Introduction To Enterprise Valuation Inkedup-1

Congrats on finishing your midterm!
1
Session 11
FIN2000
Summer 2022
Professor Mark Potter, Ph.D.
2
The Agenda
Enterprise Valuation Overview
• Free Cash Flow Valuation
• Valuation by Multiples (this will look familiar!)
JetBlue and Spirit Airlines
3
Chapter 17 – Corporate Valuation
Free Cash Flow
• Free Cash Flow:
‒Amount of cash you would receive from business if you were sole owner or sole
owner and sole lender.
Operating Cash Flow
− Investment in Net Working Capital (ΔNWC)
− Net Capital Expenditures (CAPEX)
= Free Cash Flow
FCF = OCF – ΔNWC – CAPEX = EBIT × (1–T) + Depr. – ΔNWC – CAPEX

Free Cash Flow (FCF)
6
Free Cash Flow (FCF)
7
CORPORATE AND PROJECT VALUATION
• Project Valuation
‒ NPV = PV of project’s incremental free cash flows
‒ Discounted at WACC
• Corporate Valuation
‒ Treats firm as large project
‒ Value = PV of company’s free cash flow
‒ Discounted at WACC
Enterprise Value0 = [FCF1/(1+r)1] + [FCF2/(1+r)2] + …
• The value is the value of the “assets,” not the equity ownership
Enterprise Value (EV)
Market Value Balance Sheet
Non-Operating Assets
(e.g., “excess” cash) Debt
Enterprise Value Operating Assets Market Cap

(Equity)
(EV)
Enterprise value (EV) = Market Capitalization + Debt – Non-operating Assets

Market Capitalization = # of shares X share price
Enterprise value (EV) = # of shares X share price + Debt – Non-operating Assets
 Share Price
DCF VALUATION
0 1 2 3 4
FCF FCF FCF FCF
FCF
V=
𝑊𝐴𝐶𝐶
• Assuming no growth.
DCF VALUATION WITH NON-CONSTANT GROWTH
• Assume forecast period ends in n years

• Terminal period from n+1 to ∞
• Terminal Value
‒ Assume constant growth during terminal period
‒ Vn = FCFn+1 / (r - g)
or
‒ Vn = FCFn (1 + g) / (r - g)
‒ g = terminal growth rate
DCF VALUATION FORMULA
n
𝐹𝐶𝐹 𝑡 𝑉𝑛
𝑉 0=∑ t
+¿ 𝑛
¿
Where:
t =1
• n = length of forecast period
( 1+𝑟 ) ( 1+𝑟 )
• FCFt = Free Cash Flow at time t
• r = WACC = weighted average cost of capital
• Vn = Terminal Value at time n
13
WACC: 12%
4%
1 2 3 4 5
(in $ millions) $ 10 $ 12 $ 13 $ 14 14.56
$ 182
Total FCF: $ 10 $ 12 $ 13 $ 196
PV FCF: $152.31
Enterprise Value: $ 152.31

Plus cash: $ 3.00
Minus Debt: $ -
Equity Value: $ 155.31
# shares: 8
Equity Value/Share: $ 19.41
14
15
16
17
Victoria Enterprises
EBIT $1,000,000
Tax on EBIT ($400,000)
NOPAT $600,000
+Depreciation $300,000
- Δ NWC ($50,000)
- CAPEX ($300,000)
Free Cash Flow (FCF) $550,000
18
Enterprise Value to Share Price
Share Price
19
Enterprise Value to Share Price
Share Price
20
DCF Valuation
21
DCF Valuation
22
23
Spirit Stock Price Past Month
Jetblue: $3.4 billion offer, which translates into about $31.31 per share
WHERE WE ARE AT
Analyst Expectations and Ratings
Frontier: $2.9 billion offer, which translates into about $26.70 per share
24
Article Source: Bloomberg.com, 6/8/22
So, what is Spirit Airline worth???
• Use a multiples approach
• Use a free cash flow approach
25
Valuing Spirit: Multiples Approach
Steps:
1. Find Peer Set
2. Find or compute the multiples we want to use and take average
3. Apply the peer multiples to Spirit
26
Multiples We Will Use
1. Enterprise Value / Revenue

2. Enterprise Value / EBITDA
3. P/E
Averages: 0.948 7.124 17.66
0.948*$5.91 = $5.603 BILLION

(Enterprise Value of Spirit Estimate using
EV/Revenue Multiple
27
Spirit Valuation Table
Valuation Estimates Enterprise Value Equity Value Price per Share

Using EV/Revenue $5.603 billion
28

3. P/E
Averages: 0.948 7.124 17.66
7.124*$1040.81 = $7.415 BILLION

(Enterprise Value of Spirit Estimate using EV/EBITDA
Multiple 29

Using EV/EBITDA $7.415 billion
30

3. P/E
Averages: 0.948 7.124 17.66
$17.66*$0.21*4 = $14.83
(Price per Share of Spirit Estimate using P/E Multiple 31

Using P/E $14.83
AND,
JetBlue Offer = $32/share
Frontier Offer = $26/share
32

Using P/E $14.83
How do we go from Enterprise Value to Equity Value?
Enterprise Value = Equity + Debt – Cash
So Equity = Enterprise Value – Debt + Cash
So now we need to find Debt and Cash

33
CASH
1247.9
Or $1.248
billion
DEBT
293.2
165.6
2801.1
1835.9
5,095.8
Or $5.096
billion
34

Using P/E $14.83
Enterprise Value = Equity + Debt – Cash CASH DEBT

1.2480 293.2
So Equity = Enterprise Value – Debt + Cash 165.6
2801.1
Now, using Enterprise Value, Cash, and Debt, Find Equity Value! 1835.9
5.096
$5.603 - $5.096 + $1.248 = $1.755 billion Price per Share:
And, if we know that Spirit has 108.6 million shares of equity outstanding…
1.755 / 0.1086 = $16.16 35

Using EV/Revenue $5.603 billion $1.755 $16.16
Using P/E $14.83
Enterprise Value = Equity + Debt – Cash CASH DEBT

1.2480 293.2
So Equity = Enterprise Value – Debt + Cash 165.6
2801.1
Now, do the same with EV/EBITDA: 1835.9
5.096
$7.415 - $5.096 + $1.248 = $3.567 billion Price per Share:
And, if we know that Spirit has 108.6 million shares of equity outstanding…
3.567 / 0.1086 = $32.85 36

Using EV/EBITDA $7.415 billion $3.567 $32.85
Using P/E $14.83
AND,
JetBlue Offer = $32/share
Frontier Offer = $26/share
37
So, what is Spirit worth???
• Use a multiples approach Valuation Estimates
Using EV/Revenue
Price per Share
$16.16
Using EV/EBITDA $32.85
Using P/E $14.83
• Use a free cash flow approach
38

Using P/E $14.83
Dividend Discount Model? Spirit Airlines Does Not Pay A Dividend
Free Cash Flow Valuation
39
Valuing Spirit: Free Cash Flow Approach
Steps:
1. Calculate the Free Cash Flow for Spirit for 2022
(or most recent year)
2. Forecast Free Cash Flow and Terminal Value
3. Discount Free Cash Flow and Terminal Value and
determine equity price for spirit
40
Valuing Spirit: Free Cash Flow Approach
Steps:
1. Calculate the Free Cash Flow for Spirit for 2022
(or most recent year)
FREE CASH FLOW CALCULATION
41
Free Cash Flow
• Free Cash Flow:
‒Amount of cash you would receive from business if you were sole owner or sole
owner and sole lender.
Operating Cash Flow
− Investment in Net Working Capital (ΔNWC)
− Net Capital Expenditures (CAPEX)
= Free Cash Flow
MOST COMMON APPROACH USED

FREE CASH FLOW CALCULATION FCF
Earnings Before Interest and Taxes EBIT Operating earnings

(taxes) Abbreviated (taxes) Effective tax rate
Net Operating Profit After Taxes Version NOPAT
+ Depreciation & Amortization + Depr
+/- Net Working Capital Changes +/- NWC
+/- Changes in Property, Plant, & Equipment - CAPEX
Where do you find this stuff?

43

INCOME STATEMENT

44

BALANCE SHEET

45

+/- Net Working Capital Changes NWC
STATEMENT OF CASH FLOWS

46
Last time they paid taxes: 2018
(335.6) Earnings Before Interest and Taxes

0 (taxes)
(335.6) Tax rate: 101.2/436.4 = 23.2%
Net Operating Profit After Taxes
+ 205.9 + Depreciation & Amortization
Taxes will be 0 for this year
+/- Net Working Capital Changes
+/- Changes in Property, Plant, & Equipment
47
In Total, Cash went up by
$13+$244.3 = $267.3 due
to changes in working
FREE CASH FLOW CALCULATION capital accounts
0 (taxes) Current Assets decreased by: $13
(335.6) Net Operating Profit After Taxes
205.9 + Depreciation & Amortization Therefore Cash went UP by $13
+/- Net Working Capital Changes
Remaining Current
Liabilities increased from:
908.1 in 2021 to
1152.4 in 2022
For an increase of 244.3
Therefore Cash went UP by $244.3
48

0 (taxes)
+205.9 + Depreciation & Amortization
+267.3 +/- Net Working Capital Changes

