controlshort

controlshort - Aswath Damodaran 1 The Value of Control:...

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Unformatted text preview: 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 Aswath Damodaran 2 Why control matters… When valuing a frm, the value oF control is oFten a key Factor is determining value. ¡or 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. Aswath Damodaran 3 What is the value of control? The value of controlling a Frm derives from the fact that you believe that you or someone else would operate the Frm 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 Frm 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 Frst component. 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 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...
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This note was uploaded on 12/01/2011 for the course FINANCE 350 taught by Professor Aswath during the Summer '10 term at NYU.

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controlshort - Aswath Damodaran 1 The Value of Control:...

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