Some Extra Problems

1. Multiples Problem 2. DCF Problem

DNWCt FCFt = EBITt•(1-t) . annuity. DCF – Terminal Value: perpetuity.Make Sure you Know… 1. annuity 2. Net Present value – When to use perpetuity. WACC – – Calculation of WACC (for DCF problems) Interpretation of WACC FCFt = EBITt•(1-t) + dept – Gross CapExt . perpetuity with growth.Net CapExt .DNWCt 3. CF/(1+r)t – Timing of first cash flow in perpetuity. multiples .

Value/Sales – Some financial measure in denominator – Forward looking vs historical • Forward looking P/E = Ptoday / Eest 2011 • Backward looking P/E = Ptoday / E2010 • Note: always use price at time you do analysis • Mergers – everything in HO 13 • AAG – Chip Baird’s presentation . or equity. or total value? • P/E. Value/Sales) – Some measure of firm value in numerator • Which one – price.Make Sure you Know… • Multiples (P/E. Equity/NI.

7 5-yr sales growth % TA P/E MV firm / BV firm 7.2 Kenneth Cole 27.5 1. All data 12/31/98.5 Brown Group 1.8 Average (excl Timber.8 469.5 Wolverine World Wide 15.2 13. Assume all companies are comparable.7 15.Problem #1: Estimate the stock price using multiples • Use multiples (P/E and MV firm/BV firm) to estimate the stock price of Timberland.5 13.2 1.0 2. Timberland Stride Rite 0.3 655.0 1.7 335.5 19.2 15.7 96.5 .3 521.3 1.3 402.) 11.

56 100 mil How does the actual price compare with the estimated price based on comparable firms’ P/E and firm M/B ratios? .5 mil 11.5 mil 469.Data on Timberland: 12/31/1998 Net Income 59.2 mil BV Equity BV firm # Shares Price Debt 369.098 mil $45.

Estimating Value of Timberland • Using P/E multiple of all firms – method 1 – Avg industry P/E = 15.02 .33 – Timberland estimated price = industry P/E * Timb E • = 15.2 / 11.098 = 5.33 = $81.2 – Timberland NI = 59.2 mil – Timberland EPS = NI/# shares • = 59.2 * 5.

098 = $81.08 .Estimating Value of Timberland • Using P/E multiple of all firms – method 2 – Industry P/E = Industry MV equity / NI – 15.2 = MV equity / 59.2 Estimate of Timberland MV equity Timberland NI – MV equity = 899.84 / 11.84 – Timberland Price = MV equity / # shares • = 899.

90 .15 – Timberland estimated MV of equity • = estimated MV firm – value of debt • = 798.Estimating Value of Timberland • Using MV / BV of whole firm – Avg industry MV / BV = 1.5 = 798.15 mil – Timberland estimated stock price • = estimated MV of equity / # shares • = 698.5 mil – Timberland estimated MV of firm • = industry M/B * Timb BV • = 1.15 / 11.098 = $62.7 * 469.7 – Timberland BV = 469.15 – 100 = $698.

56 • Estimate based on P/E = $81 • Estimate based on firm M/B = $63 • Bottom line: There is a lot of noise in all these estimates!! .Estimating value of Timberland A comparison of prices • Actual price = $45.

Based on these financial statements. What is the estimated value of Wal-Mart in 2002? . Assume that these free cash flows grow at a 2% rate in perpetuity. 2. plus the company-specific information on the following slide: 1. Estimate 2003 free cash flows.Problem #2 – A DCF Problem • Year 2002 financial statements are given in the following 2 slides for Wal-Mart.

Wal-Mart Income Statement Actual ‘02 Net Sales 219.751 3.897 6.812 COGS Gross Profit SG&A Expenses EBIT Interest expenses EBT Taxes Earnings after tax 171.326 10.173 12.077 1.250 36.671 .562 48.

102 83.349 35.517 .880 1.868 45.618 Wal-Mart 2002 Balance Sheet Prepaid expenses and other Total current assets Gross PP&E Accumulated Depreciation Net PP&E Other assets Total assets 12.Cash and cash equivalents 2161 Accounts receivable Inventories 2000 22.451 Accrued liabilities and income tax 8.451 Remember.455 83.128 1.617 24.246 58.750 9.134 21.207 48.614 1.471 28. this is the same as FA Accounts payable Total current liabilities Long-term debt Deferred income taxes Minority interest Total liabilities Shareholders equity Total liabilities and equity 15.

2. Sales are expected to increase by 14%. Assume WalMart’s WACC is 7.7% . 3. 4. Depreciation in 2002 was 3. 6. The COGS margin. SG&A margin. FA turnover. Don’t end up using this info. and NWC turnover are expected to the same in 2003 as they were in 2002. The firm’s tax rate equals 36%.Additional information pertaining to Wal-Mart 1.290. 5. The firm has no excess cash.

EBIT(1-t)03 = 13.165 = 41.782 1.5% 1.812 * 1. SGA margin02 = 36.0% 1. Sales03 = 219. COGS03 = 250.812 = 78.586 – 195.586 2.812 = 16.173 / 219.780 = 195. EBIT03 = 250. SGA03 = 250.562 / 219.Chg NWC First. Calculate EBIT 1.Part 1: Calculate FCFs for 2003 FCF = EBIT(1-t) – Net CapEx .586*.14 = 250.497 – 41 347 = 13.36) = 8821 .347 4.782 * (1-.586*.457 3. COGS margin02 = 171.

Part 1 (cont.Chg NWC Second.205 – 45. Calculate Net CapEx FA turnover = sales / Net PP&E • FA turnover02 = 219.80 = 250.80 • To find Net PP&E03: – 4.750 = 4.205 • Net CapEx03 = change in Net PP&E – 52.586 / PP&E – Net PP&E03 = 52.) Calculate FCFs for 2003 FCF = EBIT(1-t) – Net CapEx .812 / 45.750 = 6.455 .

158 = 19.812 / 11.Part 1 (cont.720 – 11.614 – 15.158 • NWC turnover02 = 219.7 • To find NWC03: – 19.7 = 250.158 = 1562 .617 = 11. calculate NWC NWC turnover = sales / NWC • NWC02 = cash + AR + Inv – AP = 2161 + 2000 + 22.) Calculate FCFs for 2003 FCF = EBIT(1-t) – Net CapEx .720 • To find Change in NWC03: – Change in NWC = 12.586 /NWC – NWC = 12.Chg NWC Fourth.

6455 – 1562 – = $804 .Chg NWC Finally.) Calculate FCFs for 2003 FCF = EBIT(1-t) – Net CapEx .Chg NWC – = 8821 . calculate FCF03 • FCF = EBIT(1-t) – Net CapEx .Part 1 (cont.

077 .Part 2: What is final value? • Terminal Value in 2003 = FCF03*(1+g) / (r-g) – Terminal Value in 2003 dol’s = 804 * (1.077 + 14..387 / 1.077 = $14.02) = $14.387 2004 FCFs • Firm Value in 2002 = 804 / 1.105 .02) / (.

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