Ch13 Show

Ch13 Show - CHAPTER 13 Corporate Valuation, ValueBased...

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1 CHAPTER 13 Corporate Valuation,  Value-Based  Management and Corporate Governance
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2 Topics in Chapter n Corporate Valuation n Value-Based Management n Corporate Governance
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3 Value =                        +                         +  ···  + FCF1 FCF2 FCF∞ (1 + WACC)1 (1 + WACC)∞ (1 + WACC)2 Free cash  flow (FCF) Market interest rates Firm’s business risk Market risk aversion Firm’s debt/equity mix Cost of debt Cost of equity Weighted  average cost of capital (WACC ) Net operating profit after  taxes Required  investments in operating capital = Intrinsic Value: Putting the Pieces Together
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4 Corporate Valuation: A company  owns two types of assets. n Assets-in-place n Financial, or nonoperating, assets  
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5 Assets-in-Place n Assets-in-place are tangible, such as  buildings, machines, inventory. n Usually they are expected to grow. n They generate free cash flows. n The PV of their expected future free  cash flows, discounted at the WACC, is  the value of operations.
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6 Value of Operations Vop = Σ t = 1 FCFt (1 + WACC)t
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7 Nonoperating Assets n Marketable securities n Ownership of non-controlling interest in  another company n Value of nonoperating assets usually is  very close to figure that is reported on  balance sheets.
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8 Total Corporate Value n Total corporate value is sum of: n Value of operations n Value of nonoperating assets
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9 Claims on Corporate Value n Debtholders have first claim. n Preferred stockholders have the next  claim. n Any remaining value belongs to  stockholders.
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10 Applying the Corporate  Valuation Model n Forecast the financial statements, as  shown in Chapter 12. n Calculate the projected free cash flows. n Model can be applied to a company that  does not pay dividends, a privately held  company, or a division of a company,  since FCF can be calculated for each of  these situations.
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11 Data for Valuation n FCF0 = $24 million n WACC = 11% n g = 5% n Marketable securities = $100 million n Debt = $200 million n Preferred stock = $50 million n Book value of equity = $210 million n Number of shares =n = 10 million
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12 Value of Operations: Constant  FCF Growth at Rate of g Vop = Σ t = 1 FCFt (1 + WACC)t = Σ t = 1 FCF0(1+g)t (1 + WACC)t
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13 Constant Growth Formula n Notice that the term in parentheses is  less than one and gets smaller as t gets  larger.  As t gets very large, term  approaches zero. Vop = Σ t = 1 FCF0 1 + WACC 1+ g t
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14 Constant Growth Formula  (Cont.) n The summation can be replaced by a  single formula: Vop = FCF1 (WACC - g) = FCF0(1+g) (WACC - g)
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15 Find Value of Operations Vop = FCF0 (1 + g) (WACC - g) Vop = 24(1+0.05) (0.11 – 0.05) = 420
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16 Total Value of Company (VTotal)    Voperations $420.00  + ST Inv.    100.00    VTotal $520.00 
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Ch13 Show - CHAPTER 13 Corporate Valuation, ValueBased...

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