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Corporate Finance and Controlling M4

Master of Business Administration & Engineering

Prof. Katarina Adam

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28.04.2013

Table of Contents – International Controlling
Course Overview and Topics
1. International Controlling - Context 1. Terminology
2. IFRS vs. HGB 3. Basel III and its effects

4. International Harmonization and Standardization 5. Organizational Design of International Corporations 6. Organizational Integration of the Finance Function 7. Corporate Governance and Ethics

2. Corporate Finance 1. Basic of Investment Criteria: Net present Value, IRR 2. Long-term Finance: equity finance, debt finance, leasing 3. Economic Value Add (EVA) 4. Weighted Average Cost of Capital (WACC) 5. Venture Capital, IPO, 6. Stocks and Stock Evaluation

3. Cash Planning & Liquidity Management 1. Cash Flow Management 2. Working Capital Management 3. Finance Analysis and Planning 4. Lifecycle Costing 4. Managerial Accounting (Controlling) 1. Overview 2. Product Costing Methods a. Process Costing b. Activity-based Costing c. Job-Order Costing 3. Project Controlling 4. Value Chain Controlling 5. Profit Center Reporting 6. Segment Reporting 7. Transfer Pricing 5. Risk Management 1. Defining Risk 2. Types of Risk 3. Portfolio Theory and the Capital Asset pricing Model (CAPM) 4. Risk Management

Prof. Katarina Adam

2

28.04.2013

EVA => Economic Value Added Prof.04. Katarina Adam 3 28.2013 .

04. 3.2013 . Katarina Adam 4 28. Adjusted Present Value (APV) Flows to Equity (FTE) WACC Prof.Three Methods of Valuation with Leverage 1. 2.

Example: Celebrities Travel Service Corporation Assume: Tc = 30% r0 = 11.04.32% (cost of unlevered equity) rd = 10% EBIT = $145.500 per year in perpetuity (operating cash flow) Prof.2013 . Katarina Adam 5 28.

Katarina Adam 6 28.Book Value Balance Sheet Example .04.2013 . thousands) 150 250 Debt 750 650 Equity 900 900 Total liabilities Prof.Celebrities Travel Servicecontinued Balance Sheet (Book Net Working Capital Fixed Assets Total assets Value.

30 250 . Prof.04. Katarina Adam 7 28.Assume MM Theory According to the MM Theory and Proposition I: VL VU TC D TC D .000 So the Value of Celebrities Travel Service Ventures increases by $75.2013 .000 due to the debt tax shield and this increase is added to the equity value of the firm.000 75.

04.2013 . Katarina Adam 8 28.Market Value Balance Sheet Balance Sheet (Market Value. Net Working Capital 150 Fixed Assets 825 Total assets 975 thousands) 250 Debt 725 Equity 975 Total liabilities Prof.

Adjusted Present Value Approach  What is the value of an all-equity financed firm (or project)?  What is the value of any and all additional side effects to financing? Prof.04. Katarina Adam 9 28.2013 .

3)]/.500 Value of the all-equity financed firm = (EBIT)(1 .Tc )/r0 = [(145.04. Katarina Adam 10 28.2013 .500) (1 .000 Prof.1132 = $900.All-Equity Value (APV) The all equity financed return is 11.32% The EBIT is $145..

30 ($250.2013 .04.Additional Financing Side Effect (APV) Present Value of the Tax Shield from Debt Financing = Tc (rD D)/rD = TcD {MM Prop.000 Prof. I} = . Katarina Adam 11 28.000) = $75.

04.000 = $975.000 Prof.Valuation of Celebrities Travel Seervice Corporation (APV) Adjusted Present Value of the firm is = NPV (under all-equity financing) + Present Value of financing effects = $900.000 + $75.2013 . Katarina Adam 12 28.

Flows to Equity Approach (also called Equity Residual Method)  Estimate cash flows to levered equity  Estimate return on equity  Value the after-tax cash flows to levered equity at the required return on levered equity Prof.04.2013 . Katarina Adam 13 28.

350 per year Prof.10)(250.04..30) = $84.000)] (1 .rDD)(1 .2013 .(.Estimation of Cash Flows (FTE) Annual after-tax cash flow to levered equity = (EBIT .Tc ) = [(145. Katarina Adam 14 28.500 .

1132 .1132 + (1 .T ) (D/E) (r0 .Estimate of Return on Levered Equity (FTE) rE = r0 + (1 .3) (250/725) (.64% Prof.10) = .. II} = .. Katarina Adam 15 28.rD) {MM Prop.1164 = 11.04.2013 .

000 (approx.000 = $975.350/.000 Prof.Valuation of Celebrities Travel Service Corporation (FTE) Levered Equity Value = Cash Flow to Equity/rE = $84. Katarina Adam 16 28.000 + $725.) V=D+E V = $250.1164 = $725.2013 .04.

After Tax WACC Tax Adjusted Formula WACC D (1 Tc ) V 17 rD E V rE 28.2013 Prof.04. Katarina Adam .

Katarina Adam 725 .10 975 .1045 10.1164 975 18 28.30) .After Tax WACC WACC D (1 Tc ) V rD E V rE 250 WACC (1 .2013 .04.45% Prof.

04.30 ) .2013 Prof. Katarina Adam .Valuation of Celebrities Skis Ventures Corporation (WACC) EBIT is $145.000 19 28.1045 $975 .500 (1 .500 per year in perpetuity Value EBIT (1 TC ) WACC $145 .

Prof.2013 .04.Formula for APV APV NPV (all equity) UCFt (1 r0 ) t Financing Effects PV of Financing Effects t 0 where UCF is the after-tax cash flow to unlevered equity and r0 is the required return on unlevered equity. Katarina Adam 20 28.

Prof.2013 . Katarina Adam 21 28.Formula for FTE Levered Equity Value t 0 LCFt (1 rE ) t where LCF is the after-tax (and after interest) cash flow to levered equity and r is the required return on levered equity.04.

Formula for WACC Levered Asset Value t ATCFt t ( 1 WACC ) 0 where ATCF is the after-tax cash flow to both debt and (levered) equity and WACC is the weighted-average cost of capital. Prof.04.2013 . Katarina Adam 22 28.

Summary for the Application of the Three Methods of Valuation  WACC and FTE assume that the firm’s debt ratio is approximately constant for the firm (or the life of the project)  Used in most cases of valuation  APV assumes that the level of debt is known over the life of the project or firm.2013 .  Good for LBOs. Katarina Adam 23 28. Real Options.04. Leases. and other cases Prof.