Distributed To What is Valued Enterprise FCFWACC FCF WACC Providers of DE

Distributed to what is valued enterprise fcfwacc fcf

This preview shows page 173 - 180 out of 187 pages.

Distributed To What is Valued? Enterprise (FCF/WACC) FCF WACC Providers of D&E Operations APV FCF, ITS (1) K u for FCF; K u or K d for ITS Providers of D&E Operations Equity DCF FCFE K e Equity holders Common equity Dividend Expected Dividends to Stockholders K e Equity holders Common equity Fall 2020 173 DCF Models (1) ITS = i x t
COMPARISONS OF DCF MODELS Fall 2020 174 DCF Models Enterprise DCF APV Equity Cash Flow Dividend Discount Cash Flow Discount Rate Interest Tax Shield Recommende d Applications EBIT – Taxes on EBIT = NOPLAT + Depreciation – Capex – Increase in operating working capital WACC = K e (E/V) + K d (1 – t)(D/V) In the discount rate Constant Debt/Capital + Constant tax rate FCF calculated as in Enterprise model ITS calculated separately K u for FCF; K u or K d for ITS Calculated separately When amount of debt in capital structure is specified in terms of dollars as opposed to a percentage of firm value Net Income + Depreciation Capex Incr. in operating w/c Increase in nonoper. assets + Incr. in debt and pfd. stock K e In Cash Flows Banks Dividends K e In Cash Flows Utilities, REITs, Stable growth companies
ECONOMIC PROFITS MODEL Model estimates the value of operations by discounting the expected economic profits by WACC and then adding book value of invested capital in place at the beginning of the first year of the forecast. Value= IC 0 + PV of future Economic Profits Where IC 0 = book value of IC beginning of explicit forecast period Definition of economic profits in any year: Economic Profits = (ROIC – WACC) x IC = NOPLAT – (IC x WACC) Where IC = invested capital at beginning of year Formulas for stable company with constant growth rate and constant ROIC going forward: V 0 = FCF 1 = IC 0 + IC 0 (ROIC – WACC) = NOPLAT 1 (1 – g/ROIC) WACC – g WACC – g WACC – g DCF model Economic Profits model McK Value Driver model Economic Profits is often called EVA (Economic Value Added) Fall 2020 175 DCF Models
MULTI-STAGE ECONOMIC PROFITS MODEL FOR UNEVEN GROWTH Value = current book value of IC + PV of future Economic Profits in explicit forecast period + PV of TV TV = Economic Profits T+1 WACC – g Where Economic Profits T is Economic Profits in last year of explicit forecast period Choice of ROIC – WACC spread for TV computation takes into account same considerations as in cash flow models (zero or some excess return to be maintained indefinitely) Fall 2020 176 DCF Models
VALUATION USING ECONOMIC PROFITS MODEL Actual Explicit Forecast Period 2019 2020 2021 2022 2023 2024 ROIC 20% 18% 16% 14% 11% 9% −WACC 9% 9% 9% 9% 9% 9% = Spread 9% 7% 5% 2% 0% x IC (1) 575 662 734 786 825 = Economic Profits 52 46 37 16 0 . (1) Beginning of year values Assumes ROIC = WACC in 2024 and thereafter , so Economic Profits in 2024 = 0 and TV = 0! IC forecasted as % of sales(in effect, we do this in Enterprise DCF model when we project future W/C needs, capex and depr. as % of sales Fall 2020 177 DCF Models
VALUATION USING ECONOMIC PROFITS MODEL – cont. VALUATION PV of Economic Profits, 2020-2024 @ 9% $126 PV of TV (ROIC = WACC) 0 IC, beg. year 2020 575 Value Operations $701 Value of debt (a given) 210 Value of equity 12/31/19 $491 Fall 2020 178 DCF Models
ECONOMIC PROFITS MODELS Condition needed for reasonable estimate of intrinsic value: Stable capital structure in market value terms

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture