443_1 - Applied Equity Analysis and Por3olio...

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Unformatted text preview: Applied Equity Analysis and Por3olio Management Lecture 1 Valua;on 101 •  A company is worth the sum of the future cash flows that it is able to generate •  Investors will adjust the value or “discount” these cash flows based on risk PV of Cashflow from Opera;ons PV of Cashflow from Non Opera;ng Ac;vi;es = Enterprise Value Cash Available to Debt Equivalents Cash Available to Equity Equivalents 2 The Cashflow Cycle •  Interest •  Debt Repayment •  Taxes •  Dividends •  Treasury Shares Return Capital Capital Markets Raise Capital •  Notes Payable •  Long Term Debt •  Preferred Stock •  Common Stock •  Capital Surplus •  Revenues •  Cost of Goods Sold (COGS) •  Depreciation •  Amortization •  Accounts Receivable Operating Cash Operating Cash •  Inventory •  Property •  Plant •  Equipment •  Goodwill •  Accounts Payable •  Accrued Expenses Run Operations Investments Make Investments 3 Need for External Financing – Starbucks Example • At the end of 2009, Starbucks had 25 days of cash on hand • In 2009 cash was ;ed up for an average of 96 days • The difference of 71 days led to the need for Starbucks to borrow $2.6 billion of capital • Each day of ;me ;es up $27mm of cash and requires an equal amount of financing Sales NOPAT Invested Capital Cash Opera;ng Margin A]er Tax Cash Cycle (days) Days of Cash on Hand Cash per Day (mm) NOPAT = Net Opera;ng Profit A]er Tax Days of Cash on Hand Cash Cycle (days) Key Data $9,779 $467 $2,572 $674 $0.05 96 25 $27  ­ 20 40 60 80 100 120 Cash Cycle = Invested Capital / Sales x 365 Source: Thomson 4 Which Alterna;ve is More Afrac;ve? Where would you invest your $1 of capital? 5 Starbucks Performance Source: Google 6 SBUX ROIC Tree 7 SBUX Profitability Drivers 8 SBUX Produc;vity Drivers 9 Value Crea;on 101 Bank Deposit Account Bank Loan Rate 5% 9% Would you take a $10,000 loan and invest in this bank account? 10 Value Crea;on Terminology Invested Capital $ x minus = Value NOPAT $ minus Capital Charge $ 11 Return on Invested Capital (ROIC) % Cost of Capital (%) SBUX WACC 12 Crea;ng Value 101 Value is created when return exceeds expecta;on 13 A Key Assump;on Over the long run, the rate of return earned by owning the investment will be equal to the cash rate of return the investment generates. 14 $ Thousand DCF and Economic Profit are Equal Projected economic profit 61,911 39,691 Economic profit valua;on 22,220 Discounted at 10% Current invested capital PV of Total value economic profit Discounted at 10% 61,911 2004 2005 2006 2007 2008 2009 2010 Discounted cash flow valua;on DCF value 2004 2005 2006 2007 2008 2009 2010 15 Key Value Drivers Value ROIC vs WACC Growth Ability to Sustain ROIC Cost of Capital Profit Margin Factors driving value crea;on 1.  Spread 2.  Growth 3.  Compe;;ve Advantage Productivity 16 17 5 Lessons of Value Crea;on 18 ...
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This note was uploaded on 02/22/2011 for the course BMGT 443 taught by Professor Perfetti during the Spring '11 term at Maryland.

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