advval - Valuation The Big Picture Aswath Damodaran...

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Aswath Damodaran Valuation The Big Picture Aswath Damodaran http://www.damodaran.com
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Aswath Damodaran DCF Choices: Equity Valuation versus Firm Valuation Assets Liabilities Assets in Place Debt Equity Fixed Claim on cash flows Little or No role in management Fixed Maturity Tax Deductible Residual Claim on cash flows Significant Role in management Perpetual Lives Growth Assets Existing Investments Generate cashflows today Includes long lived (fixed) and short-lived(working capital) assets Expected Value that will be created by future investments Equity valuation : Value just the equity claim in the business Firm Valuation : Value the entire business
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Aswath Damodaran Equity Valuation Assets Liabilities Assets in Place Debt Equity Discount rate reflects only the cost of raising equity financing Growth Assets Figure 5.5: Equity Valuation Cash flows considered are cashflows from assets, after debt payments and after making reinvestments needed for future growth Present value is value of just the equity claims on the firm
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Aswath Damodaran Firm Valuation Assets Liabilities Assets in Place Debt Equity Discount rate reflects the cost of raising both debt and equity financing, in proportion to their use Growth Assets Figure 5.6: Firm Valuation Cash flows considered are cashflows from assets, prior to any debt payments but after firm has reinvested to create growth assets Present value is value of the entire firm, and reflects the value of all claims on the firm.
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Aswath Damodaran Cashflow to Firm EBIT (1-t) - (Cap Ex - Depr) - Change in WC = FCFF Expected Growth Reinvestment Rate * Return on Capital FCFF 1 2 3 4 5 Forever Firm is in stable growth: Grows at constant rate forever Terminal Value= FCFF n+1 /(r-g n ) n ........ Cost of Equity Cost of Debt (Riskfree Rate + Default Spread) (1-t) Weights Based on Market Value Discount at WACC= Cost of Equity (Equity/(Debt + Equity)) + Cost of Debt (Debt/(Debt+ Equity)) Value of Operating Assets + Cash & Non-op Assets = Value of Firm - Value of Debt = Value of Equity Riskfree Rate : - No default risk - No reinvestment risk - In same currency and in same terms (real or nominal as cash flows + Beta - Measures market risk XRisk Premium - Premium for average risk investment Type of Business Operating Leverage Financial Base Equity Premium Country Risk DISCOUNTED CASHFLOW VALUATION
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Aswath Damodaran Current Cashflow to Firm EBIT(1-t) : $ 404 - Nt CpX 23 - Chg WC 9 = FCFF $ 372 Reinvestment Rate = 32/404= 7.9% Expected Growth in EBIT (1-t) .2185*.2508=.0548 5.48% Stable Growth g = 4.17%; Beta = 1.00; Country Premium= 5% Cost of capital = 8.76% ROC= 8.76%; Tax rate=34% Reinvestment Rate=g/ROC =4.17/8.76= 47.62% Terminal Value 5 = 288/(.0876-.0417) = 6272 Cost of Equity 10.52 % Cost of Debt (4.17%+1%+4%)(1-.34) = 6.05% Weights E = 84% D = 16% Discount at $ Cost of Capital (WACC) = 10.52% (.84) + 6.05% (0.16) = 9.81% Op. Assets $ 5,272 + Cash: 795 - Debt 717 - Minor. Int. 12 =Equity 5,349 -Options 28 Value/Share $7.47 R$ 21.75 Riskfree Rate : $ Riskfree Rate= 4.17% + Beta 1.07 XMature market premium 4 % Unlevered Beta for Sectors: 0.95 FirmÕs D/E Ratio: 19% Embraer: Status Quo ($) Reinvestment Rate 25.08% Return on Capital 21.85% Term Yr 549 - 261 = 288 Avg Reinvestment rate = 25.08% Year 1 2 3 4 5 EBIT(1-t) 426 449 474 500 527 - Reinvestment 107 113 119 126 132 = FCFF 319 336 355 374 395 + Lambda 0.27
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advval - Valuation The Big Picture Aswath Damodaran...

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