《估值RB内部估值模型教程》由会员分享，可在线阅读，更多相关《估值RB内部估值模型教程（307页珍藏版）》请在金锄头文库上搜索。
1、Document number1ContentExecutive Summary 执行摘要执行摘要A.Introduction to valuation B.Discount cash flow (DCF)B1. Cash flow B2. Discount rate and WACC（ Weighted Average Cost of Capital的缩写。WACC代表公司整体平均资金成本，可用来衡量一个项目是否值得投资；项目的回报必须不低于WACC）B3. Terminal value 终值B4. Common DCF Q&AC.ComparableC1. Comparable metho
2、dologyC2. Listed peer comparableC3. Transaction comparableE.Real OptionF.Other valuation topicsF1. Investment process and managementF2. Data gatheringF3. Define a relevant valuation rangeF4. Sensitivity analysisF5. Industry specific valuation insightG.Appendix Document number2Executive summaryDocume
3、nt number3A.Introduction to valuationDocument number4Valuation tools will typically revolve around two types of methodologies : Future Cash Flows and Historical Market PricesFinancial statements and analysts researchMacroeconomic and stock market dataCompany ValueDCF methodDiscountedDividendmethodCo
4、mparable companies methodAsset-based methodsDifferentvaluation methodsManagement JudgmentReal option methodComparable transactions methodDocument number5Making a good valuation requires a good understanding of the targetThere is no black-box to make a valuation 没有暗箱没有暗箱操作做出报价操作做出报价Valuation is infor
5、mationClassic methodology are mostly usedAdvanced computer systems are emergingInput data must be carefully documented (traceability)Valuation starts with a one page SWOT analysis of the targetValuation is a matter of common senseFormulas shall not replace your best judgmentKeep asking key questions
6、 about targetBe as rigorous as possible at every step of the processSource: Roland BergerDocument number6Getting started with valuationWhat is the purpose of valuating assets?What does a value mean?What are the most typical problems associated with a value?Transaction (Buy side sell side)Representat
7、ion (Balance sheet portfolio)Risk assessment (Loans) A good startValue is not a priceFor who?For how long?Based on which assumptions?Source: Roland Berger123Document number7Making a good valuation requires a good understanding of the targetThere is no black-box to make a valuationValuation is inform
8、ationClassic methodology are mostly usedAdvanced computer systems are emergingInput data must be carefully documented (traceability)Valuation starts with a one page SWOT analysis of the targetValuation is a matter of common senseFormulas shall not replace your best judgmentKeep asking key questions
9、about targetBe as rigorous as possible at every step of the processSource: Roland BergerDocument number8Preliminary advice for a good valuation workKnow your target, remember that ultimately the management will make the differenceAvoid working under situation of stress, take some time to reflect on
10、the numbersAsk for help and ideas if you meet unexpected problems use the power of the teamShare your valuation conclusions with a peerHave your valuation work checked by a valuation committee before coming back to the client12345Source: Roland BergerDocument number9Giving the right numberA company
11、value is always a rangeThe result of a valuation should be very clear on one pageRemember that valuation is most helpful for negotiating purposesDerived from different methodologiesNot too wide to be credibleMake very clear valuation report or resume the valuation processIdentify on a separated memo
12、 the potential issueMinority investment (writing one check)Majority investment (writing multiple checks)Source: Roland BergerDocument number10Working in an uncertain environment with confidenceChoosing a growth rate for revenues is difficultExpenditures are not always well detailedSome expenditures
13、can be also considered as assetsSensitivity to the variation of : commodities, interest rate, taxes Work on industry forecast to find an average rate by businessesTry to read more carefully financial reports and those of competitorsTry to be conservative, and prefer increasing the growth potentialRu
14、n a sensitivity analysis after modeling a “base case”Selected valuation limitationsSolutionsSource: Roland BergerDocument number11Build a knowledge baseSource: Roland BergerFinancial information is valuableKeep a library of valuation casesShare this information inside the teamBuild a transaction dat
15、a baseMaintain it properly and feed it Model business caseDifficulties and key issuesEnrich the learning experience of each team memberMake each team member a contributorDocument number12Calculating a fair value is always a challengeModels are not always “stable”Terminal value and volatility have a
16、huge impact on final resultsThe flow of corporate news does not stop!Difficult situationIdeal situation50010001500ComparablesDCFReal Options50010001500DCFReal OptionsComparablesSource: Roland BergerDocument number13The valuation equilibrium will also be affected by dynamic exogenous factors Changes
17、in macro economic conditions will influence the valuation, in particularInterest ratesGDP growth rateTax rate and government policySpecific technical market factorsLiquidityTransaction cost Corporate IssuesShareholders pactAgency signals and management entrenchment issuesDocument number14Ultimately,
18、 valuation sensitivity will depend on the management capacity to lead value creation initiativesThe shareholder value of an investment is the difference between an acquisition premium paid in advance and the management creation initiatives taken after the dealBefore making an investment, it is vital
19、 to assess the risks and opportunities involved in depth and, if you decide to go ahead, encourage the management of the target to move quickly and effectivelyInvestmentvalueValue ofintended targetPrice ofintended targetStand-alone valuePotential value creation initiativesMarket price prior to inves
20、tmentAcquisition premiumMore or less identical for listed companiesIt is this ratio which decides whether an investment is really successfulDocument number15As there is no “single value“ for a company, different approaches must be used to find the right valuation rangeDifferent perspectives of valua
21、tionCompany valueComparable companies methods - “the capital markets view”Comparable listed companies Comparable transactionsSelected ratios: P/E; P/S; Revenues/EBIT, etc.Real options modelDynamic value components of investments and acquisitionsBased on Black/Scholes modelUsed for weighting risky pr
22、ojectsAsset based method “the divestment view”Valuing assets outside their operating use (not as going concern)Replacement values versus book valuesValue indications: comparable assets; independent appraisesDCF method -“the strategic view”Discounted cash flow of future periodsEstimation of synergies
23、 Alternative approaches: discounted dividends, discounted incomes, etc.Document number16A combination of different approaches must be used to calculate a valuation rangeComparable companies methodDCF methodComparable transactions methodAsset based methodIdentification of comparable listed companies
24、Free cash flow planning Identification of comparable transactionsStand alone valuation ofindividual assets outside theoperating environmentSelection of multiples Calculation of WACC, Terminal value Selection of multiples Selection of comparable assetsor transactions or appraisersApplication of multi
25、ple-ranges to target company Sensitivity analysis Application of multiple-ranges to target transaction Alternative valuations givendifferent sales channelsValuation-range for target company Valuation-range for target company Valuation-range for target transactionValuation range for single assetsor p
26、ortfolio of assetsValuation rangeChange to Real OptionsDocument number17B.Discount cash flow (DCF)B1. Cash flowB2. Discount rate and WACCB3. Terminal valueB4. Common DCF Q&ADocument number18The DCF method is the most commonly used valuation method especially in M&A transactionsSelected aspects of th
27、e DCF methodassumptionsjudgmentPotential areas of conflictValue drivers (interest and growth rates, currencies.)Risk-potential of the businessGood will premiumCapital expenditures Company valueStrategic value of the target company (synergy potential, capital expenditures etc.)Upper limit for bidding
28、 priceImpact of an acquisition on financial structure of acquirerStand -alone value of the companyAnticipation of strategic interest of potential acquirersLower limit for selling priceStrategic buyerStrategic sellerDocument number19The DCF method is based on three key value driversFree cash flow (to
29、 firm)Weighted average costs of capital (WACC)Terminal valueCompany value (CV)CV = + TVnFCFi(1 + WACC)ii=1Document number20Value drivers in Discounted cash flow method (1)Calculation of WACCWACCre i (company) (1-t) (1- )=+re = cost of equity = i (market) + (M-i (market)i (market)= market risk free r
30、ateI (company) = interest rate of company (cost of debt)t = corporate tax rate = Beta (indicator of systematic risk) M-i (market)= market risk premium (M-i (market) )= equity risk premium1- , = target capital structurewith = and (1-) =market value of equitycompany valuemarket value of debtcompany va
31、lueTax advantage of debt financingDocument number21Value drivers in Discounted cash flow method (2)Discounted Cash Flow ValuationDerivation of Free Cash FlowsEarnings before interest and taxes (EBIT) Taxes+ Depreciation Change of provisions Change of net working capital= Operating cash flow+ Divestm
32、ents Investments= Free cash flow (to Firm)Enterprise Value =Discounted Free Cash Flow market value of interest-bearing debt+ profit from the disposal of non-operating assetsFree Cashflows0123NN+1Discount of weighted average cost of capital (WACC)Reference PointFCF1FCF2FCF3.TerminalvalueDocument numb
33、er22Value drivers in Discounted Cash Flow method (3)Calculation of Terminal valueTerminal valueFree cash flow of last planning yearEstimation of long term growth rate (g)Discounted TVTVFCFT+11(WACC-g)1(1+WACC)T=Be carefulThe Terminal value usually contributes between 50% and 70% to the overall compa
34、ny valueDocument number23Potential pitfalls of the DCF methodFree cash flow forecasting is critical for the valuationThe identification of comparable companies to select the right -factor is essentialThe market risk premium is subject to individual judgmentThe Terminal Value usually contributes 50%-
35、70% to the overall company value. As the Terminal Value is very sensitive to the underlying parameters (e.g. perpetual growth rate), a broad range of values can be derived with only slight changes of assumptions The determination of the appropriate tax rate is criticalExamples of other critical poin
36、ts:-Pension liabilities according to balance sheet (mostly Germany, Austria)-Minority stakes when calculating enterprise value versus equity valueDocument number24Value of the firm Value of the firm- Value of firms debt+ Value of firms cash= Value of firms equityDiscount free cash flows at the weigh
37、ted average cost of capital. The result is the present value of both debt and equity, or the value of the firmDocument number25Discounted cash flow analysis provides an estimate of Intrinsic valueAnalytical processDevelop business analysisEvaluate risk and target capital structureOther adjustmentsRe
38、sultsProjected annual free cash flowsEstimated terminal valueAppropriate weighted average cost of capitalRisk adjusted present value of free cash flows and terminal valueTotal firm valueNet present value of non-operating and off-balance sheet assetsValue of CommonLess debt (net of cash) and preferre
39、d stockDocument number26DCF requires in-depth business analysisIndustry outlookCompetitive positionReinvestment needsExpansion opportunitiesAnticipated industry growthMajor opportunities/risksPricing flexibilityPossible market share changesCost structureWorking capital required capital expendituresD
40、iscretionary investmentsNew products/stores/formatDevelopment costsEconomies of scaleDocument number27The DCF method is based on three key value drivers+ TVFV = ni=1FCFi(1 + WACC)iFirm value (FV)1Free cash flow to firm (FCF)Weighted average costs of capital (WACC)Terminal value (TV)23The DCF Model e
41、stimates a firms value by discounting the firms expected cash flows at a rate which reflects the riskiness of the flows. Document number28B.Discount cash flow (DCF)B1. Cash flowB2. Discount rate and WACCB3. Terminal valueB4. Common DCF Q&ADocument number29Determination of cash flowsEarnings before i
42、nterest and taxes (EBIT)Taxes1)+DepreciationChange of provisionsChange of net working investment=Operating cash flow+DesinvestmentsInvestments=Free cash flow (to Firm)1) Calculated figure (not the actual taxes) for a fully equity financed companyDocument number30Working cash balances+ Accounts Recei
43、vable+ Inventory+ Other Current Assets- Accounts Payable- Accrued Liabilities- Other Current Liabilities= Net working investmentChanging net working investmentNet working investment (NWI)NWI is the net balance of the accounts in the current portion of a companys balance sheet that move with normal b
44、usiness activity (i.e., move with sales) and operating decisions, but not with financing decisions. NWI represents the investment in current assets and liabilities required to support sales.NWI differs from “Working Capital” which includes other accounts that do not necessarily move with sales, such
45、 as cash and short-term debt. Source: Roland Berger AnalysisDocument number31NWI is useful because it helps us to understand the business of target companyFocus on the operating aspects of the business independent of discretionary financial decisions (e.g., changes in cash and short-term debt)Better
46、 understand how an industry works by analyzing its NWIIdentify changes in the management of the business as well as changes in the business environmentUnderstand how a particular company works by comparing its NWI to your expectations and its competitors NWIUnderstand how a companys performance is a
47、ffected by business and industry cycles and seasonalityUnderstand how management decisions (such as trade policies, accounting practices, buying and selling a business, etc.) can affect a companys NWIForecast a companys investment requirements to support future sales, which affect a companys debt ca
48、pacity and valuationSource: Roland Berger AnalysisDocument number32However, there are some industries where NWI dose not applyUtilitiesBanks and insurance companiesSecurities firmsThe industry uses some unusual accounting practices due to government regulation and industry specific financial reporti
49、ng standards.Banks and insurance companies do not invest in receivables and inventory as we think of them for non-financial services companies.It is difficult to distinguish current from long term assets and liabilities, given that assets are marked-to-market daily and are quite liquid. Source: Rola
50、nd Berger AnalysisDocument number33Some business are sensitive to various cycles and by understanding these will have accurate forecast of NWICycles impact NWISeasonalitySeasonal companies sell a relatively high proportion of their annual sales in one season. Department stores, for example, do most
51、of their years business during the December holiday season. Simply looking at the annual financial statements will not disclose this. Seasonality can be better determined by looking at quarterly reports.Business cycleSome companies sales are sensitive to general economic conditions (i.e. GNP) and th
52、eir sales rise and decline during economic expansions and contractions. It takes time for manufacturers to react to economic downturns, resulting in higher inventories. Customers also tend to pay their bills more slowly, increasing receivables. These factors increase NWI/Sales. Remember to analysis
53、how the company performed during past business cycles.Industry cycleSome industries have cycles that are peculiar to it and are unrelated to the economy as a whole. An example of this is the 36-month poultry cycle. The cycle occurs as follows: As poultry farmers raise chickens, supply begins to outw
54、eigh demand, causing farmers to cut back their chicken production. This leads to under-supply so farmers increase chicken production, again resulting in supply exceeding demand, and the cycle continues. Source: Roland Berger AnalysisDocument number34Changes in NWI need to be evaluatedSource: Roland
55、Berger AnalysisLooking at the behavior of the individual components of NWI and their relationship to sales andUsing financial ratios:Receivables Days = (Average Accounts Receivable/Sales)365This shows how long it takes to convert accounts receivable into cash. A receivables days ratio that is signif
56、icantly longer than the industry standard or the normal credit terms of the company or one that is growing may indicate credit management problems. A ratio lower than the industry standard may indicate restrictive credit management.Inventory Days = (Average Inventory/COGS)365This shows how fast the
57、inventory is converted from raw material into sales. If this ratio is rising, too much cash may be tied up in inventory relative to the level of sales.Payables Days = (Average Accounts Payable/COGS)365This shows how fast payables are paid by the company. When this ratio is rising, it may indicate mo
58、re favorable credit terms or late payment of bills. When falling, it may indicate tightened credit terms from suppliers. NWI evaluation methodsDocument number35B.Discount cash flow (DCF)B1. Cash flowB2. Discount rate and WACCB3. Terminal valueB4. Common DCF Q&ADocument number36Valuations are highly
59、sensitive to the discount rateBased on a recent valuation millionsA 1% change in the discount rate can change value by 15-20%WACCDocument number37Investors use various methods for calculating discount ratesHurdle ratesNominalReal“Historical” WACC“Forward-looking“ WACCDocument number38Many companies
60、use their own hurdle ratesSimple and easy to understandUseful for investment proposals and business plansUseful “sanity check” or conservative rate of returnA single REAL rate for a company with overseas divisions can be translated into different nominal rates allowing for expected inflation differe
61、ntialsReal historic rates vary between countriesDocument number39 But hurdle rates have fundamental weaknessesArbitrary liable to cause over/under-investment (faster/slower growth)Can lead to “politically-charged” material decisions; better to have a “market-driven” justificationDo not take account
62、of probability distribution of potential outcomesDocument number40Nonetheless do not ignore hurdle ratesCan account for risk by running base, upside, and downside cases and attaching probability to each outcomeTo ease “political issues” high level decisions can limit availability of capital to disfa
63、vored businesses; such an approach is commonThere is a tendency not to make risk adjustmentsDocument number41Typical Chinese hurdle ratesNominal: 10-16%Real: 6-12%NoteHigh rates are typical and compensate for “hockey-stick” projections often made by divisional managementThese rates are higher than m
64、arket-driven WACCs and would tend to cause companies to under-investThese rates imply high inflationCompanies keep their rates for a long time without changeneed to checkDocument number42Discount rate can be calculated use weight average cost of capital (WACC)Discount rate used in DCF is the costs o
65、f different type of financing, debt and equity, and proportionally weightedDiscount rateWACCkd(1-T) (D/V)Ke (E/V)Cost ofdebtCost ofequityProportionof debtProportionof equityDocument number43Cost of debt is relatively simple7-10 year maturityNon-convertibleFixed rateUse BoC capital markets update on
66、costs of debt for how to calculate the pre-tax cost of debt, and spreadsDocument number44 as is the weighting of debt and equity - usuallyWACC should use market value weights for each financing element because market values, unlike accounting values, reflect the true economic claim of each type of f
67、inancingGenerally use net debt, not gross, except where cash on the balance sheet is needed for the every day running of the business and could not be used to reduce gross debt (very judgmental)Using gross debt could be seen as more conservative, but NB would raise leverage in WACC calculation and h
68、ence reduce WACC i.e. a trade-off The share of net debt should be the current weighting unless the company is explicitly targeting a different capital structure. Check also your forecast gives rise to a future capital structure that is compatible with your WACC assumptionTypically 10-20% debt in the
69、 ChinaCheckDocument number45Cost of equity is harder to defineUncertain payment streamIn China, use long-term government high coupon fixed interest index, less market risk adjustmentFor continental Europe we use benchmark 10-year government bond (less relevant market risk adjustment)CAPM i.e. cost o
70、f equity is some premium over a risk-free rate is widely-used and acceptedDocument number46Cost of equity can be calculated wit capital asset pricing model (CAPM) Cost of equity can be represented as that investors need to be compensated in two waysTime value of the money: risk-free rate of returnRi
71、sk: premium by holding the company stockCompanyscost ofequityInvestors expectedreturn investing ina companys stockRisk-freerate ofreturnRisk premiumfor companysstockCAPMrf (umrf)Document number47Beta measures the sensitivity of a companys stock to movements in the market as a whole. Since the only r
72、isk in the marker is systematic risk, the marker risk premium rewards the investor in the market for assuming systematic risk.The investor in a companys stock should only be compensated for holding the systematic risk of his investment A companys Beta = level of systematic risk in its stockDocument
73、number48Company risk premium are determine by market risk premium and beta : measures the sensitivity of the firms stock returns to the returns of the market Market risk premium: premium associated with risk from holding the market company to holding risk free investmentCompany risk premiumMarket ri
74、sk premiumDocument number49Selecting the “right” Beta may lead to heated discussionsWhen available, use Barra-Alacra prospective s (if not historical ), and use comparables for unquoted entitiesAlways check beta against those of comparables, remembering to adjust for leverage by comparing unlevered
75、Betas. If very different use those of comparablesRemember to check if Betas are levered or unlevered Betas. To unlever use the formula:u=I/(1+(D/E(1-t) and relever at the target capital structure using the same formula rearranged:I=u(1+(D/E(1-t) Document number50In order to choose the proper Beta to
76、 put into the CAPM equation, we must incorporate the effect of debt, or financial leverageAs a firm takes on more debt, and therefore higher fixed costs, the profitability of the firm becomes more variableThis is likely to make the company stocks price, and return of the equity, more volatileMore de
77、bt in a firms capital structure, the returns of the firms stock tend to be more sensitive to the return of the marketTo accurately calculate a firms cost of equity at any given capital structure, you must choose a Beta reflecting the amount of risk in the companys stock at that amount of leverage, t
78、herefore:Beta, levered = Beta, unlevered x 1 + ( D/E x (1 t)orBeta, unlevered = Beta, levered / 1 + ( D/E x (1 t)Document number51Despite widespread use of CAPM there is much debate over the expected market return2 main approachesHistorical/Fundamental generally higher, thus higher WACCForward-looki
79、ng generally lower, thus lower WACCDocument number52Historical approach how it worksLong-term market return on equity less return on government long-term debtA market risk premium (MRP) of about 5% based on historical data, market expectations and a review of literature is generally accepted (see ar
80、ticle the WACC user guide)Document number53Historical approach Pros and ConsProsCovers broadest range of economic events20 year rolling average takes long-term view consistent with long-term investment objectivesRecognizes that current relationship between bond yields and equity returns may not be t
81、enableConsEquity prices are driven by expectations of future cash flows, not past onesPremium is driven by historic bond return which tells you nothing a bout todays bond yieldUnlikely to reconcile a companys projected free cash flows with its share price which is best test for a “market-driven” rat
82、eDocument number54Forward-looking approach Pros and ConsProsForward-looking, just like stock pricesReflects current market conditions which is appropriate when asking “what would equity cost me now”?ConsCurrent premium may not be tenable. Indeed occasionally it is negative, and it varies considerabl
83、y (NB bond yields are more volatile than the market cost of equity)Less conservative than historic approach should be used as a minimum rate of return for a company in its capital budgetingDocument number55A derivative of the forward-looking approachTake IRR of companys own projected cash flows with
84、 the current share priceShould be used when trying to determine the market value of a cash flow streamBUT,Beware of “hockey stick” projectionsYou may not have the projectionsOnly possible for quoted companiesDocument number56When to use which approachUse market-based approach, but make sure premium
85、is sensibleAlways cross-check that DCF is in line with Trading Multiples valuation, and if not be able to explain why (often difficult)On sell-side if Transaction multiplesDCF/Trading multiples then equity market is best route i.e. IPO/spin-offRemember DCF value is full, fair value. Buyer can add sy
86、nergies to cash flows but does not create shareholder value if DCF value (including synergies) is paidAlways step back and ask, how synergies will best be realized?Document number57Be wary of cash rich companies In such cases use a different formula, but be wary of whether clients will like this:(1)
87、 WACC=Kd(1-T)(D/V)+Ke(E/V) - Cc(C)where,Kd=pre-tax market expected yield-to-maturity of fixed rate debtT=marginal tax rateD=market value of GROSS interest-bearing debtE=market value of equityC=cashV=market value of entity being valued, where V=D+E-CKe=cost of equityCc=“cost of cash”=Govt. long bondS
88、ome companies have negative net debt (i.e. excess cash)N.B Unlevering and relevering beta needs to be done with net debt not grossThis does not work for very extreme levels of leverage, wither positive or negativeDocument number58Multi-currency issuesWhere does the company generate its cash flows?Wh
89、ere does the company raise its capital?Use local tax rates?Document number59There are some general rules of thumbDiscount each business/capital proposal in local currency, then translate DCF value to parent company currency if necessaryUse a local cost of capital-general businesses fund themselves l
90、ocallyUse local tax rates but bear in mind the likely duration of tax differentials between jurisdictionsDocument number60but its not mechanistic1.BOC bought x% of ICBC (PRC); funded with debt (assumption)Solution: use debt cost, equity cost2.Witco bought a German business from Schering; funded enti
91、rely with $ debtSolution: use debt cost, equity costWhat components should be used in WACC calculationMoral: always ask, where are the cash flows being realized Document number61Other issues to bear in mindWe use local cost of capital becauseIf you raise acquisition finance in HK to fund a Brazilian
92、 investment you still expect Brazilian returnsIts consistent to discount cash flows in (say) HK$, with a HK$ based WACCIf acquiring US company and $/ changes, value in $ is the same; only value changesBe careful if acquisition is being funded by a Rights issue which is at discount to share price and
93、 thus raises cost of equityDocument number62ConclusionWACC is not mechanistic and can be very complex; aim to simplify is as much as possibleFocus on the balance between the issues behind WACC; the balance between where cash flows are generated and what returns are expectedBear in mind that WACC is
94、frequently an issue during negotiations on valueUse different discount rates for different tasksAlways cross-check with multiplesDocument number63B.Discount cash flow (DCF)B1. Cash flowB2. Discount rate and WACCB3. Terminal valueB4. Common DCF Q&ADocument number64Discounted cash flow and terminal va
95、lueForecast period is still largely responsible for the absolute size of the total valueBTerminal value can be a problematic (“No visibly”) part of valuationCTerminal value usually represents over 50% of the total DCF valueADocument number65Terminal Value2What methods are used to estimate it3How is
96、it checked4Most common errorsWhen is the terminal value calculated1Document number66When is terminal value calculatedTypical approach: When forecast reaches “steady rate”OthersLong-term assumptions stabilizeLittle added value to forecasting additional yearsUsually around 10-12 yearsClient forecastIn
97、terim growth stageSpecific lifeDocument number67Steady state Sports companyAnnual growth in projected Free Cash FlowFree Cash FlowYear7%-5%17%12%7%6%6%6%6%6%6%6%6%6%6%6%6%6%6%6%Document number68Steady state High growth Internet retailerAnnual growth in projected Free Cash FlowFree Cash FlowYearDistr
98、ibution Center Expanded100%150%100%100%-10%192%25%10%7%5%5%5%5%5%5%Document number69Steady state Fish processorAnnual growth in projected Free Cash FlowFree Cash FlowYear50%160%62%-33%-85%260%105%51%-28%-68%105%74%43%-24%-54%61%54%35%-19%-43%Document number70Free Cash FlowYear50%160%62%-33%-85%260%1
99、05%51%-28%-68%105%74%43%-24%-54%61%54%35%-19%-43%Steady state Fish processorAnnual growth in projected Free Cash FlowAverage Free Cash Flow (6% growth rate)Document number71How is terminal value calculatedGrowth in perpetuity (cash flow growth model)Most consistent with DCF approachMultiplesSeveral
100、alternativesAsset-based estimatesLiquidation analysisDocument number72Growth in perpetuity formulaFCF(WACC-G)Terminal ValueVariablesFCF = Terminal Free Cash FlowCommentsLast forecasted free cash flow adjusted to reflect long-term growth rate and long-term reinvestment requirementsG = Growth rate of
101、free cash flow in perpetuity12WACC = Weighted Average Cost Capital3Long term nominal growth (price changes + real growth)Should be consistent with long-term growth rate and risk into perpetuityDocument number73Growth in perpetuity formulaFree Cash FlowYearAdjusted Terminal Cash Flow (Yr. 10+6%)66634
102、3230282725221920Terminal ValueTotal Cash FlowDCF 12%=34737.836630343230282725221920Free Cash FlowSports Cash Flow10987654321Year7%-5%17%12%7%6%6%6%6%6%Document number74Growth in perpetuity formulaTerminal Value is very sensitive to small changesAssumption: Final years projected free cash flow = 750m
103、illion Terminal cash flow adjusted to reflect growth rate 1,146 8,750 7,02014% 1,605 11,250 8,58012% 2,675 15,750 11,04010%Cost of Capital7%5%3%Growth RateValuation RangeDocument number75Market multiples1) Earnings before interest, taxes, depreciation and amortization of goodwill2) Earnings before i
104、nterest and taxesMultipleTerminal Value/EBITDA1)CommentTerminal Value/EBIt2) (or Op. Profit)Terminal Value/NOPATFirm Value/SalesIndustry SpecificGenerally most accurate multiple to useSimilar to P/E ratioRarely used (except for start-ups/small add-on acquisitions)Price per subscriber/barrel/pop.etc.
105、Used if amortization of goodwill or acquisition related depreciation is significantDocument number76Growth in perpetuity versus market MultiplesIncome Statement & Cash FlowEarn. before Depreciation & Amortization (EBITDA) Depreciation &Amortization of GoodwillEarnings Before Interest & Taxes (EBIT)
106、TaxesNOPATCapital ExpendituresDepreciation & Amortization of GoodwillNet Working InvestmentFree Cash FlowTerminal Cash FlowWACC=12%Growth Rate=5%Terminal ValueTerminal Value as a Multiple of EBITDAEBITNOPAT 2,300(500)1,8007001,100650500200 750 7,8751,1254.9x6.3x10.2xDocument number77Major considerat
107、ions in checking or choosing multipleDetermine Peer GroupCompanies in a similar business (or appropriate composite)Use appropriate kind of multipleEvaluate position within Peer GroupAnticipated growth ratesSize LeverageMarginsPredictability/stabilityInvestment opportunitiesAre multiples likely to ch
108、ange during forecast?Are current trading multiples distorted due to extraordinary items, cyclicality, etc.?Is growth of industry likely to slow likely to slow between today and terminal value year?Document number78How is the terminal value checkedUsing growth in perpetuity1) Reinvestment Ratio=1-Fre
109、e Cash Flow/NOPAT2) ROI=Growth Rate/Reinvestment RatioWhat is the companys reinvestment ratio1)?Is this normal for this type of firm?What is implied Return on Investment2) in the calculation of terminal value?Is it less than the companys WACC? Does this make sense?Is it greater than the companys WAC
110、C? How much greater?What multiples of Net Income, EBIT, etc. does value imply?Is this higher than peers currently trade?How does it compare to the market (S&P 400)?Document number79Checking growth in perpetuity terminal valueExampleCompanyAssumptions (Terminal Value Year)RatiosPrivate Fittings Compa
111、nyPeer Group P/E=12.1xTrades at 25% discount to marketEBITNOPATFree Cash FlowGrowth in PerpetuityWACCTerminal Free Cash FlowTerminal ValueReinvestment RatioROIP/E Ratio Firm Value/EBIT= 240million= 150million= 100million= 5%= 11%= 105million= 1,750million= 33= 15= 11.3= 2.3Document number80General E
112、rror # 1Fixated on the Answer-Not the MethodologyYour Valuation AssignmentInvolved in a fairness opinionWorking on a share repurchase programDoing an estate-tax valuationRepresenting a seller in the “auction” sale of a divisionRepresenting a buyer in an auctionAgent bank on an acquisition financingV
113、alue potential IPOComments from the Team (on rare occasions)Details2Document number81General Error # 2Enamored with the Valuation Methodology-Lose sight of realityQuestions to ask yourselfDid I spendDid I useDid I takeDid I enjoyDid I haveDid I spendDocument number82Methodology not lgnoredValuation
114、Committee-Selected issues reviewed includeBeta of Long Bond-1% market risk adjustment made to the risk-free rateReleveraging Beta Formula-Agreement on Formula & TauEquity Risk Premium-1987-1989Possible specific valuation business casesConglomerate DiscountSpin-off ValuationPrivate company discount-f
115、or lack of liquidity-for lack of controlTargeted stockDividend policyKey determinants of P/E ratiosBetaEquity Risk PremiumM&AValuation CommitteeValuation CommitteeValuation CommitteeDocument number83Specific terminal value errorsFinal year not “normalized”BOther cash flow adjustments not madeCToo sh
116、ort forecast periodADocument number84Example Acquisition Forecast“Most Likely” financial forecast AssumptionsAcquisition SynergiesSuperior sales and earnings growth anticipated near-termCapital expenditures lower than historical levels (% of sales)Net working investment reducedCorporate staffs well
117、be cut in halfMarketing groups will be consolidated, reducing SG&ASelected distribution facilities will be closed/R&D sites mergedCross selling will boost revenues of consolidated companiesMargins expand as new products matureExtensive plant modernization completedAcquired company has “state of the
118、art” facilitiesJust in-time inventory management will cut needsPayable terms are being extendedTax rate held at 35%Tax loss carry forwards being used up over timeSome income sheltered by off-shore facilitiesDocument number85Example Acquisition Forecast200520062007201320142015RevenuesOperating Profit
119、TaxesNet IncomeNet Working InvestmentCapital ExpendituresDepreciationFree Cash Flow1,0001,1201,25421032,2512,4088010613223124826528374681879352698615016117232282831293255565079849045505695101108103664135148159Document number86Calculating and Checking Terminal ValueTerminal ValueFree Cash Flow (yr.20
120、02)WACCGrowth RateTerminal Cash FlowTerminal ValueRatiosReinvestment RatioROIP/E Ratio= 159= 10.5%= 5% (3% price + 2% real growth)= 167= 3,035= 7.6= 68.3= 17.4Document number87Example-Acquisition Forecast-“Normalized” Terminal Year Cash Flow200520062007201320142015Terminal Cash FlowRevenuesOperating
121、 ProfitTaxesNet IncomeNet Working InvestmentCapital ExpendituresDepreciationFree Cash FlowRevenue GrowthOperating MarginTax RateNWI/SalesDepreciation/Cap. Ex.Terminal ValueReinvestment RatioROIP/E Ratio$1,000$1,120$ 1,254$ 2,103$ 2,251$ 2,40880106132231248265283746818793526986150161172159.3322828312
122、93224555650798490135455056951011081141036641351481591107.4%12.0%10.0%8.0%7.0%7.0%8.0%9.5%10.5%11.0%11.0%11.0%35%35%35%35%35%35%25%32%21%20%20%20%82%90%113%120%120%120%$ 3,0357.6%65.8%17.6xDocument number88Specific Terminal Value ErrorsToo short a forecast periodFinal year not “normalized”Cash flow d
123、oesnt reflect long-term growth rate (FCF, Cap. Ex., NWI)Margins over/understatedDepreciation in correct relative to required capital expendituresCash tax rate is wrongForecast not adjusted for economic cycleCash flow adjustments not madeValue of non cash assets not reflectedOngoing off balance sheet
124、 liabilitiesDocument number89Its critical that the terminal value be estimated with great care in every discounted cash flow valuationImportant points of consideration for Terminal ValueTreat the terminal value as a separate valuationThe terminal value is not always a mechanical extrapolation of the
125、 lat projected year. Make sure that all long-term relationship are evaluated and necessary changes made.Review whether the underlying risk of the entity has changed materially over the course of the forecast. -In selected cases, this may necessitate altering the discount rate.Determine whether a cha
126、se flow growth in perpetuity valuation formula is the appropriate technique. -In some instances a trading multiple approach is more accurate. Check key rations to determine the reasonableness of the terminal valueEstimate the return on investment and reinvestment rate inferred by your terminal value
127、 forecastIn using a cash flow growth in perpetuity model, check the multiples implied by this terminal value.Review the proportion of the total value represented by the terminal valueIn evaluating the terminal value, the availability of the high-return investments and the amount that can be reinvest
128、ed drive growth and value.Document number90Potential pitfalls of the DCF methodFree cash flow-planning is critical for the valuationThe identification of comparable companies to select the right -factor is crucialThe market risk premium is subject to individual judgment in a way that it depends on t
129、imeframe & geographic scope of underlying market studiesThe terminal value usually contributes 50-70% to the overall company value. As the terminal value is very sensitive to the underlying parameters (e.g. perpetual growth rate or exit multiple), a broad range of values can be derived with only sli
130、ght changes of assumptions The determination of the appropriate tax rate is criticalOther critical points:Pension liabilities according to balance sheet (mostly Germany, Austria)Minority stakes when calculating enterprise value versus equity valueStatic approach value affects due to a changing compa
131、ny environment can only be accounted for by applying scenario techniques or real option approachesDocument number91DCF valuation problem set and open questionsCapital StructureTo be assessed in market values circularity problemExpected cash flows change over time values change over time Either amoun
132、t of debt or cost of capital have to be adjustedAdjustment of cost of capital roll back approachDebt adjustment: active vs. passive debt mgmt. Impact on tax shieldNon-interest bearing debt Estimating cost of capital for pensions reserves, accruals, accounts payable Leverage impact of non-interest be
133、aring debtTerminal value and growthInflation and perpetual growthHyper growth companies: changing growth rates over timeTax loss carry forwardsEstimation of tax savingsAppropriate discount rate Document number92Treat pension as debt and isolate all pension-related effects from cash flowPensions in c
134、ompany evaluationElimination of pensions in P&Land CE for entity methodP&L: Add back non-cash delta provision to EBIT = tax basebut add back interest component only if it was deducted beforeBalance sheet: Incl. net pension liability in net debt pension provisionnet pension deficit of funded plansCas
135、h flow: Add back periodic pension payments to cash flow since it effectively is principal repaymentWACC: Treat pensions as debt or use threefold WACC Normalization in terminal yearMake the same adjustments as for the other years, whichever going concern assumption you makeIf you assume closure of th
136、e plan, employees would require compensation (e.g. contributions for funded plan) and pension payments from closed plan are unchangedIf going concern were assumed, the same adjustments as before are required to isolate the effects of pensionsIn the balance sheet forecast, assume that pension and per
137、sonnel cost grows with revenues to imply constant personnel cost ratioMake sure you only add back what was deducted beforeThe threefold WACC (illustration)PensionsDebtEquityx 5.0%x 6.0%x 12.0%= 0,5%= 3.0%= 4.8%EV com-ponentsCost ofresp. capitalWACC:8.3%Document number93DCF data sourceSource: Roland
138、Berger AnalysisMacroeconomic informationRisk free rate (long-term)Equity market premium (on relevant stock market)Corporate aggregated tax rateGDP growth rate (annual)Inflation rate (annual)Money market fund rate (short term cash deposit: 1 & 3 month)Any necessary exchange rate (average 1 year)Valua
139、tion target company informationInternal financial informationAnnual ReportHalf-year reportIPO prospectusExternal financial informationCompany news Analysis reportMarket capital & capital structureTrading platform-Number of shares & percentage of share trading-Historical Beta-Stock trading chart, pri
140、ce and volumeMarket informationIndustry peersIndustry trendsregulatory issuesDocument number94B.Discount cash flow (DCF)B1. Cash flowB2. Discount rate and WACCB3. Terminal valueB4. Common DCF Q&ADocument number95Cash Flow (1/11)Operating income is defined to be revenues less operating expenses and s
141、hould be before financial expenses (interest expenses, for example) and capital expenses (which create benefits over multiple periods). Specify at least two items that currently affect operating income that fail this definitional test and explain what you would do to adjust for their effectsThe two
142、items that most directly contradict this definition of operating income are operating leases and R&D expenses, both of which are categorized as operating expenses. Based on your judgment, operating leases can be considered as financial expenses and R&D expenses as capital expenses. To correct the op
143、erating income, you may have to do the followingTake the present value of operating lease commitments, using the pre-tax cost of debt of the firm as the discount rate, and treat the present value as debt. When possible, the operating income has to be adjusted by adding back the operating lease expen
144、se and subtracting out the depreciation created by the operating leasesSpecify the number of years before R&D can be expected to generate commercial products, collect R&D expenses from the past for that many years and then amortize them; straight line usually works. The remaining unamortized R&D fro
145、m prior years can be considered the book value of the R&D asset, and operating income has to be adjusted by adding back the R&D expense from the current year and subtracting out the R&D amortization for the current year. However the jury is still out and many people will consider R&D expenses as nor
146、mal P&L expenses because there is no evidence that the R&D will be fruitful and will translate into real and valuable assetsDCF Q&ADocument number96Cash Flow (2/11)Operating income can be volatile both as a result of the normal ebb and flow of business and as a result of accounting transactions (one
147、 time income and expenses). Should you smooth or normalize operating income and if so how do you do it?If you plan to base your future operating income on current operating income, it stands to reason that you want to remove any items that are transitional (one time charges or income) or cancel out
148、over time (exchange rate or pension fund gains or losses). It is a tougher call as to whether you should smooth out operating income by using the average income over time. For some firms, such as commodity companies, it clearly makes sense given the ups and downs in commodity prices over time. For o
149、ther firms, especially those that are facing long term structural or operating problems, you should not replace current depressed earnings with an average earnings over time. Instead, you should recognize that the earnings improvement, if it occurs, will happen gradually over time and reflect that i
150、n your valuation by a gradual improvement in operating marginsDCF Q&ADocument number97Cash Flow (3/11)In computing the tax on the operating income, there are three choices that you can use - effective tax rate, marginal tax rate and actual taxes paid. Which one would you choose?Lets start with what
151、you cannot use - the actual taxes paid. Why not? The actual taxes paid will reflect the fact that you save on taxes when you make interest payments. The problem, however, is that you have already counted the tax benefits in your cost of capital (by using the after-tax cost of debt) and increasing yo
152、ur cashflow for the same reason would be double countingIt boils down to a choice between effective and marginal tax rates. The effective tax rate is lower than the marginal tax rate for a number of reasons but one reason is that companies defer paying taxes. Since this is a tax saving, there is not
153、hing wrong with using the effective tax rate in computing the after-tax operating income for last year and even for the next few years. If you use it forever, though, you are assuming that you can defer taxes in perpetuity and that is a dangerous assumption. The best compromise is to use effective t
154、ax rates for the early forecast years and move towards a marginal tax rate in the later yearsDCF Q&ADocument number98Cash Flow (4/11)What happens if you are a multinational and are in several countries with very different tax rates?While some would push for an average tax rate, weighted by the incom
155、e in each country, it makes far more sense to use the marginal tax rate of the country the company is domiciled in as a floor. After all, income earned in countries with lower tax rates than the domestic tax rate eventually has to be repatriated back to the domicile at which point it will be taxed.
156、It is a tougher call for countries with higher marginal tax rates than the domestic tax rate. Here, it does make sense to use a weighted averageWhat happens if you are reporting an operating loss?In the year of the operating loss, the tax rate used in computing the after-tax operating income and the
157、 after-tax rate cost of debt should be zero. As you project the earnings into future years and they turn positive, you first have to cover your net operating losses from prior years, during which period your tax rate will still be zero. When you use up your net operating losses, your tax rate will c
158、onverge on the marginal tax rateDCF Q&ADocument number99Cash Flow (5/11)Many companies grow through acquisitions, some of which they pay for with cash and some with stock. In computing capital expenditures, should you include any of the acquisitions, only acquisitions funded with cash or all acquisi
159、tionsThe basic rule is both simple and logical. If you want to count the growth from acquisitions in your top line earnings, you have to consider the acquisitions, whether they be paid for with cash or stock, as part of your capex. If you do not do this, you will be giving companies that grow throug
160、h acquisitions the equivalent of a free lunch - growth without cost. The argument that stock based acquisitions do not affect cash flows is wrong, since all you are doing is skipping a step. If you had issued that same stock to the market and used the cash to fund the acquisitions, it would have bee
161、n a cash acquisitionIf you are willing to ignore the growth from acquisitions, you can ignore acquisitions in your cap ex, but your resulting value can be different. To the extent that you systematically underpay or overpay on acquisitions, you will under or over estimate value by ignoring them. Onl
162、y with fair value acquisitions will ignoring them give you the same valueDCF Q&ADocument number100Cash Flow (6/11)Depreciation and amortization includes a number of different items. Some of them are tax deductible (like conventional depreciation on assets) but some may not be (like amortization/depr
163、eciation of goodwill). In computing depreciation, should you include all depreciation and amortization or only tax-deductible depreciation and amortization?It is only tax deductible depreciation and amortization that affects your cash flows. Consequently, you should compute the operating income afte
164、r tax deductible depreciation and add back only the tax deductible depreciation. For example, assume that you have EBITDA of RMB 500 million, tax deductible depreciation of RMB 100 million and non-tax deductible amortization of RMB 50 million. You should use operating income of RMB 400 million (500
165、less 100) to compute your after tax operating income and then add back only the tax deductible depreciationWhat, you may wonder, is the harm in using all depreciation since you add it back anyway? If you subtract out 150 from the EBITDA to get an operating income of RMB 350 million, compute the taxe
166、s on RMB 350 million and then add back the entire depreciation and amortization back, you will give the non-tax deductible amortization a tax benefitIf you had a choice, you would much rather based you cash flow estimates on the income and depreciation reported in the tax books than in the reporting
