16% 19.16% $ 18,504.82 $ 19,245.02 $ 19,922.44 $ 20,528.08 $ 21,053.60 $ 21,491.52
22.33% 22.33% 24.87% 27.40% 29.93% 32.47% $ 14,372.33 $ 14,947.23 $ 14,968.61 $ 14,903.56 $ 14,751.67 $ 14,514.00$ 4,375.59 $ 4,550.61 $ 4,164.72 $ 3,723.41 $ 3,230.82 $ 2,692.24$ 9,996.75 $ 10,396.62 $ 10,803.90 $ 11,180.15 $ 11,520.85 $ 11,821.75$ - $ - $ - $ - $ - $ -
7.11% 7.11% 6.91% 6.71% 6.50% 6.30%0.7598 0.7093 0.6635 0.6218 0.5838 0.5492
$ 7,595.19 $ 7,374.66 $ 7,168.36 $ 6,951.82 $ 6,726.20 $ 6,492.70
0.85 0.85 0.85 0.85 0.85 0.85 $ 113,765 $ 118,316 $ 122,481 $ 126,204 $ 129,435 $ 132,127
12.63% 12.63% 12.22% 11.81% 11.40% 10.98%
Compaa. theb. theIf it is t
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10 Terminal year1.60% 1.60%
$ 113,965.56 $ 115,789.0119.16% 19.16%
$ 21,835.38 $ 22,184.75 # -,--.0&35.00% 35.00%
$ 14,193.00 $ 14,420.09$ 2,114.03 $ 3,782.32 # /(,00-.'$ 12,078.96 $ 10,637.77$ - $ -
6.10% 6.10%0.5176
$ 6,252.56
After year 100.85
$ 134,24110.57% 6.10%
Check these re"enues againsta. *"erall market si@eb. argest companies in this market
re this return on capital in year +( against industry a"erage7column E of worksheet9 eturn on capital after year +(
oo high 7low9, you may want to lower 7raise9 your sales to capital ratio
This is how much capital youin"ested o"er the ten yearperiod.
This is is how much your operatingincome grew o"er the ten6year period.
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Valuing Options or WarrantsEnter the current stock price = $ 61.45
Enter the strike price on the option = $ 13.35
Enter the expiration of the option = 6.20
Enter the standard deviation in stock prices = 60.00% (volatility)
Enter the annualized dividend yield on stock = 0.00%
Enter the treasury bond rate = 1.60%
Enter the number of warrants (options) outstan 0.00
Enter the number of shares outstanding = 2,740.00
Do not input any numbers below this line
VALUING WARRANTS WHEN THERE IS DILUTION
Stock Price= 61.45 # Warrants issued= 0
Strike Price= 13.35 # Shares outstanding= 2,740
Adjusted S = 61.45 T.Bond rate= 1.60%
Adjusted K = 13.35 Variance= 0.3600
Expiration (in years) = 6.2 Annualized dividend yield= 0.00%
Div. Adj. interest rate= 1.60%
d1 = 1.835294219
N (d1) = 0.9667689464
d2 = 0.3413062673
N (d2) = 0.6335634849
Value per option = $ 51.75
Value of all options outstanding = $0.00
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VALUATION DIAGNOSTICS
Invested capital at start of valuationInvested capital at end of valuationChange in invested capital over 10 yearsChange in EBIT*(1–t) (after-ta operating inco!e) over 10 years"arginal #$IC over 10 years#$IC at end of valuation
%verage &%CC over the 10 years (co!pounded)
'our calculated value as a percent of current price
Inputs
Revenue growth rate (input cell !"
Last perio# $IT as % o& revenue (Input cell '"
Sales to Capital Ratio or reinvest)ent (Input cell '*"
Return on capital in perpetuit+ (!, - !'"
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+,.00 1/+,1.0 /+.0 +01./
1.,210.32.12
.312
If calculated value is negative or looks too low
Increase revenue gro4th rate
Increase the target pre-ta operating !argin
5ecrease the sales6capital ratio
Increase relative to your cost of capital
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If calculated value looks too high
5ecrease revenue gro4th rate
5ecrease the target pre-ta operating !argin
Increase the sales6capital ratio
If higher than your cost of capital+ lo4er to4ards your cost of capital T
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pera ng ease onver erThe yellow cells are input cells. Please en
Inputs
Operating lease expense in current year = $ 8.50
Operating Lease Commitments (From footnote to financials)
Year Commitment ! Year 1 is next year, ….
1 $ 8.482 $ 8.49
3 $ 8.16
4 $ 7.33
5 $ 6.17
6 and beyond $ 18.14
Output
Pre-tax Cost of Debt = 3.65% ! If you do not have a cost of debt, use the synthetic rating esti
Number of years embedded in yr 6 estimate = 2 ! I use the average lease expense over the first
to estimate the number of years of expenses in
Converting Operating Leases into debt
Year Commitment Present Value
1 $ 8.48 $ 8.18
2 $ 8.49 $ 7.90
3 $ 8.16 $ 7.33
4 $ 7.33 $ 6.35
5 $ 6.17 $ 5.16
6 and beyond $ 9.07 $ 14.37 ! Commitment beyond year 6 converted into an annuity for ten
Debt Value of leases = $ 49.29
Restated Financials
Depreciation on Operating Lease Asset = $ 7.04 ! I use straight l
Adjustment to Operating Earnings = $1.46 ! Add this amoAdjustment to Total Debt outstanding = $ 49.29 ! Add this amo
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er them.
ator
ive years
r 6
years
ine depreciation
nt to pre-tax operating incoment to debt
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Estimation of Current Cost of Capital
Inputs
Equity
Number of Shares outstanding = 2740.00
Current Market Price per share = $ 61.45
Unlevered beta = 0.95 Industry average unlevered beta in column G of industry avera
Riskfree Rate = 1.60%
Equity Risk Premium = 6.00%
Debt
Book Value of Straight Debt = $ 32,014.00
Interest Expense on Debt = 831
Average Maturity = 5
Pre-tax Cost of Debt = 3.65%
Tax Rate = 35%
Book Value of Convertible Debt = 0
Interest Expense on Convertible = 0
Maturity of Convertible Bond = 0
Market Value of Convertible = 0
Debt value of operating leases = $ 49.29
Preferred Stock
Number of Preferred Shares = 0
Current Market Price per Share= 70
Annual Dividend per Share = 5
Output
Estimating Market Value of Straight Debt = $ 30,496.57
Estimated Value of Straight Debt in Convertible = $ -
Value of Debt in Operating leases = $ 49.29
Estimated Value of Equity in Convertible = $ -
Levered Beta for equity = 1.06
Equity Debt Preferred Stock Capital
Market Value $ 168,373.00 $ 30,545.86 $ - $ 198,918.86
Weight in Cost of Capital 84.64% 15.36% 0.00% 100.00%
Cost of Component 7.97% 2.37% 7.14% 7.11%
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e worksheet
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Inputs for synthetic rating estimationPlease read the special cases worksheet (see below) before you use this spr
Before you use this spreadsheet, make sure that the iteration box (under calculation optio
Enter the type of firm = 2 (Enter 1 if large manufacturing firm, 2 if smaller or riskier firm
Do you have any operating lease or rental commitments? Yes
Enter current Earnings before interest and taxes (EBIT) = $ 15,818.00 (Add back onlyEnter current interest expenses = 831 (Use only long
Enter long term risk free rate = 1.60%
Output
Interest coverage ratio = 19.00
Estimated Bond Rating = %%% Note0 If you get :3F; 9ll
Estimated Default Spread = 0.65% to No, and then reset it t
Estimated Cost of Debt = 2.25%
If you want to update the spreads listed below, please visit http://www.bondsonline.com
For large manufacturing firms For financial service firms (d
If interest coverage ratio is If long term interest coverage r
> ≤ to Rating is Spread is greater than ≤ to
-100000 0.199999 D 12.00% -100000 0.049999
0.2 0.649999 C 10.50% 0.05 0.099999
0.65 0.799999 CC 9.50% 0.1 0.199999
0.8 1.249999 CCC 8.75% 0.2 0.299999
1.25 1.499999 B- 6.75% 0.3 0.399999
1.5 1.749999 B 6.00% 0.4 0.499999
1.75 1.999999 B+ 5.50% 0.5 0.599999
2 2.2499999 BB 4.75% 0.6 0.749999
2.25 2.49999 BB+ 3.75% 0.75 0.899999
2.5 2.999999 BBB 2.50% 0.9 1.199999
3 4.249999 A- 1.65% 1.2 1.499994.25 5.499999 A 1.40% 1.5 1.99999
5.5 6.499999 A+ 1.30% 2 2.49999
6.5 8.499999 AA 1.15% 2.5 2.99999
8.50 100000 AAA 0.65% 3 100000
For smaller and riskier firms
If interest coverage ratio is
greater than ≤ to Rating is Spread is
-100000 0.499999 D 12.00%
0.5 0.799999 C 10.50%
0.8 1.249999 CC 9.50%
1.25 1.499999 CCC 8.75%1.5 1.999999 B- 6.75%
2 2.499999 B 6.00%
2.5 2.999999 B+ 5.50%
3 3.499999 BB 4.75%
3.5 3.9999999 BB+ 3.75%
4 4.499999 BBB 2.50%
4.5 5.999999 A- 1.65%
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6 7.499999 A 1.40%
7.5 9.499999 A+ 1.30%
9.5 12.499999 AA 1.15%
12.5 100000 AAA 0.65%
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adsheet.
s in excel) is checked.
