N stockholders in asian latin american and many

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n Stockholders in Asian, Latin American and many European companies have little or no power over the managers of the firm. In many cases, insiders own voting shares and control the firm and the potential for conflict of interests is huge. Would you discount the value that you estimated to allow for this absence of stockholder power? q Yes q No.
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Aswath Damodaran 15 Dealing with Operating Leases: A Valuation of the Home Depot n The Home Depot does not carry much in terms of traditional debt on its balance sheet. However, it does have significant operating leases. n When doing firm valuation, these operating leases have to be treated as debt. This, in turn, will mean that operating income has to get restated.
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Aswath Damodaran 16 Operating Leases at The Home Depot in 1998 n The pre-tax cost of debt at the Home Depot is 5.80% Year Commitment Present Value 1 $ 294.00 $277.88 2 $ 291.00 $259.97 3 $ 264.00 $222.92 4 $ 245.00 $195.53 5 $ 236.00 $178.03 6 and beyond $ 270.00 $1,513.37 n Debt Value of leases = $ 2,647.70
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Aswath Damodaran 17 Other Adjustments from Operating Leases Operating Lease Operating Lease Expensed converted to Debt EBIT $ 2,661mil $ 2,815 mil EBIT (1-t) $1,730 mil $1,829 mil Debt $1,433 mil $ 4,081 mil
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Aswath Damodaran 18 Current Cashflow to Firm EBIT(1-t) : 1,829 - Nt CpX 1,799 - Chg WC 190 = FCFF <160> Reinvestment Rate =108.75% Expected Growth in EBIT (1-t) .8862*.1637= .1451 14.51 % Stable Growth g = 5%; Beta = 0.87; D/(D+E) = 30%;ROC=14.1% Reinvestment Rate=35.46% Terminal Value 10 = 4806/(.0792-.05) = 164,486 Cost of Equity 9.79% Cost of Debt (5%+ 0.80%)(1-.35) = 3.77% Weights E = 95.55% D = 4.45% Discount at Cost of Capital (WACC) = 9.79% (0.9555) + 3.77% (0.0445) = 9.52% Firm Value: 68,949 + Cash: 62 - Debt: 4,081 =Equity 64,930 -Options 2,021 Value/Share $42.55 Riskfree Rate : Government Bond Rate = 5% + Beta 0.87 X Risk Premium 5.5% Unlevered Beta for Sectors: 0.86 Firm’s D/E Ratio: 4.76% Historical US Premium 5.5% Country Risk Premium 0% The Home Depot: A Valuatio Reinvestment Rate 88.62% Return on Capital 16.37% EBIT(1-t) - Reinv FCFF 2095 1857 238 2399 2126 273 2747 2434 313 3146 2788 358 3602 3192 410 4125 3655 469 4723 4186 538 5409 4793 616 6194 5489 705 7092 6285 807
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Aswath Damodaran 19 Dealing with R&D: Bristol Myers n Bristol Myers, like most pharmaceutical firms, has a significant amount of research and development expenses. These expenses, though treated as operating expenditures, by accountants, are really capital expenditures. n When R&D expenses are reclassified as capital expenditures, there is a ripple effect on the following: Operating income Capital Expendiutures Depreciation and Amortization Reinvestment Rates Return on Capital
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Aswath Damodaran 20 Converting R&D Expenses to Capital Expenses Year R&D Expense Unamortized portion Amortization this year Current 1939.00 1.00 1939.00 -1 1759.00 0.90 1583.10 $175.90 -2 1577.00 0.80 1261.60 $157.70 -3 1385.00 0.70 969.50 $138.50 -4 1276.00 0.60 765.60 $127.60 -5 1199.00 0.50 599.50 $119.90 -6 1108.00 0.40 443.20 $110.80 -7 1128.00 0.30 338.40 $112.80 -8 1083.00 0.20 216.60 $108.30 -9 983.00 0.10 98.30 $98.30 -10 881.00 0.00 0.00 $88.10 Value of Research Asset = $8,214.80 Amortization this year = $1,237.90
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Aswath Damodaran 21 The Consequences of a Research Asset n Amortization of asset for current year = $ 1,238 million n Adjustment to Operating Income : Add back the R& D Expenses $1,939 million Subtract out the amortization $1,238 million Increase in Operating Income $ 701 million (Increase) n Tax Effect of R&D Expensing The entire R&D expense of $1,939 million is tax-deductible, rather than just the amortization of $1,238 million This creates a tax benefit that can be computed as follows: Additional tax benefit of expensing = (1939-1238) (.35) = $ 245 million
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