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Chapter 07 exhibits

Chapter 07 exhibits - VALUATION Measuring and Managing the...

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Unformatted text preview: VALUATION Measuring and Managing the Value of Companies TIM KOLLER ° MARC GOEDHART ° DAVID WESSELS Chapter 7 Exhibits McKINSEY 85 COMPANY EXHIBIT 7.1 An Example of Invested Capital $million Accountant's balance sheet Prior year Assets Inventory 200 Net PP&E 300 Equity investments 15 Total assets 515 Liabilities and equity Accounts payable 125 Interest—bearing debt 225 Common stock 50 Retained earnings 115 Total liabilities and equity 515 Current year 225 350 25 600 150 200 50 200 600 Invested capital Assets Inventory Accounts payable Operating working capital Net PP&E Invested capital Equity investments Total funds invested Reconciliation of total funds invested Interest—bearing debt Common stock Retained earnings Total funds invested Prior year 200 (125) 75 300 375 15 390 225 50 115 390 Current year 225 (150) 75 350 425 25 450 200 50 200 450 Operating liabilities are netted against operating assets Nonoperating assets are not included in invested capital EXHIBIT 7.2 An Example of NOPLAT $million Accountant's income statement Current year Revenues 1,000 Operating costs (700) Depreciation (20) Operating profit 280 Interest (20) Nonoperating income 4 Earnings before taxes 264 Taxes (55) Net income 198 1 Assumes a marginal tax of 25% on all income. NOPLAT Revenues Operating costs Depreciation Operating profit Operating taxes1 NOPLAT After—tax nonoperating income1 Income available to investors Reconciliation with net income Net income After—tax interest expense1 Income available to investors Current year 1,000 (700) (20) 280 (70) 210 213 198 15 213 Taxes are calculated on operating profits Do not include income from any asset excluded from invested capital as part of NOPLAT Treat interest as a financial payout to investors, not an expense EXHIBIT 7.3 An Example of Free Cash Flow $million Accountant's cash flow statement Net income Depreciation Decrease (increase) in inventory Increase (decrease) in accounts payable Cash flow from operations Capital expenditures Decrease (increase) in equality investments Cash flow from investing Increase (decrease) in debt Increase (decrease) in common stock Dividends Cash flow from financing Current year 198 20 (25) 25 218 (70) (10) (80) (25) (113) (138) Free cash flow NDPLAT Depreciation Gross cash flow Decrease (increase) in inventory Increase (decrease) in accounts payable Capital expenditures Free cash flow After-tax nonoperating Income Decrease (increase) in equity investments Cash flow available to investors Reconciliation of cash flow available to investors After-tax interest Increase (decrease) in interest—bearing debt Increase (decrease) in common stock Dividends Cash flow available to investors Current year 210 20 230 (25) 25 (70) 150 (10) 153 15 25 113 153 Subtract investments in operating items from gross cash flow Evaluate cash flow from nonoperating assets separately from core operations Treat interest as a financial payoutto investors, not an expense EXHIBIT 7.4 Home Depot and Lowe's: Historical Balance Sheets $million Assets Cash and cash equivalents Receivables, net Merchandise inventories Short-term deferred tax assets Other current assets Total current assets Net property and equipment Goodwill Notes receivable Other assets: Equity investments Other assets: Acquired intangibles Other assets: Long-term deferred tax assets Other assets: Undisclosed Total assets Liabilities and equity Shorteterm debt Accounts payable Accrued salaries Deferred revenue Short-term deferred tax liabilities Other accrued expenses Total current liabilities Long-term debt Deferred income taxes Other longrterm liabilities Common stock and paidein capital Retained earnings Accumulated other comprehensive income Treasury stock Total liabilities and shareholders' equity Home Depot 2006 2007 614 457 3,223 1,259 12,822 11,731 561 535 780 692 18,000 14,674 26,605 27,476 6,314 1,209 343 342 — 325 778 100 7 _ 216 198 52,263 44,324 18 2,047 7,356 5,732 1,295 1,094 1,634 1,474 30 10 2,598 2,349 12,931 12,706 1 1,643 11,383 1,416 688 1,243 1,833 8,051 5,885 33,052 11,388 310 755 (16,383) (314) 52,263 44,324 2008 525 972 10,673 491 701 13,362 26,234 1,134 36 325 69 41,164 1,767 4,822 1,129 1,165 2,265 11,153 9,667 369 2,198 6,133 12,093 (77) (372) 41,164 2006 796 7,144 161 213 8,314 18,971 165 317 27,767 111 3,524 372 731 1,801 6,539 4,325 735 443 864 14,860 27,767 Lowe's 2007 530 7,61 1 247 298 8,686 21,361 509 313 30,869 1,104 3,713 424 717 1,793 7,751 5,576 670 774 745 15,345 30,869 2008 661 8,209 166 215 9,251 22,722 253 460 32,686 1,021 4,109 434 674 1,784 8,022 5,039 660 910 1,012 17,049 (6) 32,686 EXHlBlT 7.5 Home Depot and Lowe's: Invested Capital Calculations $ million Home Depot Lowe's 2006 2007 2000 2006 2007 2008 Total funds invested: Uses Operating cash 614 457 525 796 530 661 Receivables, net 3,223 1,259 972 7 7 7 Merchandise inventories 12,822 11,731 10,673 7,144 7,611 8,209 Other current assets 780 692 701 213 298 215 Operating current assets 17,439 14,139 12,871 8,153 8,439 9,085 Accounts payable 17,356) 15,732) 14,822) 13,524) 13,713) 14,109) Accrued salaries 11,295) 11,094) 11,129) 1372) 1424) 1434) Deferred revenue 11,634) 11,474) 11,165) 1731) 1717) 1674) 3ther accrued expenses 12,598) 12,349) 12,265) 11,801) 11,793) 11,784) Dperating current liabilities 112,883) (10,649) 19,381) 16,428) 16,647) 17,001) Dperating working capital 4,556 3,490 3,490 1,725 1,792 2,084 et property and equipment 26,605 27,475 26,234 18,971 21 ,361 22,722 Capitalized operating leasesl 9,141 7,878 8,298 3,034 3,528 3,913 Dther long-term assets, net of liabilities 11,027) (1,635) 12,129) 1126) 1461) 1450) nvestedcapital(excludinggoodwillandacquiredintangibles) 39,275 37,209 35,893 23,604 26,220 28,269 Hoodwill and acquired intangibles 7,092 1,309 1,134 7 7 7 Sumulative amortization and unrecorded goodwillZ 177 49 49 730 730 730 nvested capital 46,543 38,567 37,075 24,334 26,950 29,000 Excess cash 7 7 7 7 7 7 unconsolidated investments 343 667 361 165 509 253 Tax loss carry7forwards3 66 101 124 133) 11) 156) Total funds invested 46,952 39,335 37,560 24,466 27,458 29,197 Total funds invested: Sources Short-term debt 18 2,047 1,767 111 1,104 1,021 _ong-term debt 11,643 11,383 9,667 4,325 5,576 5,039 Capitalized operating leasesl 9,141 7,878 8,298 3,034 3,528 3,913 Debt and debt equivalents 20,802 21,308 19,732 7,470 10,208 9,973 Deferred income taxes: operating3 480 105 114 541 422 438 Deferred income taxes: nonoperating3 464 159 1111) — — — 3umulative amortization and unrecorded goodwillZ 177 49 49 730 730 730 30mmon stock and paid7in capital 8,051 5,885 6,133 864 745 1,012 Retained earnings 33,052 11,388 12,093 14,860 15,345 17,049 Accumulated other comprehensive income 310 755 177) 1 8 16) reasury stock 116,383) 1314) 1372) — — — Equity and equity equivalents 26,151 18,027 17,829 16,996 17,250 19,223 otal funds invested 46,952 39,335 37,560 24,466 27,458 29,197 1 Capitalized operating lease adjustments are detailed in Exhibit 7.14. 2 Goodwi l and cumulative amortization adjustments are detailed in Exhibit 7.6. 3 Deferred tax adjustments are detailed in Exhibit 7.8. EXHIBIT 7.6 Home Depot and Lowe's: Adjustments to Goodwill and Acquired Intangibles $ million 2004 2005 2006 2007 2008 Home Depot Goodwill 1,394 3,286 6,314 1,209 1,134 Acquired intangibles — 398 778 100 — Unrecorded goodwill related to pooling — — — — — Cumulative amortization and impairments 31 60 177 49 49 Adjustedgoodwillandacquired intangibles 1,425 3,744 7,269 1,358 1,183 Lowe's Goodwill — — — — — Acquired intangibles — — — — — Unrecorded goodwill related to pooling 730 730 730 730 730 Cumulative amortization and impairments — — — — — Adjusted goodwill and acquired intangibles 730 730 730 730 730 EXHIBIT 7.7 Sources of Financing Source of capital Debt Debt equivalents Hybrid securities Minority interest Equity Equity equivalents Descfipfion Interest—bearing debt from banks and public capital markets Off—balance—sheet debt and one—time debts owed to others that are not part of ongoing operations (e.g., severance payments as part of a restructuring, an unfunded pension liability, or expected environmental remediation following a plant closure) Claims that have equity characteristics but are not yet part of owner’s equity (e.g., convertible debt and employee options) External shareholder that owns a minority position in one of the company’s consolidated subsidiaries Common stock, additional paid—in capital, retained earnings, and accumulated other comprehensive income Balance sheet accounts that arise because of noncash adjustments to retained earnings; similar to debt equivalents but not deducted from enterprise value to determine equity value (e.g., most deferred—tax accounts and income—smoothing provisions) EXHIBIT 7.8 Home Depot: Deferred-Tax Assets and Liabilities $million Reported in Home Depot 10-K notes Assets Accrued self—insurance liabilities State income taxes Other accrued liabilities Net operating losses Other deferred—tax assets Deferred-tax assets Valuation allowance Net deferred—tax assets Liabilities Accelerated depreciation Accelerated inventory deduction Goodwill and other intangibles Other deferred—tax liabilities Deferred—tax liabilities Deferred-tax assets (liabilities) 2006 2007 419 440 — 105 603 601 66 108 — 54 1,088 1,308 — (7) 1,088 1,301 (1,365) (1,133) (137) (1 18) (361) (69) (103) (144) (1,966) (1,464) (878) (163) Source: Home Depot 10—K notes, 2006—2008. 2008 460 118 490 136 307 1,511 (12) 1,499 (1,068) (114) (78) (118) (1,378) 121 Reorganized financials Tax loss carry-forwards Net operating losses Valuation allowance Tax loss carry—forwards Operating deferred taxes Accelerated depreciation Accelerated inventory deduction Accrued self—insurance liabilities State income taxes Other accrued liabilities Operating deterred—tax assets (liabilities) Nonoperating deferred taxes Goodwill and other intangibles Other deferred—tax liabilities Other deferred—tax assets Nonoperating deferred—tax assets (liabilities) Deferred-tax assets (liabilities) 2006 66 66 (1,365) (137) 419 603 (480) (361) (103) (464) (878) 2007 108 (7) 101 (1,133) (118) 440 105 601 (105) (69) (144) 54 (159) (163) 2008 136 (12) 124 (1,068) (114) 460 118 490 (114) (78) (118) 307 111 121 EXHIBIT 7.9 Home Depot and Lowe's: Historical Income Statement $million Net sales Cost of merchandise sold Selling, general, and administrative Depreciation Amortization EBIT Interest and investment income Interest expense Nonrecurring charge Earnings before taxes Income taxes Earnings from continuing operations Discontinued operations Net income Home Depot 2006 2007 90,837 77,349 (61,054) (51,352) (18,348) (17,053) (1,645) (1,693) (117) (9) 9,673 7,242 27 74 (392) (696) 9,308 6,620 (3,547) (2,410) 5,761 4,210 — 185 5,761 4,395 2008 71,288 (47,298) (17,846) (1,785) 4,359 18 (624) (163) 3,590 (1,278) 2,312 (52) 2,260 2006 46,927 (30,729) (9,884) (1,162) 5,152 52 (206) 4,998 (1,893) 3,105 3,105 Lowe's 2007 48,283 (31,556) (10,656) (1,366) 4,705 45 (239) 4,511 (1,702) 2,809 2,809 2008 48,230 (31,729) (11,176) (1,539) 3,786 40 (320) 3,506 (1,311) 2,195 2,195 EXHIBlT 7.10 Home Depot and Lowe's: NOPLAT Calculation $million Income statement Net sales Cost of merchandise sold