0 (taxes)
PP&E increased from
6692 to 6834.3.
This results in a cash

decline of:
6834.3
6692.0
142.3
51

0 (taxes)
-142.3 +/- Changes in Property, Plant, & Equipment
- 4.7 Spirit Free Cash Flow for 2022

Step 2. Forecast Free Cash Flow and Terminal Value
0 1 2 3 4
- 4.7 FCF FCF FCF FCF

$41.8 million $67 million $107 million $171 million
From Analyst $7,904 million
Forecasts
$171*1.04 / (0.0625-0.04)
Forecasts range, but average is for growth to be roughly
60% per year from years 1-4.
From there, we can dial it down to a sustainable level, for

simplicity (for now) we will assume 4% per year beyond
year 4.
Also, for now, assume that investor’s require a rate of

return of 6.25%
https://www.wallstreetzen.com/stocks/us/nyse/save/stock-forecast 53
Step 3. Discount Free Cash Flow and Terminal Value
0 1 2 3 4
FCF FCF FCF FCF
$6,524 $41.8 $67 million $107 million $171 million

$7,904 million
$6,524 Enterprise Value for Spirit

(5,096) Debt
1,248 Cash
$2,676 Equity for Spirit $3,520 / 108.6 shares = $24.64
54

Using P/E $14.83
Dividend Discount Model? Spirit Airlines Does Not Pay A Dividend
Free Cash Flow Valuation $6,524 $2,676 $24.64
55
DCF Valuation
DO NOT DO NOW
57
DO NOT DO NOW
58
For our next session
1. Open Q&A and Discussion: JetBlue, Frontier, and Spirit
2. McDonald’s Valuation using free cash flow and multiples

approaches
3. We will be using laptops
59

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Congrats on finishing your midterm!

JetBlue and Spirit Airlines

Operating Cash Flow

− Investment in Net Working Capital (ΔNWC)

− Net Capital Expenditures (CAPEX)

= Free Cash Flow

FCF = OCF – ΔNWC – CAPEX = EBIT × (1–T) + Depr. – ΔNWC – CAPEX

Enterprise Value0 = [FCF1/(1+r)1] + [FCF2/(1+r)2] + …

Enterprise Value Operating Assets Market Cap

Enterprise value (EV) = Market Capitalization + Debt – Non-operating Assets

FCF FCF FCF FCF

• Assume forecast period ends in n years

Enterprise Value: $ 152.31

Analyst Expectations and Ratings

• Use a free cash flow approach

1. Enterprise Value / Revenue

Averages: 0.948 7.124 17.66

0.948*$5.91 = $5.603 BILLION

Valuation Estimates Enterprise Value Equity Value Price per Share

1. Enterprise Value / Revenue

Averages: 0.948 7.124 17.66

7.124*$1040.81 = $7.415 BILLION

Valuation Estimates Enterprise Value Equity Value Price per Share

1. Enterprise Value / Revenue

Averages: 0.948 7.124 17.66

Valuation Estimates Enterprise Value Equity Value Price per Share

JetBlue Offer = $32/share

Frontier Offer = $26/share

Valuation Estimates Enterprise Value Equity Value Price per Share

How do we go from Enterprise Value to Equity Value?

Enterprise Value = Equity + Debt – Cash

So Equity = Enterprise Value – Debt + Cash

So now we need to find Debt and Cash

Valuation Estimates Enterprise Value Equity Value Price per Share

Enterprise Value = Equity + Debt – Cash CASH DEBT

Valuation Estimates Enterprise Value Equity Value Price per Share

Enterprise Value = Equity + Debt – Cash CASH DEBT

Valuation Estimates Enterprise Value Equity Value Price per Share

JetBlue Offer = $32/share

Frontier Offer = $26/share

• Use a free cash flow approach

Valuation Estimates Enterprise Value Equity Value Price per Share

FREE CASH FLOW CALCULATION

Operating Cash Flow

− Investment in Net Working Capital (ΔNWC)

− Net Capital Expenditures (CAPEX)

= Free Cash Flow

FCF = OCF – ΔNWC – CAPEX = EBIT × (1–T) + Depr. – ΔNWC – CAPEX

MOST COMMON APPROACH USED

Earnings Before Interest and Taxes EBIT Operating earnings

Where do you find this stuff?

Earnings Before Interest and Taxes EBIT Operating earnings

Where do you find this stuff?

Earnings Before Interest and Taxes EBIT Operating earnings

Where do you find this stuff?

Earnings Before Interest and Taxes EBIT Operating earnings

STATEMENT OF CASH FLOWS

Where do you find this stuff?

(335.6) Earnings Before Interest and Taxes

For an increase of 244.3

Therefore Cash went UP by $244.3

(335.6) Earnings Before Interest and Taxes