Section _7B -- F '10 Val - Section #9B Firm Valuation...

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Section #9B Firm Valuation October 20th, 2010 Copyright 2010 by Rich Curtis
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The Kraft’s Financial Statements, Key Statistics, and Analyst Estimates on the following 5 slides were obtained from: http://finance.yahoo.com 2
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10. Firm Valuation Based on Discounted Cash Flows Free Cash Flow to Firm = NOPAT From Operations (FCFF) + Depreciation & Amortization - Increases in Non-Cash Op. WC - Capital Expenditures NOPAT = (1-t c )(Operating Revenues - Operating Expenses) a. Enterprise Value = Firm Value - Value of Non-Operating Assets = Debt + Preferred + Common - Value of Non-Operating Assets b. Net Operating Profit After Tax = Operating Profit if the firm had no debt
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Time 0 1 2 3 FCFF 1 FCFF 2 FCFF 3 EV 0 Firm Value = Enterprise Value 0 + Value of Non-Operating Assets = FCFF 1 1+WACC at + FCFF 2 1+WACC at Λ Ν Μ Ξ Π Ο 2 + FCFF 3 1+WACC at Λ Ν Μ Ξ Π Ο 3 + . .. + Value of Non-Operating Assets 2. Value of Non-Operating Assets + V Non-Operating 9
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3. If the FCCF’s grow at the constant rate g forever after Time T+1, and if g < WACC at , then: Terminal Value T = Enterprise Value T = FCFF T+1 WACC at - g and Firm Value = FCFF 1 1+WACC at + FCFF 2 1+WACC at Λ Ν Μ Ξ Π Ο 2 + . .. + FCFF T-1 1+WACC at Λ Ν Μ Ξ Π Ο T-1 + FCFF T + Terminal Value T 1+WACC at Λ Ν Μ Ξ Π Ο T + Value of Non-Operating Assets (Horizon Value) 10
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Time 0 1 2 FCFF 1 FCFF 2 FCFF 10 EV 0 Firm Value 0 = FCFF 1 1+WACC at + FCFF 2 1+WACC at Λ Ν Μ Ξ Π Ο 2 + . .. + FCFF 9 1+WACC at Λ Ν Μ Ξ Π Ο 9 + FCFF 10 1+WACC at Λ Ν Μ Ξ Π Ο 10 + FCFF 11 WACC at - g 1+WACC at ( ) 10 + Value of Non-Operating Assets 10 FCFF 11 11 12 FCFF 12 Terminal Value Value of Non-Operating Assets + V Non-Operating 11
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Kraft’s Example i. Let’s first estimate WACC at . We’ll need the after-tax costs of debt and equity. a. One might estimate the before-tax cost of debt by averaging the yields-to-maturity of all the firm’s bond issues and bank loans. (The weights are the fraction of the total debt PV represented by each of the bonds and loans.) To estimate the after-tax cost of debt, multiply the average before-tax yield of the aggregate debt by “1 minus an estimate of the firm’s tax rate”. 12
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Section _7B -- F '10 Val - Section #9B Firm Valuation...

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