Selling, general, and administrative Depreciation EBITA Add: Operating lease interest3 Adjusted EBITA Operating cash taxes NOPLAT Operating cash taxes Operating taxes1 Increase (decrease) in operating deferred taxes2 Operating cash taxes Reconciliation with net income Net income Decrease (increase) in operating deferred taxesZ Adjusted net income After-tax interest expense After-tax operating lease interest expense3 Total income available to investors Nonoperating taxes Loss (gain) from discontinued operations Afteretax nonrecurring charges After-tax amortization of intangibles After-tax interest income NOPLAT l Operating taxes calculation detailed in Exhibit 7.12. 2 Operating deferred tax liabilities, net of operating deterred tax assets. 3 Operating lease interest detailed in Exhibit 7.14. Home Depot 2006 2007 2008 90,837 77,349 71,288 (61,054) (51,352) (47,298) (18,348) (17,053) (17,846) (1,645) (1,693) (1,785) 9,790 7,251 4,359 441 536 486 10,231 7,787 4,845 (3,986) (3,331) (1 ,81 1) 6,245 4,456 3,033 3,873 2,956 1,820 113 375 (9) 3,986 3,331 1,811 5,761 4,395 2,260 (1 13) (375) 9 5,648 4,020 2,269 244 432 390 274 333 303 6,166 4,784 2,962 23 (103) (71) — (185) 52 — — 102 73 6 7 (17) (46) l1 1 l 6,245 4,456 3,033 Lowe's 2006 2007 2008 46,927 48,283 48,230 (30,729) (31,556) (31,729) (9,884) (10,656) (11,176) (1,162) (1,366) (1,539) 5,152 4,705 3,786 185 169 199 5,337 4,874 3,985 (2,071) (1,973) (1,496) 3,266 2,901 2,489 2,043 1,854 1,512 28 1 19 (16) 2,071 1,973 1,496 3,105 2,809 2,195 (28) (119) 16 3,077 2,690 2,211 127 148 199 114 105 124 3,318 2,943 2,533 (20) (14) (19) w 3,266 2,901 2,489 EXHIBIT 7.11 Home Depot:Tax Reconciliation Tables $ million 2006 Tax reconciliation Income taxes at statutory rate 3,258 State income taxes, net of federal 281 Foreign rate differences 5 Other, net 23 Reported taxes 3,547 Earnings before taxes 9,308 Source: Home Depot 2008 10—K, note 6. 2007 2008 2,317 1,257 196 92 (103) (71) 2,410 1,278 6,620 3,590 Step 1: percent 2006 Reformatted tax reconciliation Income taxes at statutory rate 35.0 State income taxes, net of federal 2.8 Foreign rate differences 0.1 Other, net 0.2 Reported taxes 38.1 2007 2008 35.0 35.0 3.0 2.6 (1.6) (2.0) 36.4 35.6 EXHIBIT 7.12 Home Depot: Operating Taxes and Operating Cash Taxes $million 2004 2005 2006 Operating taxes Step 2: Marginal tax rate (percent) 37.7 38.0 37.8 x Adjusted EBITA 8,214 9,731 10,231 = Marginal taxes on EBITA 3,098 3,698 3,868 Step 3: Other operating taxes (17) (10) 5 Operating taxes 3,081 3,688 3,873 Operating cash taxes Operating taxes 3,081 3,688 3,873 Increase in operating deferred taxes1 (548) 668 113 Operating cash taxes 2,533 4,356 3,986 1 Increase in operating deferred tax liabilities, net of operating deferred tax assets, as reported in Exhibit 7.8. 2007 38.0 7,787 2,956 2,956 2,956 375 3,331 2008 37.6 4,845 1,820 1,820 1,820 (9) 1,811 EXHIBIT 7.13 Home Depot and Lowe's: Free Cash Flow Calculation $ million Home Depot Lowe's 2006 2007 2008 2006 2007 2008 0PLAT 6,245 4,456 3.033 3,266 2,901 2,489 Depreciation 1,645 1,693 1,785 1,162 1,366 1,539 3ross cash flow 7.890 6,149 4,818 4,428 4.267 4,028 Change in operating working capital (936) (739) — 168 (67) (292) et capital expenditures (3,349) (3,577) (543) (3,779) (3,756) (2,900) Decrease (increase) in capitalized operating leases (1,214) 1,262 (419) 291 (494) (385) nvestments in goodwill and acquired intangibles (3,525) 7 175 7 7 7 Decrease (increase) in net long-term operating assets 224 457 494 52 335 (11) ncrease (decrease) in accumulated other comprehensive income (99) 445 (832) 7 7 (14) Eross investment (8,899) (2,152) (1,125) (3,268) (3,975) (3,602) :ree cash flow (1,009) 3,998 3,693 1,160 292 426 A er—tax interest income 17 46 11 32 28 25 A er7tax nonrecurring charge — — (102) — — — Loss (gain) from