{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

controlshort - T h e V a lu e o f C o n tr o l S o m e G e...

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

View Full Document Right Arrow Icon
Aswath Damodaran 1 The Value of Control: Some General Propositions Aswath Damodaran Home Page : www.damodaran.com E-Mail : [email protected] Stern School of Business
Image of page 1

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

View Full Document Right Arrow Icon
Aswath Damodaran 2 Why control matters… When valuing a firm, the value of control is often a key factor is determining value. For instance, In acquisitions, acquirers often pay a premium for control that can be substantial When buying shares in a publicly traded company, investors often pay a premium for voting shares because it gives them a stake in control. In private companies, there is often a discount attached to buying minority stakes in companies because of the absence of control.
Image of page 2
Aswath Damodaran 3 What is the value of control? The value of controlling a firm derives from the fact that you believe that you or someone else would operate the firm differently (and better) from the way it is operated currently. The expected value of control is the product of two variables: the change in value from changing the way a firm is operated the probability that this change will occur In a private business or an acquisition, we can assume that the latter will be one (if we succeed in acquiring the business) and concentrate on the first component.
Image of page 3

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

View Full Document Right Arrow Icon
Aswath Damodaran 4 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 4
Aswath Damodaran 5 Current Cashflow to Firm EBIT(1-t) : 1414 - Nt CpX 831 - Chg WC - 19 = FCFF 602 Reinvestment Rate = 812/1414 =57.42% Expected Growth in EBIT (1-t) .5742*.1993=.1144 11.44% Stable Growth g = 3.41%; Beta = 1.00; Debt Ratio= 20% Cost of capital = 6.62% ROC= 6.62%; Tax rate=35% Reinvestment Rate=51.54% Terminal Value 10 = 1717/(.0662-.0341) = 53546 Cost of Equity 8.77% Cost of Debt (3.41%+..35%)(1-.3654) = 2.39% Weights E = 98.6% D = 1.4% Cost of Capital (WACC) = 8.77% (0.986) + 2.39% (0.014) = 8.68% Op. Assets 31,615 + Cash: 3,018 - Debt 558 - Pension Lian 305 - Minor. Int. 55 =Equity 34,656 -Options 180 Value/Share106.12 Riskfree Rate : Euro riskfree rate = 3.41% + Beta 1.26 X Risk Premium 4.25% Unlevered Beta for Sectors: 1.25 Mature risk premium 4% Country Equity Prem 0.25% SAP: Status Quo Reinvestment Rate 57.42% Return on Capital 19.93% Term Yr 5451 3543 1826 1717 Avg Reinvestment rate = 36.94% On May 5, 2005, SAP was trading at 122 Euros/share First 5 years Growth decreases gradually to 3.41% Debt ratio increases to 20% Beta decreases to 1.00 Year 1 2 3 4 5 6 7 8 9 10 EBIT 2,483 2,767 3,083 3,436 3,829 4,206 4,552 4,854 5,097 5,271 EBIT(1-t) 1,576 1,756 1,957 2,181 2,430 2,669 2,889 3,080 3,235 3,345 - Reinvestm 905 1,008 1,124 1,252 1,395 1,501 1,591 1,660 1,705 1,724 = FCFF 671 748 833 929 1,035 1,168 1,298 1,420 1,530 1,621
Image of page 5

Info icon This 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