Lecture Series #2

Corporate Finance & Valuation Analysis

Chris Droussiotis
October 2011
 Table of Contents

 TIME-Value of Money, Risk and Return concepts

 Valuation Methods for Publicly Traded Companies (Methods 1,2,3)
 DCF Analysis (Method 4), CAPM
 Applying DCF for Privately own companies
 Debt Capacity / Equity Requirments
 WACC and Equity Returns

2
 Time Value Concepts

 Time-Value of Money, Risk and Return Concepts

– PV / NPV Concepts
 Future Cash Flows
 Discount Rate
 Annuity / On-time investment
– IRR
 Risk Free Return (1- Y)
 Risky Return (Y)
– Measuring Risk
 Fundamental Analysis – projection assumptions
 Technical Analysis – Volatility comparison (Beta concept)
 Behavioral Analysis - EMH

3
 Valuation Methods – Method #1

• Using the Stock Price – Base Case

Calculations SP SO SP * SO = EQ D C EQ + D - C = EV

Stocks Enterprise
Stock Price Outstanding Equity Value Debt (ST&LT) Cash Value
Company Symbol (as of 10/10/11) ($000) ($000) ($000) ($000) ($000)
Starwood Hotels &
Resorts HOT 43.59 190,650 8,310,434 3,222,000 1,077,000 10,455,434

Starwood's EV 10,455,434

4
 Valuation Methods – Method #2

• Using the EBITDA Trading Multiples – Comparative Analysis

SP SO SP * SO = EQ D C EQ + D - C = EV E EV / E
Stocks Enterprise
Stock Price Outstanding Equity Value Debt (ST&LT) Cash Value EBITDA EBITDA
Company Symbol (as of 10/10/11) ($000) ($000) ($000) ($000) ($000) ($mm) Multiple Beta
Choice Hotels International CHH $ 33.28 59,270 1,972,506 252,500 90,960 2,134,046 176,410 12.10x 0.68x
Hyatt H $ 32.75 165,130 5,408,008 769,000 1,400,000 4,777,008 386,000 12.38x
Intercontinental Hotel IHG $ 17.05 290,000 4,944,500 858,000 55,000 5,747,500 575,000 10.00x 1.57x
Marcus Corporation MCS $ 10.96 29,240 320,470 196,060 7,070 509,460 71,860 7.09x 1.59x
Marriott International MAR $ 29.45 252,900 7,447,905 2,920,000 117,000 10,250,905 1,020,000 10.05x 1.60x
Morgan Hotel Group MHGC $ 6.11 30,520 186,477 534,860 109,590 611,747 18,720 32.68x 3.01x
Orient Express Hotels Ltd OEH $ 7.04 102,600 722,304 715,610 113,000 1,324,914 81,150 16.33x 3.00x
Wyndham Worldwide WYN $ 30.70 163,790 5,028,353 3,750,000 298,600 8,479,753 1,010,000 8.40x 3.45x
Starwood Hotels & Resorts HOT 43.59 190,650 8,310,434 3,222,000 1,077,000 11,532,434 887,628 12.99x 2.15x

Average 13.56x 2.13x

EBITDA * Average Multiple 887,628 11.75x Excl. Outlier 11.75x
(taken out the high and low)
Starwood's EV 10,427,503

5
 Valuation Methods – Method #3

• Using the EBITDA Acquisition Multiples – Comparative Analysis

Calculations AP SO AP * SO = EQ D EQ + D = EV E EV / E

Date Acquisition Shares Equity Value Total Debt Enterpised EBITDA (last EBITDA
Anouncement Target Acquirer Price /Share Outstanding ($mm) ($mm) Value (EV) reported) Multiple
7/4/2007 Hilton Hotels Blackstone Group $ 47.50 390,400,000 $ 18,544.00 $ 6,180.00 $ 24,724.00 $ 1,680.00 14.72x
Kingtom Hotels
11/6/2006 Four Seasons* Int'l / $ 82.00 33,078,000 $ 3,300.00 $ 278.68 $ 3,578.68 $ 112.18 31.90x
Gates' Cascade
5/11/2006 Fairmont/Rafles Kingtom Hotels Int'l $ 45.00 73,333,333 $ 3,300.00 $ 123.50 $ 3,423.50 $ 187.20 18.29x
1/10/2006 Hilton International Hilton Hotels Corp. $ 5,578.00 $ - $ 5,578.00 $ 504.00 11.07x
11/14/2005 Starwood Hotels Host Marriott $ 4,096.00 $ 315.08 13.00x
10/24/2005 La-Quinta Corp $ 12.22 203 $ 2,474.00 $ 925.71 $ 3,400.00 $ 229.70 14.80x
8/16/2005 Wynham Int'l Blackstone Group $ 1.15 172,053,000 $ 197.86 $ 2,681.96 $ 2,879.82 $ 275.18 10.47x
8/8/2005 John Q. Hammons Hotels JQH Acquisition LLC
$ 24.00 19,583 $ 470.00 $ 765.20 $ 1,235.00 $ 123.07 10.00x
07/22/2005 Societe du Louvre Starwood Capital $ 1,028.90 $ 91.05 11.30x
3/10/2005 Intercontinental Hotels LRG $ 981.00 $ 106.63 9.20x
12/10/2004 Boca Resorts Blackstone Group $ 24.00 40,284,000 $ 966.82 $ 217.29 $ 1,184.11 $ 90.07 13.15x
8/18/2004 Prime Hospitality Blackstone Group $ 12.25 44,808,000 $ 548.90 $ 243.60 $ 792.50 $ 55.12 14.38x
3/8/2004 Extended Stay Blackstone Group $ 19.93 95,077,000 $ 1,894.88 $ 1,231.50 $ 3,126.38 $ 224.85 13.90x
* Four Seasons' $112.18 million represents 2007 EBITDA (2005 EBITDA was $11.4 negative)

Average 14.32x
Adjust. Outlier 13.19x
EBITDA * Average Multiple 887,628 13.19x

6 Starwood's EV 11,705,857
 Valuation Methods – Method #4

 DCF Analysis
– FIRST STEP:
 Building Projections – determining the Equity Cash Flows
– Top Line
– Bottom Line (unleveled)
– SECOND STEP:
 Determine Exit Year
– THIRD STEP:
 Terminal Value – use two methods
– FOURTH STEP
 Discount Rate (Weighted Average Cost of Capital (WACC)

7
 DCF Analysis – Building up the Projections

Income Statement Projections

LTM
Operating
4-year Assumpt.
PERIOD ENDING 31-Dec-07 31-Dec-08 31-Dec-09 31-Dec-10 30-Jun-11 Average Input 31-Dec-11 30-Dec-12 30-Dec-13 30-Dec-14 31-Dec-15

Total Revenue 6,153,000 5,907,000 4,696,000 5,071,000 5,316,000 5,547,674 5,825,058 6,116,311 6,422,126 6,743,232
Cost of Revenue 2,235,664 2,184,936 1,737,000 1,800,000 1,885,000 1,997,163 2,097,021 2,201,872 2,311,965 2,427,564
Gross Profit 3,917,336 3,722,064 2,959,000 3,271,000 3,431,000 3,550,511 3,728,037 3,914,439 4,110,161 4,315,669
Total Operating Expenses 3,059,336 3,103,064 2,933,000 2,671,000 2,756,000 2,884,790 3,029,030 3,180,482 3,339,506 3,506,481

EBIT 858,000 619,000 26,000 600,000 675,000 665,721 699,007 733,957 770,655 809,188
Interest Expense 168,000 210,000 227,000 236,000 221,000 227,000 215,650 204,300 192,950 181,600
EBT 690,000 409,000 (201,000) 364,000 454,000 438,721 483,357 529,657 577,705 627,588
Income Tax Expense 189,000 76,000 (293,000) 27,000 - 175,488 193,343 211,863 231,082 251,035
Net Income 501,000 333,000 92,000 337,000 454,000 263,233 290,014 317,794 346,623 376,553

Income Statement Assumptions

Revenue Growth -4.00% -20.50% 7.99% 4.83% -2.92% 9.40% 5.00% 5.00% 5.00% 5.00%
Gross Margin 63.67% 63.01% 63.01% 64.50% 64.54% 63.77% 64.00% 64.00% 64.00% 64.00% 64.00% 64.00%
Operating Exp as % of Revenue 52.53% 62.46% 52.67% 51.84% 54.88% 52.00% 52.00% 52.00% 52.00% 52.00% 52.00%
Tax as % of EBT 27% 19% 146% 7% 0.00% 42.94% 40.00% 40.00% 40.00% 40.00% 40.00% 40.00%

Other Assumptions % of Revenue

Depreciation 229,000 245,000 245,000 217,000 201,000 221,907 233,002 244,652 256,885 269,729
Capex 384,000 476,000 196,000 227,000 298,000 332,860 349,503 366,979 385,328 404,594

Depreciation 3.72% 4.15% 4.61% 4.08% 3.78% 4.15% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Capital Expenditures 6.24% 8.06% 4.17% 4.48% 5.61% 5.58% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%

Debt Schedule
Short Term Debt 733,000
Long Term Debt 2,489,000
Total Debt Outstanding 3,222,000 3,060,900 2,899,800 2,738,700 2,577,600 2,416,500
Increase/Decease 5.00% (161,100) (161,100) (161,100) (161,100) (161,100)

8
Interest Payment 7.05% 7.05% 227,000 215,650 204,300 192,950 181,600
 Valuation Analysis - Method #4 (DCF)

year (n) = 1 2 3 4 5 6
Projected
Discout Cash Flow Valuation Analysis Input Actual EXIT YEAR
Assumptions 30-Jun-11 31-Dec-11 30-Dec-12 30-Dec-13 30-Dec-14 31-Dec-15 30-Dec-16
Revenues 5,316,000 5,547,674 5,825,058 6,116,311 6,422,126 6,743,232 7,080,394
Revenue Growth Assumptions 4.4% 5.0% 5.0% 5.0% 5.0% 5.0%

Cost of Revenues (CoGS) 36.0% (1,885,000) (1,997,163) (2,097,021) (2,201,872) (2,311,965) (2,427,564) (2,548,942)

Operating Expenses 52.0% (2,756,000) (2,884,790) (3,029,030) (3,180,482) (3,339,506) (3,506,481) (3,681,805)
EBIT 675,000 665,721 699,007 733,957 770,655 809,188 849,647
Less Taxes / % of EBIT 40.0% (270,000) (266,288) (279,603) (293,583) (308,262) (323,675) (339,859)
Plus Depreciation 4.0% 201,000 221,907 233,002 244,652 256,885 269,729 283,216
Less Capex 6.0% (298,000) (332,860) (349,503) (366,979) (385,328) (404,594) (424,824)
Cash Flow 308,000 288,479 302,903 318,048 333,951 350,648 368,180

EBITDA 887,628 887,628 932,009 978,610 1,027,540 1,078,917 1,132,863

Terminal Value Assumptions
EBITDA Multiple Method 11.75x (EBITDA x EBITDA Multiple) 12,674,695
Perpetuity Method 10.00% (Next Year's Cash Flow / (Discount Rate - Growth) 7,363,610
Average 10,019,152
Less Debt Outstanding (at Exit) (2,416,500) (75% of orginal Debt)
Plus Cash (at Exit) -
Equity Value at Terminal 7,602,652

Equity Cash Flows 288,479 302,903 318,048 333,951 7,953,300

x x x x x
PV Table or ( 1 / [ ( 1 + i ) ^ n ] 0.9090909 0.8264463 0.7513148 0.6830135 0.6209213
= = = = =

PV (1) = $262,254
PV (2) = $250,333
PV (3) = $238,954
PV (4) = $228,093
PV (5) = $4,938,374
PV= $9,196,681 at Discount Rate using Average of Purchase Multiple and Perpetuity Method

Enteprise Value = PV of Equity + PV of Debt

9
PV of Equity = $9,196,681
+ PV of Debt (2010) = 3,222,000
Starwood's EV 12,418,681
 Valuation Analysis - Comparison

STARWOOD HOTELS & RESORTS

EV Debt Cash Eq Value Shares Outs Stock Price

Method #1 - Current Market Price 10,455,434 3,222,000 1,077,000 8,310,434 190,650 $ 43.59

Method #2 10,427,503 3,222,000 1,077,000 8,282,503 190,650 $ 43.44

Method #3 11,705,857 3,222,000 1,077,000 9,560,857 190,650 $ 50.15
Method #4 12,418,681 3,222,000 1,077,000 10,273,681 190,650 $ 53.89

Average of other methods 11,251,869 3,222,000 1,077,000 9,106,869 $ 47.77

10