discontinued operations — 185 (52) — — — Nonoperating taxes (23) 103 71 20 14 19 Decrease (increase) in excess cash — — — 11 — — Decrease (increase) in long7term investments 5 (324) 306 129 (344) 256 Decrease (increase) in net loss carry-fon/vards (3) (35) (23) (6) (32) 55 Sale of HD Supply — 8,743 — — — — Nonoperating cash flow (4) 8,718 211 186 (334) 355 Cash flow available to investors (1,013) 12,716 3,904 1,346 (42) 781 A er—tax interest expense 244 432 390 127 48 199 A er—tax operating lease interest expense 274 333 303 114 05 124 Decrease (increase) in short-term debt 1,395 (2,029) 280 (79) (993) 83 Decrease (increase) in long-term debt (8,971) 260 1,716 (826) (1,251) 537 Decrease (increase) in capitalized operating leases (1,214) 1,262 (419) 291 (£94) (385) Zlows to debt holders (8,272) 258 2,269 (373) (2,485) 557 Decrease (increase) in nonoperating deferred taxes (282) 302 270 7 7 7 Dividends 1,395 1,709 1,521 276 £28 491 3epurchased and retired shares 5,889 10,336 (190) 1,400 2,607 (267) Adjustments to retained earnings 257 111 34 43 8 — :lows to equity holders 7,259 12,458 1,635 1,719 2,443 224 Dash flow available to investors (1,013) 12,716 3,904 1,346 (42) 781 1 lncrease in nonoperating deferred tax liabilities, net of nonoperating deferred tax assets. EXHIBIT 7.14 Home Depot and Lowe's: Capitalizing Operating Leases $ million Home Depot Lowe's 2006 2007 2008 2006 2007 2008 EBITA EBITA 9,790 7,251 4,359 5,152 4,705 3,786 Implied interest1 441 536 486 185 169 199 Adjusted EBITA 10,231 7,787 4,845 5,337 4,874 3,985 Operating cash taxes Operating cash taxes 3,819 3,128 1,629 2,000 1,909 1,420 Tax shield on operating lease interest expense 167 204 182 71 64 76 Adjusted operating cash taxes 3,986 3,331 1,811 2,071 1,973 1,496 NOPLAT NOPLAT (using rental expense) 5,971 4,123 2,730 3,152 2,796 2,366 NOPLAT (capitalizing operating leases) 6,245 4,456 3,033 3,266 2,901 2,489 Invested capital Invested capital 37,403 30,689 28,778 21,300 23,422 25,086 Capitalized operating leases 9,141 7,878 8,298 3,034 3,528 3,913 Invested capital (with operating leases) 46,543 38,567 37,075 24,334 26,950 29,000 Return on average capital (percent) ROIC (using rental expenses) 17.3 12.1 9.2 14.3 12.5 9.8 ROIC (capitalizing operating leases) 14.5 10.5 8.0 14.0 11.3 8.9 1 Implied interest equals each company’s cost of debt times the prior year’s value of operating leases. We normally prefer to use the secured cost of debt to compute an embedded interest expense, but instead use the company's cost of debt in order to tie enterprise DCF to equity cash flow valuation in Chapter 6. EXHIBIT 7.15 Ratio Analysis: Consolidated Financial Statements $milli0n Company A Company B Company C Operating profit 100 100 100 Interest — - (20) Earnings before taxes 100 100 80 Taxes (25) (25) (20) Net income 75 75 60 Balance sheet Inventory 125 125 125 Property and equipment 400 400 400 Equity investments — 50 — Total assets 525 575 525 Accounts payable 50 50 50 Debt — — 200 Equity 475 525 275 Liabilities and equity 525 575 525 EXHIBIT 7.16 HealthCo: Income Statement and Balance Sheet $milli0n Income statement Revenues Cost of sales Selling costs Depreciation Operating profit Interest expense Gain on sale Earnings before taxes Taxes Net income Prior year 605 (200) (300) (40) 65 (5) 60 (16) 44 Current year 665 (210) (320) (45) 90 (15) 25 100 (40) 60 Balance sheet Prior year Working cash 5 Accounts receivable 45 Inventories 15 Current assets 65 Property, plant, and equipment 250 Prepaid pension assets 10 Total assets 325 Accounts payable 10 Short—term debt 20 Restructuring reserves 20 Current liabilities 50 Long—term debt 70 Shareholders' equity 205 Liabilities and equity 325 Current year 5 55 20 80 260 50 390 15 40 55 70 265 390 ...
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