BA103-F04-class20-apv(6slides) - Todays plan Adjusted...

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1 class #20 page 1 Adjusted Present Value (APV) class #20 class #20 page 2 Today’s plan Really understand this capital structure stuff Learn a second way to value a firm (APV) we have talked about WACC already Next class we will compare WACC, APV and multiples class #20 page 3 Office hours • For the remainder of the semester, I really want to help students learn the material • You may come to office hours at any of the following times (still in room F494): – Tuesdays: 12:45 - 1:45pm – Wednesdays: 9:30 - 10:30am class #20 page 4 Excel workbook • There is an excel workbook on Catalyst under “Handouts” • It uses the same numbers as the example in class today class #20 page 5 Let’s think about a company What is a company ? Let’s think about a factory that makes blue ball point pens The factory (hopefully) turns out profits every year class #20 page 6 Let’s think about a company (2) The company’s assets were initially paid for by investors (providers of capital) These providers of capital expect a return on their investment there can be debt holders there can be equity holders
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2 class #20 page 7 How much is this company worth? • We can value the factory (and its ability to produce cash) • We can also find out how much the “providers of capital” value their (individual) claims on the company class #20 page 8 Company value • Let’s suppose neither the debt nor the equity is traded • Therefore, valuing the right hand side is VERY difficult Assets Debt Equity ? ? class #20 page 9 Company value (2) • So let’s try to value the left hand side • To start with, we will assume our company is financed by all equity Assets Equity class #20 page 10 Company value (3) • Let’s suppose our assets are expected to turn out an operating profit of $1.0mm per year, every year, forever • The cash flows are not risk less • Our ability to produce and sell pens is subject to general economic conditions and our ability not to blow up our own factory (market and unique risk) • In fact, β A = 0.60 Assets Equity class #20 page 11 Company value (4) • The risk free rate = 8% and market risk premium = 7% • The EBIT is $1.00mm per year (forever) • Assume the tax rate is 35% • Therefore, the after-tax profits are $650,000 per year • (technical assumptions: depreciation = cap ex.
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This note was uploaded on 12/06/2011 for the course UGBA 103 taught by Professor Berk during the Fall '07 term at University of California, Berkeley.

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BA103-F04-class20-apv(6slides) - Todays plan Adjusted...

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