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Unformatted text preview: FINA537 Slides Suggested Answers Lecture 1 (DDM) Slide P26‐27 Earnings of the business: (100*80%)*5‐(100*80%)*3=160 Firm Value: 160/20%=800 ROE(ROA): 160/300=53.3% Slide P28‐29 Earnings at year 1: 160 Earnings at year 2: 240=160+80=160+150*(160/300) Earning growth rate: (240‐160)/160=50% Or another way to calculate: 150/160 (retention ratio) * (160/300) (ROE) = 50% Slide P30‐31 Small machine: If 20% sold: Firm value without investment: 800 Firm value with investment: 10/1.2+((160+20%*50*2)/0.2)/1.2=758.3 No not invest. If 30% sold: Firm value without investment: 800 Firm value with investment: 10/1.2+((160+30%*50*2)/0.2)/1.2=800 No difference. If 40% sold: Firm value without investment: 800 Firm value with investment: 10/1.2+((160+40%*50*2)/0.2)/1.2=841.67 Invest. Another way to do this: If20% sold, investment=50*3=150 PV=50*20%*2/20%=100 NPV=‐50 Not invest! If 30% sold, investment=150 PV=50*30%*2/20%=150 NPV=0 Indifferent. If 40% sold, investment=150 PV=50*40%*2/20%=200 NPV=50 Invest! Analysis of new ROE for the small machine: If 20% sold, ROE=20%*50*2/150=13.3%<r If 30% sold, ROE=30%*50*2/150=20%=r If 40% sold, ROE=40%*50*2/150=26.7%=r Take away: Not all the growth creates value. In 20% case, growth destroys value. Only when the growth represents positive NPV, the growth creates value. It also explains why firms have different growth rate in reality. Assuming firms only invest into positive NPV projects, firms that do not have positive NPV projects cannot grow as fast as firms that do have positive NPV projects. Slide P20‐21(DCF) No debt: IS: (no debt) Sale: 400=80%*100*5 COGS: 240=80%*100*3 Income before tax: 160=400‐240 Tax: 56=160*35% NI: 104=160‐56 B/S: (no debt) LHS: Inventory: 300 Total Asset: 300 RHS: Equity: 300 Total liability and Equity: 300 FCF: 160*(1‐35%)=104 FCFE: 104 With debt IS: (with debt) Sale: 400=80%*100*5 COGS: 240=80%*100*3 Interest: 15=150*10% Income before tax: 145=400‐240‐15 Tax: 50.75=145*35% NI: 94.25=145‐50.75 B/S: (with debt) LHS: Inventory: 300 Total Asset: 300 RHS: Debt: 150 Equity: 150 Total liability and Equity: 300 FCF: 160*(1‐35%)=104 FCFE: 94.25 FCFD: 15 FCF(104)=FCFE(94.25)+FCFD(15)‐tax shield flow (56‐50.75=15*35%) Lecture 3 (Multiples) Slide P18 Higher growth firm have higher PE. Higher risk firms have lower PE. Firms with lower reinvestment needs will have higher PE. Slide P20 1 Similar growth. 2 Similar risk. Slide P29 Higher risk companies will have lower PEG ratios. Companies that can attain growth more efficiently by investing less in better return projects will have higher PEG ratios. Companies with very low or very high growth rates will tend to have higher PEG ratios. Slide P33 High reinvestments need will lead to lower Value/EBIT. Higher costs of capital will lead to lower Value/EBIT multiples. Higher growth sectors will tend to have higher Value/EBIT multiples. Slide P13‐14 Petes’s is the comparable. Using PE: price=100*0.35=35 Using PBE: price=129*13.23/19.182=89 ROE_petes=129/100=129% ROE_bostonbeers=0.35/(13.23/19.182)=51% Petes have much higher ROE, which may explain why valuation using P/BE is much higher. Slide P21‐22 Firm value: 8.36*1=8.36 million Firm value(1 million arrives in 2002, 1 million in 2003 and 2 million in 2004): 8.36+8.36/1.15+(8.36*2)/1.15^2=28.27 Lecture 4 (PE) Slide P10 Post‐money valuation=800 Pre‐money valuation=650 VC’s ownership=150/800=18.75% Price/share=650/100=6.5 Shares held by VC=150/6.5=23.08 Slide P19 If only 60% of cans are sold, post‐money valuation=600, pre‐money valuation=450 Shares held by VC=150/4.5 Ratio: 1 share of type B= 1.44(650/450) shares of type A Lecture 5 (cost of capital) Slide P54 (same as Lecture DCF P20‐21) Without debt: money goes to the firm=104 With debt: money goes to the firm=94.25+15=109.25 ...
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 Spring '09
 LUXIAOLEI
 Valuation

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