Chapter_12 - Instructors: Please do not post raw PowerPoint...

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Click to edit Master subtitle style Chapter 12 From Enterprise Value to Equity Value Instructors: Please do not post raw PowerPoint files on public website. Thank you! 11
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Session Overview When you have completed the valuation of core operations, you are ready to estimate three values: enterprise value, equity value, and value per share. 1. To determine enterprise value, add to the value of core operations the value of nonoperating assets, such as excess cash and nonconsolidated subsidiaries. 2. To convert enterprise value to equity value, subtract short-term and long-term debt, debt equivalents (such as unfunded pension liabilities), and hybrid securities (such as employee stock options). 3. To estimate value per share, divide the resulting equity value by the most recent number of undiluted shares outstanding. •. Estimating the value per share completes the technical aspect of the valuation, yet the entire job is not complete. It is time to revisit the valuation with a comprehensive look at its implications. We examine this process in the next session. 22
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Enterprise Value and Equity Value PRESENT VALUE OF OPERATIONS Present value of free cash flows + Present value of continuing value ENTERPRIS E VALUE NONOPERATING ASSETS Excess cash and marketable securities + Illiquid investments and unconsolidated subsidiaries + NONEQUITY CLAIMS Debt + Pensions/leases + Employee options + Minority interests = EQUITY VALUE = Enterprise value (i.e., a company’s value to all financial stakeholders) equals the combined value of a company’s operations and the value of its nonoperating assets. A company’s value is shared between nonequity claims and equity holders. The equity value of a company equals enterprise value less the value of nonequity claims. 33
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The Valuation Buildup: An Example When measured properly, free cash flow from operations should not include any cash flows from nonoperating assets. Instead, nonoperating assets should be valued separately. Nonoperating assets can be segmented into two groups, marketable securities (marked to market) and illiquid investments (held at cost). Given their different accounting treatments, each nonoperating asset type must be valued separately. $ million DCF value of operations 5,000 Excess cash and marketable securities 50 Excess real estate 5 Nonconsolidated subsidiaries 270 Financial subsidiary 300 Tax loss carry-forwards 10 Discontinued operations 30 Enterprise value 5,665 Sample Comprehensive Valuation Buildup 44
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The Valuation Buildup: An Example To calculate the value of common equity, you need to deduct the value of all nonequity claims from the enterprise value. Although nonequity claims include a long array of items, they can be grouped into four categories: 1. Traditional debt 2. Debt equivalents such as operating leases, pensions, specific types of provisions 3. Hybrid claims such as employee stock options and convertible bonds 4. Minority interests Sample Comprehensive Valuation Buildup
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This note was uploaded on 06/06/2011 for the course FINA 4210 taught by Professor Staff during the Spring '08 term at University of Georgia Athens.

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Chapter_12 - Instructors: Please do not post raw PowerPoint...

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