BrazilJune04 - Valuation The Big Picture A s w a th D a m o...

Info icon This preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
Aswath Damodaran 1 Valuation The Big Picture Aswath Damodaran http://www.damodaran.com
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Aswath Damodaran 2 Valuing a Firm The value of the firm is obtained by discounting expected cashflows to the firm, i.e., the residual cashflows after meeting all operating expenses and taxes, but prior to debt payments, at the weighted average cost of capital, which is the cost of the different components of financing used by the firm, weighted by their market value proportions. where, CF to Firm t = Expected Cashflow to Firm in period t WACC = Weighted Average Cost of Capital Value of Firm = CF to Firm t (1+ WACC) t t =1 t=n !
Image of page 2
Aswath Damodaran 3 Cashflow to Firm EBIT (1-t) - (Cap Ex - Depr) - Change in WC = FCFF Expected Growth Reinvestment Rate * Return on Capital FCFF 1 FCFF 2 FCFF 3 FCFF 4 FCFF 5 Forever Firm is in stable growth: Grows at constant rate forever Terminal Value= FCFF n+1 /(r-g n ) FCFF 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 X Risk Premium - Premium for average risk investment Type of Business Operating Leverage Financial Leverage Base Equity Premium Country Risk Premium DISCOUNTED CASHFLOW VALUATION
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Aswath Damodaran 4 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 X Mature market premium 4 % Unlevered Beta for Sectors: 0.95 Firm’s 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 X Country Equity Risk Premium 7.67% Country Default Spread 6.01% X Rel Equity Mkt Vol 1.28 On October 6, 2003 Embraer Price = R$15.51 $ Cashflows
Image of page 4
Aswath Damodaran 5 Current Cashflow to Firm EBIT(1-t) : 504 - Nt CpX 146 - Chg WC 124 = FCFF $ 233 Reinvestment Rate = 270/504= 53.7% Expected Growth in EBIT (1-t) .537*.1624=.0872 8.72% Stable Growth g = 4.70%; Beta = 1.00; Country Premium= 5% Cost of capital = 9.94% ROC= 9.94%; Tax rate=34% Reinvestment Rate=g/ROC =4.70/9.94= 47.31% Terminal Value 5 = 641/(.0994-.047) = 12,249 Cost of Equity 11.41% Cost of Debt (4.70%+2%+4%)(1-.34) = 7.06% Weights E = 84% D = 16% Discount at $ Cost of Capital (WACC) = 11.41% (.84) + 7.06% (0.16) = 10.70% Op. Assets $ 6546 + Cash: 743 - Debt 1848 - Minor. Int. 137 =Equity 5304 -Options 0 Value/Sh $137.62 R$ 433/sh Riskfree Rate : $ Riskfree Rate= 4.70% + Beta 0.87 X Mature market premium 4 % Unlevered Beta for Sectors: 0.77 Firm’s D/E Ratio: 19.4% Ambev: Status Quo ($) Reinvestment Rate 53.7% Return on Capital 16.24% Term Yr 1217 - 576 = 641 + Lambda 0.41 X Country Equity Risk Premium 7.87% Country Default
Image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern