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Unformatted text preview: 10  1 CHAPTER 10 Corporate Valuation and Value Based Management Corporate Valuation ValueBased Management Corporate Governance 10  2 Corporate Valuation: List the two types of assets that a company owns. Assetsinplace Financial, or nonoperating, assets 10  3 AssetsinPlace Assetsinplace are tangible, such as buildings, machines, inventory. Usually they are expected to grow. They generate free cash flows. The PV of their expected future free cash flows, discounted at the WACC, is the value of operations . 10  4 Value of Operations = + = 1 t t t Op ) WACC 1 ( FCF V 10  5 Nonoperating Assets Marketable securities Ownership of noncontrolling interest in another company Value of nonoperating assets usually is very close to figure that is reported on balance sheets. 10  6 Total Corporate Value Total corporate value is sum of: Value of operations Value of nonoperating assets 10  7 Claims on Corporate Value Debtholders have first claim. Preferred stockholders have the next claim. Any remaining value belongs to stockholders. 10  8 Applying the Corporate Valuation Model Forecast the financial statements, as shown in Chapter 8. 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. 10  9 Data for Valuation FCF = $20 million WACC = 10% g = 5% Marketable securities = $100 million Debt = $200 million Preferred stock = $50 million Book value of equity = $210 million 10  10 Value of Operations: Constant Growth Suppose FCF grows at constant rate g. ( 29 ( 29 = = + + = + = 1 t t t 1 t t t Op WACC 1 ) g 1 ( FCF WACC 1 FCF V 10  11 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. = + + = 1 t t Op WACC 1 g 1 FCF V 10  12 Constant Growth Formula (Cont.) The summation can be replaced by a single formula: ( 29 ( 29 g WACC ) g 1 ( FCF g WACC FCF V 1 Op + = = 10  13 Find Value of Operations ( 29 ( 29 420 05 . 10 ....
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 Spring '09
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