When using the straight perpetuity method the forecast period must be chosen to

When using the straight perpetuity method the

This preview shows page 28 - 33 out of 42 pages.

When using the straight perpetuity method, the forecast period must be chosen tocoincide with the period of time investors believe a company will create value withtheir current strategy - the value growth duration (VGD)°This can be different than standard forecast periods, or management's assessment oftheir competitive advantage period°Factors to consider when estimating the forecast period-Proprietary technologies-Patented products-Product life cycles-Established brands-Distribution channels-Company strategyFORECAST PERIOD (C)Source: APT!, Value Line 1Q/2000, L.E.K. AnalysisIndustry Value Growth DurationsValue Growth DurationIndustry(Using Straight Perpetuity)Banking1-5 yearsFood Products3-10 yearsFast Foods3-15 yearsPharmaceutical15+ yearsBeer and Wine2-20 yearsAirlines3-10 years
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28The DCF framework discounts free operating cash flows to estimate Acme sshareholder valueTHE DISCOUNTED CASH FLOW FRAMEWORKMarket Valueof Debt and OtherObligations$10.8Shareholder ValueTotal$100.0(C)Forecast PeriodResidual PeriodCumulativePresent Valueof Cash Flow$32.1++=-=Present Valueof ResidualValue$77.6Non OperatingAssets$1.0Corporate Value$110.820032004 2005200620072008 - - - - - - - -Residual Value$127.7CFCFCFCFCF12345(A)(B)(D)(E)($000)
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29You can calculate a business value using theShareholder Value” sheetTHE DISCOUNTED CASH FLOW FRAMEWORKShareholder Value CalculatorCompany Name:Acme CorporationScenario:Base CaseUnits:$ millionsShareholder Value$100.0Shareholder Value Per Share$10.00Value Growth Duration (Years)5Residual Value Approach or ValueNOPAT/KValue Drivers:200220032004200520062007Historical Sales$250.0Sales Growth (G)12.00%12.00%11.00%10.00%9.00%Operating Profit Margin (P)6.00%7.00%7.00%6.00%5.00%Operating Cash Tax Rate (T)36.00%36.00%36.00%36.00%36.00%Incremental Fixed Capital Investment (F)5.00%5.00%5.00%5.00%5.00%Incremental Working Capital Investment (W)10.00%10.00%10.00%10.00%10.00%Cost of Capital (K)10.46%10.46%10.46%10.46%10.46%Non-Operating Assets$1.00$1.00$1.00$1.00$1.00Market Value of Debt$10.80$10.80$10.80$10.80$10.80Number of Shares Outstanding10.00010.00010.00010.00010.000Operating Cash Flows & Value:Sales$250.0280.0313.6348.1382.9417.4Operating Costs263.2291.6323.7359.9396.5Operating Profit16.822.024.423.020.9Cash Taxes6.07.98.88.37.5Net Operating Profit After Taxes (NOPAT)10.814.015.614.713.4Fixed Capital Investment1.51.71.71.71.7Working Capital Investment3.03.43.43.53.4Cash Flow (CF)6.39.010.49.58.2Discount Factor0.90530.81960.74200.67170.6081Present Value (PV) of CF5.77.47.76.45.0Cumulative PV of CF5.713.020.827.132.1Residual Value (NOPAT Perpetuity Method)127.7PV of Residual Value77.6Non-Operating Assets1.0Corporate Value110.8Market Value of Debt10.8Shareholder Value (SHV)$100.0Share Price$10.00
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30What long-term expectations explain Acme s $100 per share stock price?Acme CorporationValue Driver2002 SalesForecast PeriodSales GrowthProfit MarginsCash Tax RateIncremental FixedCapital InvestmentIncremental WorkingCapital InvestmentCost of CapitalCash Flows$25.4M84.4M1.0M(10.8M)$100.0MPV OperatingCash FlowsPV Residual ValuePV InvestmentsDebt and ObligationsShareholder Value$11.00$10.00Shareholder ValuePer ShareStock Price$250.0M5 years10.8%5.4%36.0%5.0%10.0%10.5%THE DISCOUNTED CASH FLOW FRAMEWORK
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31TheSensitivity Analysis” sheet identifies the value drivers with the greatestimpact on valueTHE DISCOUNTED CASH FLOW FRAMEWORKSensitivity AnalysisCompany Name:Acme CorporationScenario:Value LineValue DriverValueMultiplicative ModifierAdditiveModifierLow Range
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