, 3 if financial s Small:
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Industry Name Number of !rmsnnual 9verage :evenue growth / 8ast % year re/ta- 7perating Margin
d"ertising + +-.0-4 +(.%04
erospaceA;efense -/ './+4 +(.+-4
ir Transport - $.004 $.0$4
pparel &0 &.$4 +(.'04
uto ?arts &+ %.'/4 -./'4
utomoti"e +% +.--4 -.''4Bank /%- (.((4 1
Bank 75idwest9 /& (.((4 1
Be"erage / 6(.&'4 %(./&4
Biotechnology +&$ %-.'/4 60.0'4
Building 5aterials /& %.$%4 /.+04
Cable T> %+ +.&4 +'.&$4
Chemical 7Basic9 +- ./(4 +%.('4
Chemical 7;i"ersied9 + '.%+4 +.%(4
Chemical 78pecialty9 0( %&.-'4 ++.+(4
Coal %( +-.'+4 +&.'/4
Computer 8oftware +$/ +/.$$4 +.&4
ComputersA?eripherals $0 +(.'4 +/.+&4
;i"ersied Co. +(0 +0.%/4 +/.('4
;rug %0' /.'04 %+.'+4
E6Commerce &0 %+.$04 +/.'4
Educational 8er"ices / +0.%04 %(.$(4
Electric til. 7Central9 %+ /.$+4 +0.0%4
Electric tility 7East9 %+ 6.%'4 +'.+4
Electric tility 7
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5aritime &% &.'4 +/.$+4
5ed 8upp In"asi"e $ -.&4 %%.%%4
5ed 8upp 1on6In"asi" +/- 0.+$4 -./$4
5edical 8er"ices +%% /.'%4 ++.++4
5etal abricating %/ +(.0-4 +&.(04
5etals D 5ining 7;i".9 0 +.&'4 +.&04
1atural Gas 7;i".9 %' $.'(4 %$.'/41atural Gas tility %% 6(.'&4 +%.$(4
1ewspaper + 6&.(+4 +/.&'4
*Hce EuipA8upplies %/ +(.$+4 -.-&4
*ilAGas ;istribution + +%.-&4 +$./&4
*ileld 8"csAEuip. ' +0.(%4 +&.++4
?ackaging D Container %- '.('4 +(.+%4
?aperAorest ?roducts % +(.$$4 +%.(+4
?etroleum 7Integrated9 %( %(.$+4 '.0-4
?etroleum 7?roducing9 +0- %.%%4 %&.0/4
?harmacy 8er"ices +' ++.'&4 &.++4
?ipeline 5?s %0 %%.$4 $.'&4
?ower ' /.(-4 +/.&/4
?recious 5etals $/ %.+4 .(4
?recision Instrument 00 %.-4 +(.0/4
?roperty 5anagement + +'.$(4 +&.-4
?ublicA?ri"ate Euity ++ '.'/4 6%.&$4
?ublishing %/ 6-.'4 +%.+(4
!.E.I.T. & (.(+4 +%'.(04
!ailroad +% +%.%'4 %$./4
!ecreation &- -.&-4 ++.&+4
!einsurance + (.((4 1
!estaurant - %./&4 +&.$%4
!etail 7Fardlines9 0& .$4 0.&(4
!etail 78oftlines9 /0 -.+$4 '.'4
!etail utomoti"e %( ++.('4 -.$$4
!etail Building 8upply $ +&.$4 $.+4
!etail 8tore 0 $.$&4 &.$/4
!etailA
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Total Market ' *+',- .+/*-
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9fter/ta- :7C verage e5ective ta- rate >nlevered eta 3)uity "8evered' eta Cost of e)uity
+(.&/4 +(.04 +.0& %.(% +/.('4
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/.0-4 &.&&4 (.&$ +./( +(.(4
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+'.%/4 +%.04 +.(0 +.( $.('4
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/+/- +*'- ,+/ + $.$+4
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td deviation in stock price =re/ta- cost of debt Market Debt@Capital Cost of capital ?ales@Capital 31@?ales
+(+.%'4 &.$04 (.%(4 +(.'(4 +./% +.+/
-+.%4 .04 %(./%4 0.+04 %.& (.'
-/.$(4 .04 +'.&-4 0.$(4 %./( +.0$
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