428_lecture15_proforma_S09

428_lecture15_proforma_S09 - 428 Valuation Lecture 15 Pro...

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428 Valuation Lecture 15 – Pro Forma Statement
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Midterm Exam March 12 in class, 1 hour 15 minutes Bring a calculator (not a laptop), a ruler (optional) You can bring one 8’ x 11’ cheat sheet. Write only one side.
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Timberland Case (Group project) Additional question sheet Form your group Download the Excel template to work with from course blackboard It is due on 3/26
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Review: Which Multiple to Use? Sector Multiple used Rational Manufacturing P/E, P/S Use earnings If it is available and representative. Otherwise use sale. High Tech, High growth High Growth PEG Big differences in growth across firms High Growth/No Earnings P/S, V/S Assume future margins will be good Financial Services P/B Book value often marked to market Retailing P/S, P/E V/S If leverage is similar across firms If leverage is different REIT P/CF Generally no Cap Ex investment from equity earnings
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What do we need to value Price-to-Book ratio? 1 2 1 3 2 2 3 ( ) ( ) ( ) ( ) ( ) ( ) ... 1 (1 ) e e e t t t t t t t t e ROE ROE ROE r r r B B B B B r + + + + + - - - + + + + = + + , ) 1 ( : 1 1 Earn B B Where t t t k + + - + = ( 29 ( 29 * 1 1 1 1 t t i e t i t i i t e t E ROE r B P B r B t + + - = - = + + 1 1 1 (1 ) t t t k B therefore ROE B + + = + - Profitability Growth Review: What do we need to value Price-to- Book ratio?
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Review: Growth, Profitability and Payout 1 1 1 (1 ) t t t k B ROE B + + - = - Define: Reinvestment rate = 1 – payout ratio Growth of Book = Reinvestment Rate * Profitability Once the reinvestment rate and profitability are known, then the growth of book is tied down.
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Review: ROE and ROCE ROE = (NI/SE) = (NI/Asset)(Asset/SE) =(NI/Sales)(Sales/Asset)(Asset/SE) = PM * AST * Capital Leverage ROE = (NI/Asset)(Asset/SE)(EBI/EBI) = (EBI/Asset)(NI/EBI)(Asset/SE) = ROA*Earning leverage* Capital structure Leverage ROCE = RNOA + Financial Leverage
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Review: Decomposition: Drivers of Profitability [ ] t t t t t ROCE RNOA FLEV RNOA NBC = + - t t t t t t NOA Sales Sales OI NOA OI = (1) Profit margin (PM): The profitability of each dollar of sales (2) Asset Turnover (ATO): The ability to generate sales for a given asset base (Net operating asset) (3) Financial Leverage: Amount of leverage Spread
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Review: Financial Items in ROCE OI = Revenue – Operating expense Financing activities FLEV = NFO / CSE (Financial Leverage) NBC = NFE (after tax) / NFO (Net Borrowing Cost) SPREAD = RNOA – NBC (Operating Spread)
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Quiz In year 2007, company XYZ’s ROE is 15% and payout ratio is 60%. What is company XYZ’s equity growth rate in 2007?
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Pro-forma statements are firm’s financial statements prepared as projections of the future. Pro-forma Statements Help financial managers plan the firm's financial needs. Help general managers make business plan and problem solving Help potential Investors make investment decisions Pro forma Statement
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• The financial statements for the previous period can be used as a base. Collect them from SEC, company’s website,….
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This note was uploaded on 09/23/2009 for the course AEM 4280 taught by Professor Ng,d. during the Spring '08 term at Cornell.

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428_lecture15_proforma_S09 - 428 Valuation Lecture 15 Pro...

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