WEBSITE: EQUITY VALUATION: MODELS FROM LEADING INVESTMENT BANKS

The material on this website is for educational purposes only. Please do not make investment decisions based on the information provided on this webpage. For the readers of the book Equity Valuation: Models from Leading Investment Banks, we provide three different models on this website which can be used to value equities. Please note that the models are based on a number of assumptions which might not hold in reality. The models and its assumptions are discussed in detail in Equity Valuation: Models from Leading Investment Banks.

MODEL 1:

MC-FCFF model (MATLAB Version):

The Monte Carlo Free Cash Flow (MC-FCFF) model programmed in MATLAB can be used to value an unlimited number of stocks. Running the model requires that MATLAB and the MATLAB version of the MC-FCFF model are installed properly on your PC. The manual MonteCarloFCFF.doc explains in detail how to install the MCFCFF program on your PC. If the MATLAB version of the MC-FCFF is properly installed on your PC, you can run MC-FCFF models for an unlimited number of stocks. The inputs of the model are briefly explained in the manual MonteCarloFCFF.doc. For a more detailed explanation of the model and its assumptions please refer to Part I and Part II of Equity Valuation: Models from Leading Investment Banks.

We already entered input data for 40 stocks which are identified below by their Bloomberg ticker. Please note that the inputs of a valuation model are highly subjective. Please also note that we do not update the inputs. However, you can change the inputs of the model for each stock and then run Monte Carlo simulations for each stock based on your assumptions using the MC-FCFF model.

AG AKS ANA ASEI BBY BGC BID BSY BWIN CBK

CC CCI CPR CQB DELL ELNK EZPW FCC GOOG LGBT

LH LTO NRE1V NTRI ORAT PEP PLA PTV REDF RIMM

SAS SBUX SZU TDY TIE UHAL VK VMI WEN WW

If MATLAB and the MC-FCFF model are properly installed on your PC, you can find the models by typing in your MATLAB command window: >> loadModels >> Models

You can open the Model for GOOG, or Google, for example by typing in MATLAB: >>Model.GOOG=MonteCarloFCFF(Model.GOOG)

In Part II of Equity Valuation: Models from Leading Investment Banks, we explain in detail how to model Baidu.coms fundamental value per share. Baidu is the leading internet search company in China. The MATLAB version of our MC-FCFF model allows you to model fundamental value per share of an unlimited number of companies. We recommend that you use stock codes, e.g. Bloomberg tickers, when

entering input data for a new stock. Baidus Bloomberg ticker is BIDU. To model Baidus share price simply type in MATLAB: >>Model.BIDU=MonteCarloFCFF()

This opens an input mask in MATLAB. You can now enter the input data for Baidu discussed in Part II of Equity Valuation: Models from Leading Investment Banks to run your first Monte Carlo FCFF model. However, we recommend that you input your own assumptions for Baidu. If you have troubles running the program, please refer to the manual MonteCarloFCFF.doc. We used MATLAB Version 7.3 (R2006b) to program the MC-FCFF model. If you have questions about MATLAB, please visit: www.mathworks.com

MODEL 2:

MC-FCFF model (Excel Version):

In the Excel file Baidu.xls you find Excel models to determine the fundamental value per share of Baidu.com. The spreadsheet Baidu.xls contains five sheets:

(1) The Excel sheet Standard FCFF model 2005 in Baidu.xls explains how analysts at leading investment banks valued Baidu.com in Fall 2005. The model is explained in detail in Part II of Equity Valuation: Models from Leading Investment Banks. On average, analysts believed in fall 2005 that a share of Baidu.com is worth USD 35. Of course, Baidus shares today trade at much higher prices, mainly because Baidus revenues increased more than analysts predicted in fall 2005.

(2) The Excel sheet Standard FCFF model 2007 in Baidu.xls explains how analysts at leading investment banks valued Baidu.com in early 2007 after the company reported FY 2006 results. The model is explained in detail in Part II of Equity Valuation: Models from Leading Investment Banks. On average, analysts believed in early 2007 that a share of Baidu.com is worth USD 135. In 2005 - 2007, analysts have increased their share price targets dramatically for Baidu.com, mainly because Baidus revenues increased much stronger than earlier predicted in fall 2005.

(3) The Excel sheet MC-FCFF model 2007 (univariate) in Baidu.xls allows you to run Monte Carlo simulations to model Baidus fundamental value per share. The main driver of Baidus intrinsic value is its revenue growth. The model allows you to enter different input distributions based on your revenue growth assumptions for Baidu.com. The model is explained in detail in Part II of Equity Valuation: Models from Leading Investment Banks.

(4) The Excel sheet MC-FCFF 2007 (multivariate) in Baidu.xls allows you to enter your assumptions for multiple share price drivers of Baidu.com: - Revenue growth - EBIT margins - Tax rate - Depreciation and amortization (D&A) - Change in net working capital (NWC), and - Capital expenditures (CAPEX) The model is explained in detail in Part II of Equity Valuation: Models from Leading Investment Banks.

(5) The Excel sheet Invested Capital in Baidu.xls explains how we determined Baidus invested capital.

To run a sophisticated Monte Carlo simulation in Excel, you need a Monte Carlo addinn. We recommend Palisades @Risk software to run Monte Carlo simulations in Excel. @Risk is a sophisticated add-in to Microsoft Excel. The software enables Excel users to run simulations in Microsoft Excel, an operating environment most people are familiar with. To use @Risk, you first have to install the software. If you do not have @Risk 4.5, you can easily download the software from Palisades homepage: www.palisade.com. On palisades website you will find a full evaluation copy of @Risk for free which can be used for a limited period of time. The user guide @Risk: Guide to Using on Palisdes website explains the full functionality of @Risk in detail. We strongly recommend @Risks online tutorial. Once @Risk is properly installed on your PC, you can start the online tutorial by selecting: StartMenu/Programs/PalisadeDecisonTools/Tutorial/@RiskTutorial/Risk45.html. Please note that you have to install @Risk properly on your PC to run the Excel sheets: MC-FCFF model 2007 (univariate) MC-FCFF model 2007 (multivariate)

The three other Excel sheets in Baidu.xls do not require @Risk. All models and the use of @Risk are explained in detail in Part II of Equity Valuation: Models from Leading Investment Banks.

MODEL 3:

Leverage Buyout (LBO) Model

The model Conti LBO.xls explains in detail how analysts at UBS Investment Bank valued Continental AG in late July 2006. Investors of publicly listed companies can benefit from leveraged buyouts as private equity investors typically pay a control premium when they take a public company private. Many leading investors and investment banks have developed LBO models to screen for potential LBO candidates. LBO models are based on a number of subjective assumptions, including: Transaction details (control premium) Financial structure (leverage / cost of debt) Operational assumptions Debt schedule (use of free cash flows and length of interim period) Final cash flows and exit multiple

These assumptions and the valuation of Continental AG are discussed in detail in Part VI of Equity Valuation: Models from Leading Investment Banks.