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Ch 15 - CHAPTER15 CorporateValuation ,and...

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  1 CHAPTER 15 Corporate Valuation, Value-Based Management, and  Corporate Governance
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  2 Topics in Chapter Corporate Valuation Value-Based Management Corporate Governance
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  3 Corporate Valuation: A company  owns two types of assets. Assets-in-place Financial, or nonoperating, assets  
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  4 Assets-in-Place Assets-in-place 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.
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  5 Value of Operations V op = t = 1 FCF t (1 + WACC) t
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  6 Nonoperating Assets Marketable securities Ownership of non-controlling interest in  another company Value of nonoperating assets usually is  very close to figure that is reported on  balance sheets.
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  7 Total Corporate Value Total corporate value is sum of: Value of operations Value of nonoperating assets
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  8 Claims on Corporate Value Debtholders have first claim. Preferred stockholders have the next  claim. Any remaining value belongs to  stockholders.
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  9 Applying the Corporate  Valuation Model Forecast the financial statements, as  shown in Chapter 14. 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.
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  10 Data for Valuation FCF 0  = $20 million WACC = 10% g = 5% Marketable securities = $100 million Debt = $200 million Preferred stock = $50 million Book value of equity = $210 million
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  11 Value of Operations: Constant  FCF Growth at Rate of g V op = t = 1 FCF t (1 + WACC) t = t = 1 FCF 0 (1+g) t (1 + WACC) t
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  12 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. V op = t = 1 FCF 0 1 + WACC ( 1+ g ) t
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  13 Constant Growth Formula  (Cont.) The summation can be replaced by a  single formula: V op = FCF 1 (WACC - g) = FCF 0 (1+g) (WACC - g)
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  14 Find Value of Operations V op = FCF 0 (1 + g) (WACC - g) V op = 20(1+0.05) (0.10 – 0.05) = 420
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  15 Value of Equity Sources of Corporate Value Value of operations =  $420 Value of non-operating assets = $100 Claims on Corporate Value Value of Debt = $200 Value of Preferred Stock = $50 Value of Equity = ?
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  16 Value of Equity Total corporate value  = V op  + Mkt. Sec.
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