FINA 4210 SEMESTER REVIEW

FINA 4210 SEMESTER - F INA 4210 END OF THE SEMESTER OVERVIEW SPRING 2011 POULSEN 1 Framework for Valuation a Fundamentals of measuring and managing

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FINA 4210 – END OF THE SEMESTER OVERVIEW – SPRING 2011 POULSEN 1) Framework for Valuation a) Fundamentals of measuring and managing value i) Chapter 2 ii) Valuation is based on cash flows, not accounting earnings (1) Adjustments for non-cash items and items not related to operations (2) Interest payments are reflected in cost of capital iii) Cash flows will depend on return on invested capital and revenue growth (1) Profit = NOPLAT = net operating profit less adjusted taxes (2) IR = investment rate = net investment / NOPLAT (3) ROIC = return on invested capital (4) g = IR * ROIC
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b) Analyzing key value drivers – to some extent, can choose which to emphasize i) Return on invested capital (1) Chapter 4 (2) ROIC = NOPLAT (1-tax rate) / Invested Capital (3) Sources of competitive advantage include price premium, cost efficiencies and capital efficiencies (4) ROIC is driven by competitive advantages
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ii) Revenue growth (1) Chapter 5 (2) Chapter provides data on growth patterns. Some important notes: (a) It is difficult to sustain growth (b) Growth varies by industry, depends on markets in which firms operate (c) There is often a tradeoff between ROIC and growth (3) There will be a tradeoff between ROIC and growth
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c) Frameworks for Valuation i) Chapter 6 ii) Enterprise DCF *** (1) Analyze historical performance (2) Forecast financials and cash flows (3) Estimate a continuing value (4) Compute the cost of capital (5) Enterprise value to equity value (6) Calculate and interpret the results iii) Adjusted present value *** (1) Enterprise value as if the company were all equity finance + present value of debt-related tax shields (2) Review of Modigliani and Miller and capital structure theory. (a) Tradeoff theory – use of debt lowers the cost of capital due to deductibility of interest before calculation of taxes paid. At some point, financial distress costs are greater than tax benefits.
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Model Measure Discount factor Assessment Enterprise discounted cash flow Free cash flow Weighted average cost of capital Works best for projects, business units, and companies that manage their capital structure to a target level. Discounted economic profit Economic profit Weighted average cost of capital Explicitly highlights when a company creates value. Adjusted present value Free cash flow Unlevered cost of equity Highlights changing capital structure more easily than WACC-based models. Capital cash flow Capital cash flow Unlevered cost of equity Compresses free cash flow and the interest tax shield in one number, making it difficult to compare operating performance among companies and over time. Equity cash
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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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FINA 4210 SEMESTER - F INA 4210 END OF THE SEMESTER OVERVIEW SPRING 2011 POULSEN 1 Framework for Valuation a Fundamentals of measuring and managing

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