Professional Documents
Culture Documents
Terminal
value
(TV)
Company
PV (CF) C1/ C1/ C1/ C1/ (C1+TV) enters
(1+r)1 (1+r)1 (1+r)1 (1+r)1 /(1+r)1 steady
Sum of EV EV of the company as of the state
PV(CF) end of year 2007
Example: Kraft (NYSE: KFT)
• Kraft Foods
• Remember, before we jump into Excel:
– What does Kraft do?
– Market position (market share, revenue, etc)?
– Established or emerging industry?
– Level of competition?
– Growth opportunities?
– Quality management?
• Excel demonstration
VALUING A FIRM
Cashflow to Firm Expected Growth
EBIT (1-t) Reinvestment Rate
- (Cap Ex - Depr) * Return on Capital
Firm is in stable growth:
- Change in WC
Grows at constant rate
= FCFF
forever
Riskfree Rate :
- No default risk Risk Premium
- No reinvestment risk Beta - Premium for average
- Measures market risk X
- In same currency and + risk investment
in same terms (real or
nominal as cash flows
Type of Operating Financial Base Equity Country Risk
Business Leverage Leverage Premium Premium
Q3 FY2006
Non-recurring items 0 0 0
Recommendation 0 0 0
Daily Q/ V WS.C O [B ar, MA 20, V OL]
[Professional] 8/15/2006 - 12/1/2006 (GMT)
P rice
Q/VWS.CO, Last Trade, Bar
11/29/2006 217.00 220.00 215.75 219.00 DKK
Q/VWS.CO, Close(Last Trade), MA 20
11/29/2006 185.38 220
215
210
205
200
195
190
185
180
175
170
165
160
155
150
Vo l
Q/VWS.CO, Last Trade, VOL
11/29/2006 20,579
12M
8M
4M
0
21 28 04 11 18 25 02 09 16 23 30 06 13 20 27
A ug 06 S ep 0 6 Oct 0 6 No v 0 6
Industry Implications
• Everyone in the industry knows how to do a DCF
• Every bank, every analyst uses , uses similar
assumptions, studies the same theories in
school, but bankers and analysts come up with
extremely different values and recommendations
(Buy/Sell/Hold) for the same company
• Interesting trends
• The industry always comes back to two
questions:
– What percentage of a banker/analyst’s performance is
due to luck vs. skills
– Is past performance a good indicator of future
performance?
So is it all just a crapshoot?
• Experience leads to better valuation
• Valuation is an art, not a science
– The key is to develop your own framework and style
• Understanding of the business is the key
• Wall Street often gets it wrong?
Discounted Cash Flow Valuation
• DCF is the cornerstone of valuations and is the "analytically most correct"
way
– In reality: several "fudge-factors" and disagreement between practitioners
• Robust in valuing anything that gives cash-flow in the future given
assumptions
– Bonds, derivatives, companies, etc.
• Valuation of future cash that the investor will get from holding the firm. At the
end of the day:
"Cash is King"
"Cash is fact – profit is an opinion"
"Earnings do not pay the bills"
Expected
CF1 CF2 CF3 CF4 cashflow
Value ...
(1 r ) (1 r ) (1 r ) (1 r )
1 2 3 4
Year
Discount rate
15 15 15 15 15 15 15 15
Value ... ... 150
(1 .1) (1 .1) (1 .1) (1 .1)
1 2 3 4
1.10 1.21 1.33 1.46
Discounted Cash Flow Valuation
in 4 Steps
• Step 1 Compile information
– Historical accounts (last 2-3 years). Review
sales, margins, CAPEX, WC ratios, notes etc.
– Research business, strategy, products,
customers, markets, competition etc.
– Industry and environment forecasts (official
forecasts, KB research, news etc.)
– Discuss main risk factors
– Look up information on similar companies
Discounted Cash Flow Valuation
• Key Drivers of Cashflow
– Sales growth rates
• Market, strategic considerations, pricing, economy, competition
– EBITDA margin
• Cost development, fixed vs. floating costs etc.
– Capital expenditure (CAPEX)
• Maintenance and investment CAPEX
– Working capital requirement
• Must support current operations and strategy (inventories,
receivables & payables)
– Cash tax rate
• A specialist area (legislation, relief from previous tax loss, deferred
tax)
• Model also highly sensitive to
– Discount factor
– Terminal value growth
År 1997 1998 1999 2000 2,001 2,002 2,003
Resultaträkning:
Nettoomsättning: 118,955 162,521 182,923 191,567 291,643 426,310 503,418
Övriga intäkter 6,349 13,973 960 21,039 80 - -
Rörelsens kostnader: 110,018 155,205 159,624 180,371 246,558 359,321 419,849
Bruttoresultat: 15,286 21,289 24,259 32,235 45,165 66,989 83,569
Avskrivningar: 2,756 3,696 3,491 6,184 6,335 6,841 6,849
Rörelseresultat(EBIT) 12,530 17,593 20,768 26,051 38,830 60,148 76,720
Finansiella intäkter: 1,022 984 1,456 2,489 2,137 4,607 9,253
Finansiella kostnader: 211 270 465 880 1,628 3,354 7,051
Resultat e fin poster: 13,341 18,307 21,759 27,660 39,339 61,401 78,922
Övriga avsättningar: - - - 3,574 - - 142 - 96
Resultat före skatt: 13,341 18,307 21,759 24,086 39,339 61,543 79,018
Skatt: 3,916 5,151 4,929 7,886 11,601 21,113 25,703
Balansräkningen:
Omsättningstillgångar:
Kassa, bank - 13,151 32,916 42,450 87,401 130,439 170,479
Kundfordringar - 23,436 63,340 60,096 85,270 138,004 154,999
Varulager - 4,096 5,351 3,639 15,909 16,393 11,719
Övriga OT - 27,564 19,305 38,317 18,252 11,363 26,437
Totala OT - 68,247 120,912 144,502 206,832 296,199 363,634
Anläggningstillgångar:
Maskiner o inventarier - 9,198 11,422 11,580 13,925 17,442 14,352
Övriga AT - 664 671 18,834 28,089 47,827 94,542
Totala AT - 9,862 12,093 30,414 42,014 65,269 108,894
Totala tillgångar - 78,109 133,005 174,916 248,846 361,468 472,528
Kortfristiga sk ulder
Leverantörsskulder - 6,311 11,395 6,926 21,256 34,301 14,260
Skatteskulder - 3,480 2,704 5,186 6,030 7,748 13,100
Räntebärande KS - 2,380 21,148 16,183 9,004 19,818 47,955
Övriga KS - 9,733 11,838 21,006 31,447 55,412 118,126
Totala KS - 21,904 47,085 49,301 67,737 117,279 193,441
Långfristiga sk ulder
Checkkredit - - 1,902 718 1,601 - -
Räntebärande lån - 2,701 1,842 2,956 3,379 22,721 57,626
Övriga LS - - 315 5,460 32,987 45,310 -
Totala LS - 2,701 4,059 9,134 37,967 68,031 57,626
Eget k apital
Aktiekapital - 20,801 26,250 27,301 32,761 32,761 33,077
Bundna reserver - 11,538 24,037 48,184 52,059 59,568 63,583
Balanserad resultat - 5,324 10,481 18,238 22,144 31,901 56,055
Årets resultat - 12,868 16,470 16,200 27,738 40,430 53,315
Totalt EK - 50,531 77,238 109,923 134,702 164,660 206,030
Totala sk ulder/EK - 78,109 133,005 174,916 248,846 361,580 472,486
Discounted Cash Flow Valuation
• Step 2 Estimate the appropriate discount factor weighted average cost of
capital (WACC)
E D
WACC K e * ( ) Kd ( )
DE DE
Components of WACC are:
1) Cost of Debt (Kd)
K d (Risk Free Rate Credit Risk Premium) * (1 tax %)
– Risk Free Rate (e.g. 10 year government bond) Nominal or real – must
harmonize with forecasts
– Appropriate Credit Risk Premium
2) Cost of Equity (Ke) (CAPM)
K e Risk Free Rate β(Beta) * Equity Market Premium
– Several models used (APT, MFM, Proxy) but Capital Pricing model (CAPM) most
common
– Equity risk premium is an estimate of the premium investors require in excess of risk-
free assets for owning equities (4-7% most typically used)
– Beta is a measurement of firm's/similar firms volatility compared to the β levered
market (if higher than 1 company/sector is riskier than market in average). β unlevered D
When compiling and averaging betas it is necessary to take into account 1 (1 - tax)( )
E
different company leverage
CAPM
• Re = Rf + βe * Rm
Symbol What is it Where to find it
Rf Use a long-term treasury rate (e.g. Bloomberg web
10 year) (http://www.bloomberg.co
m/markets/rates/index.ht
ml)
βe Equity beta (levered), “risk” (how Bloomberg terminal,
the company’s share price moves Google Finance
compared to the market1)
Rm Market risk premium (excess Use rule of thumb (e.g.
return of market over Rf) 6%)
Kassaflödet
Omsättningen 654,443 850,776 1,106,009 1,437,812 1,869,156 2,429,903 3,158,873 3,917,003 4,778,744 5,734,492
- rörelsekostnad 549,732 714,652 940,108 1,236,518 1,626,166 2,114,015 2,716,631 3,368,622 4,157,507 4,989,008
- avskrivningar 22,906 28,926 36,498 46,010 57,944 72,897 91,607 109,676 129,026 149,097
EBIT 81,805 107,198 129,403 155,284 185,046 242,990 350,635 438,704 492,211 596,387
Skattesats 28% 28% 28% 28% 28% 28% 28% 28% 28% 28%
EBIT (1-skatt) 58,900 77,182 93,170 111,804 133,233 174,953 252,457 315,867 354,392 429,399
+ Avskrivningar 22,906 28,926 36,498 46,010 57,944 72,897 91,607 109,676 129,026 149,097
- Förändringar i AT 22,906 32,330 44,240 60,388 82,243 97,196 110,561 137,095 143,362 172,035
- Förändringar i RöK 40,777 51,047 63,808 79,633 99,209 123,364 160,374 166,789 189,583 210,265
= FCFF 18,123 22,733 21,620 17,793 9,725 27,290 73,130 121,660 150,472 196,196
Historical analysis of Sectra
Year Revenue % change in revenue EPS % change in EPS
1997 118955
1998 162521 36,6%
1999 182923 12,6% 0,56
2000 191567 4,7% 0,51 -8,9%
2001 291643 52,2% 0,85 66,7%
2002 426310 46,2% 1,23 44,7%
* 0..5% often
1 used for
DF
(1 WACC)Year perpetual
growth
* 30-70% split is a FCF(final forecast year) * (1 g)
rough guide for TV
* Equity Value WACC - g
calculated from EV mature companies
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Betavärdet 1.2 1.2 1.2 1.2 1.2 1.18 1.16 1.14 1.12 1.1
Cost of equity 11.0% 11.0% 11.0% 11.0% 11.0% 10.9% 10.8% 10.7% 10.6% 10.5%
Andelen equity 66% 66% 68% 70% 70% 72% 72% 74% 74% 74%
Efterskatt lån 4.8% 4.8% 4.8% 4.8% 4.8% 4.8% 4.8% 4.8% 4.8% 4.8%
Andelen lån 34% 34% 32% 30% 30% 28% 28% 26% 26% 26%
Cost of capital 8.9% 8.9% 9.0% 9.1% 9.1% 9.2% 9.1% 9.2% 9.1% 9.0%
Kumultativ WACC 1.0888 1.186 1.292 1.410 1.539 1.680 1.833 2.001 2.183 2.380
Kassaflödet
Omsättningen 654,443 850,776 1,106,009 1,437,812 1,869,156 2,429,903 3,158,873 3,917,003 4,778,744 5,734,492
- rörelsekostnad 549,732 714,652 940,108 1,236,518 1,626,166 2,114,015 2,716,631 3,368,622 4,157,507 4,989,008
- avskrivningar 22,906 28,926 36,498 46,010 57,944 72,897 91,607 109,676 129,026 149,097
EBIT 81,805 107,198 129,403 155,284 185,046 242,990 350,635 438,704 492,211 596,387
Skattesats 28% 28% 28% 28% 28% 28% 28% 28% 28% 28%
EBIT (1-skatt) 58,900 77,182 93,170 111,804 133,233 174,953 252,457 315,867 354,392 429,399
+ Avskrivningar 22,906 28,926 36,498 46,010 57,944 72,897 91,607 109,676 129,026 149,097
- Förändringar i AT 22,906 32,330 44,240 60,388 82,243 97,196 110,561 137,095 143,362 172,035
- Förändringar i RöK 40,777 51,047 63,808 79,633 99,209 123,364 160,374 166,789 189,583 210,265
= FCFF 18,123 22,733 21,620 17,793 9,725 27,290 73,130 121,660 150,472 196,196
DCF 16,645 19,175 16,730 12,617 6,319 16,241 39,889 60,791 68,927 82,441
Discounted Cash Flow – Presenting the
Results
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