167、 books. When companies use different depreciation methods in their tax and reporting books, and you have access only to the latter, your cash flow estimates will be skewed by your use of the reported (rather than the tax) depreciationDCF Q&ADocument number101Cash Flow (7/11)The conventional accounti
168、ng definition of working capital is current assets minus current liabilities and includes cash and marketable securities in current assets and short term debt in current liabilitiesa. Should you consider all cash, operating cash or no cash at all when you compute working capital?b. Should you consid
169、er short term debt as part of current liabilities?Should you consider all cash, operating cash or no cash at all when you compute working capital?The reason one consider working capital when computing cash flows is because investments in working capital are considered wasting assets that dont earn a
170、 fair rate of cash return. Thus, money invested in inventory is wasted because inventory sits on your shelves and does not earn a return. Until a few decades ago, the same could be said of cash that would be invested in a checking account. Today, cash at most reasonably run publicly traded firms is
171、invested in commercial paper or treasury bills, earning a low but a fair rate of return (given the lack of risk in these investments). Hence, cash is no longer a wasting asset at most firms and should not be considered part of working capitalThere should be no distinction drawn between operating and
172、 non-operating cash for purposes of this analysis. Even if a company needs cash for its operations (a retail firm like Carrefour has to maintain large cash balances), if that cash is invested in financial assets like commercial paper, it should not be considered part of working capital because it is
173、 not a wasted assetDCF Q&ADocument number102Cash Flow (8/11)Should you consider short term debt as part of current liabilities?All interest bearing debts, whether short term or long term, should be considered part of debt for computing the cost of capital. Consequently, short term banking debt shoul
174、d not be considered part of current liabilities to compute working capital. Supplier credit, accounts payable and accrued items (salaries, taxes etc), should be considered as part of current liabilitiesDCF Q&ADocument number103Cash Flow (9/11)Most of us have seen the equations for sustainable growth
175、. In particular, the growth in earnings per share = (1 - payout ratio) * Return on equitya. Can you use the same equation to compute growth in operating income? b. Under what assumptions will this sustainable growth rate also be equal to your expected growth rate?c. Increasing the amount you reinves
176、t back into the business (reduce the payout ratio or increase the reinvestment rate) will increase the growth rate for any company that is profitable. Will it also increase value?a. Can you use the same equation to compute growth in operating income?No. When computing growth in operating income, the
177、 equation is slightly different:Expected growth in operating income = (Cap ex - Depreciation + Change in non-cash Working capital)/ After-tax Operating Income* Return on capitalReturn on capital = After-tax Operating Income/ (Book value of debt + Book value of equity)You have to be consistent. When
178、talking about firm value, every input has to be stated in terms of firm value. Thus, in the above equation the retention ratio, which measures reinvestment as a percent of equity income, is replaced by the reinvestment rate, which measures reinvestment as a percent of after-tax operating income, and
179、 the return on equity (which is the net income divided by book equity) is replaced by the return on capital (which measures the total return to all investment)DCF Q&ADocument number104Cash Flow (10/11)b. Under what assumptions will this sustainable growth rate also be equal to your expected growth r
180、ate?These equations hold only if the return on equity and capital on existing assets remain unchanged over time. If the return on equity or capital is expected to change over time, there will be a second component to the expected in the growth rate equationFor instance, assume that your return on ca
181、pital this year is 10% and that you expect it to improve to 12% next year on exiting assets and that you plan to reinvest 50% of your operating income back next year into new projects on which you expect to make 12%Expected growth next year = (.50) (.12) + (.12-.10)/.12 = 22.7%You can decompose this
182、 growth into 2 parts - growth from new investments (6%) and growth from more efficient use of existing investments (16.7%). The problem with depending upon the latter is that it is a finite source of growth. At some point in time, your assets will be optimally utilized and you will no longer be able
183、 to extract additional growth. That is why you cannot count on the latter in perpetual growth (terminal value).Increasing the amount you reinvest back into the business (reduce the payout ratio or increase the reinvestment rate) will increase the growth rate for any company that is profitableWill it
184、 also increase value?No. It depends upon whether the return on capital (equity) is greater that the cost of capital (equity). If the return on capital is less than the cost of capital, increasing the reinvestment rate will increase growth but reduce value. If it is equal, increasing reinvestment wil
185、l not affect value. It is growth with excess returns that is the source of valueDCF Q&ADocument number105Cash Flow (11/11)How long can high growth last ?Since it is not growth that creates value but excess returns, this question can really be framed as: How long will excess returns continue? Since e
186、xcess returns are conditioned on the existence of barriers of entry, the larger and more sustainable the barriers to entry in a business, the longer the high growth/excess return period can lastThere are other pragmatic considerations. As firms get larger and acquire larger market shares, there is a
187、 limit on how much longer they can continue to grow at rates higher than the economy. Hence, a firm might find its growth tapering off even before the excess returns go to zeroDCF Q&ADocument number106General Question (1/6)What is the first thing that any valuation professional should have in mind w
188、hen starting the valuation of a company?Use common sense and judgment, you should have a documented, reasonable and sustainable valuation approach. Do not use the models as a black box or as an automated formula to solve your valuation problem. First put on a piece of paper (1 page) what are the str
189、engths, weaknesses, opportunities and threats of the company you are trying to value and think about it when you run modelsAn alternate approach to discounted cash flow valuation is the adjusted present value approach, where you value the firm with no debt (unlevered firm) first and then consider th
190、e value effects of debt. What is the fundamental difference between the cost of capital approach and the APV approach and why might they give you different answers?In the APV approach, the value of the firm is estimated keeping RMB debt fixed over time. The tax benefits are computed on this RMB debt
191、 and the expected bankruptcy cost is also based upon this RMB debt. In the cost of capital approach, the debt ratio of a firm is kept fixed over time. For firms that are growing over time, the cost of capital approach will tend to yield the higher estimate of value because it incorporates, into the
192、current estimate of value, your estimates of tax benefits from future debt issuesIn practice, analysts who use APV add the expected tax benefits from debt to the unlevered firm value and all too often ignore expected bankruptcy costs (which are difficult to estimate). This valuation is incomplete si
193、nce it counts in the benefits of debt but does not consider the costsDCF Q&ADocument number107General Question (2/6)Discounted cash flow valuations are usually based upon the assumption that your firm will survive as a going concern. If you are valuing a young firm or a distressed firm where there i
194、s a significant likelihood that the firm will not make it as a going concern, how do you reflect that in your valuation?Discounted cash flow valuation is built on two fundamental assumptions. The first is that capital markets are open and always accessible; thus firms that need to raise fresh capita
195、l to cover cash flow needs do not have any trouble doing so. The other is that real asset markets are liquid. In other words, a company that ceases operations will still get the present value of the expected cash flows from its assets in a sale. In reality, capital markets sometimes shut down and di
196、stress sales are at discounted pricesWhile adherents to DCF valuation will claim that the discount rates (costs of equity and capital) can be adjusted to reflect the likelihood and consequences of distress, discount rates are blunt instruments that are more suited for dealing with volatility risk (t
197、hat earnings and cash flows will be volatile) than for truncation risk (i.e., that the firm will not be around in 3 years)A better way to deal with the risk of truncation would be to do the following. First, assume that your firm will be a going concern and do a discounted cash flow valuation of it.
198、 Second, assess the probability that your firm will not be a going concern; a good place to look would be the bond market if the company has bonds outstanding. Third, estimate the distress sale value of the assets in the event of bankruptcy. Finally, compute the expected value of the firm = probabil
199、ity of going concern * DCF value + probability of distress * distress sale valueDCF Q&ADocument number108General Question (3/6)What have you not valued yet ? (In other words, what do you need to add on to the present value?)If you are valuing the firm (rather than equity), you began with operating i
200、ncome as your measure of earnings to get to cash flows. Therefore, you have not valued any assets whose earnings are not part of operating income. The first of these assets is cash and marketable securities - interest income from these holdings shows up below the operating income line. You have to a
201、dd the value of cash and marketable securities to your operating asset value. The second is minority holdings in other companies. The income from these cross holdings is variously accounted for but is almost never part of operating income. If you wanted a complete valuation, you would have to value
202、each of these subsidiary companies individually and take the share of each company that your company owns into consideration. If you have a majority holding in another company, you have a different problem since you are required to consolidate 100% of that company into your financials. If you want y
203、our valuation to hold up to scrutiny, it is best to remove the consolidated subsidiary from your financials, value the parent company first and then add the majority stake of the consolidated subsidiary to this valueIf you are valuing equity, using net income or earnings per share as your starting p
204、oint, you have valued cash and cross holdings implicitly since the income from these holdings is part of net income. The problem, though, is that you have also implicitly assumed that the share of income generated by these assets (cash and cross holdings) will not change over time. This is a dangero
205、us assumption. It is safer to remove the income from cash and cross holdings from your net income, value equity based upon this adjusted net income and then add on cash and your share of cross holdings at the end of the processDCF Q&ADocument number109General Question (4/6)What do you need to subtra
206、ct from firm value to get to the value of equity?You would need to subtract out the market value of anything that you considered debt for your cost of capital calculation. Thus, you should subtract out the market value of all interest bearing debt, short as well as long term, and the present value o
207、f operating leases and other off-balance sheet debt that you can identify. Why market rather than book value? Even if the book value of debt is substantially higher than market value, a discounted cash flow valuation is based upon a going concern assumption and going concerns pay the cash flows on d
208、ebt as they come due (and the market value reflects the present value of these cash flows). An alternative is do a liquidation valuation of the assets of the firm and subtract out the book value of the debt outstandingIf your firm has other potential obligations, this is the place to show them. For
209、instance, a tobacco firm can be expected to lose at least some of the lawsuits that are pending against it. The expected value of the payout (as a result of losing the lawsuit) should be subtracted from firm value to get to equity value. For firms with under funded pension and health care plans, you
210、 should subtract out the extent of the under funding to get to the value of equityDCF Q&ADocument number110General Question (5/6)It is common practice in valuation to add a premium for control this value or subtract out a discount (minority, marketability, private company etc.). Is this a reasonable
211、 practice?If you do a valuation right, there should be no need to apply discounts and premiums for most items to the estimated value. Consider the widely applied private company discount in the valuation of publicly traded companies. The rationale is that discounted cash flow valuations assume that
212、a firm is optimally managed and most firms are not. This is patently absurd since the analyst chooses the inputs that go into the discounted cash flow valuation. If a firm is poorly managed with a sub-optimal debt ratio and a low return on capital, the discounted cash flow valuation with these input
213、s will already reflect the poor management. Consider also the premium that is often applied for control. To value control, all you would need to do is re-value the firm with optimal management and the difference between this value and the status quo value should be the value of controlLiquidity is a
214、 tougher problem. All investments are illiquid, but to varying degrees; for publicly traded firms, it takes the form of a bid-ask spread and for private firms it takes the form of a discount on estimated value. The key is to be discriminating. Not all private companies are equally illiquid. Applying
215、 a rule of thumb (25-30% is widely used) strikes us as inappropriateDCF Q&ADocument number111General Question (6/6)How do you get from the value of equity to the value of equity per share?If the firm has issued no equity options (to management as compensation or the market in the form of convertible
216、s or warrants), you can divide by the number of shares and you should have the value of equity per share. If the firm has issued equity, it is best to value these equity options as options (rather than at exercise value), to subtract the value of equity options from the overall value of equity and t
217、hen divide by the actual number of shares outstanding. The practice of using diluted shares that many analysts use as an alternative is a blunt instrument for dealing with options since there is no way to discriminate between options that are in the money to differing degreesWhat about expected stoc
218、k issues in the future? If you do your DCF valuation right, they should already be incorporated into your present value. After all, you make equity issues to either cover negative cash flows in the future (and the present value of these negative cash flows will reduce the value today) or to change y
219、our financing mix (in which case your cost of capital in future years will change as the debt ratio changes)DCF Q&ADocument number112WACC (1/18)Debt can be defined in many ways - total liabilities, total debt or long term debt. What would you include in debt?The debt in the cost of capital is the de
220、bt used to fund the operations and investments of the firm. Using this rationale, it should include all interest bearing debt, short term as well as long term. Non-interest bearing liabilities such as accounts payable, supplier credit and accrued items should be incorporated into working capital and
221、 should not be counted as debtTo the extent that firms fund their operations with off-balance sheet debt, one should try to incorporate these borrowings as well into debt. While this may be difficult to do when firms are deceitful, you can, at the minimum, bring the present value of operating lease
222、commitments into your debtAnalysts are often tempted to include more items in debt, assuming that this is the conservative thing to do. In reality, defining debt much more broadly will increase the debt ratio and reduce the cost of capital. This, in turn, will increase value and not decrease itDCF Q
223、&ADocument number113WACC (2/18)Why do we use market value weights to come up with a cost of capital instead of book value weights?While we can present pragmatic arguments for using market value - that market value weights will always be positive whereas book equity can turn negative or that the cost
224、s of equity and debt represent current costs and the values used for each should be a current market value as well - the real reason is a little deeper. Every discounted cash flow valuation is ultimately a hypothetical acquisition valuation, where we buy all of the debt and the equity in the firm an
225、d acquire the business. Since we have to pay market values when we buy debt and equity, we should market values to compute the weightsThe use of market value weights to compute cost of capital does create a problem of circular reasoning. The cost of capita is used to estimate the values of debt and
226、equity that will generally be different from the market value weights used in the first place. If we use the hypothetical acquisition argument, this is not a problemOne will buy at the prevailing market values of debt and equity, even though one estimated values are different. If one wants to restor
227、e consistency to the valuation, one can use the estimated values of debt and equity to compute the cost of capital and iterate to a solution. This is a good idea when valuing private businesses or initial public offerings, where there is no market value to begin withIn private businesses, neither de
228、bt nor equity is traded. In most publicly traded firms, equity has a market value but a significant portion (or often all) of the debt is not publicly tradeda. How do you get market value of debt when all or even some of your firms debt is bank debt and not publicly traded? How would you compute an
229、updated cost of debt for an unrated company with bank debt?Document number114WACC (3/18)b. How do you get a market value of equity for a private business?a. How do you get market value of debt when all or even some of your firms debt is bank debt and not publicly traded? How would you compute an upd
230、ated cost of debt for an unrated company with bank debt?The questions are related. People rely on traded bonds or bond ratings to come up with an updated cost of debt. To estimate the cost of debt for an unrated company, we would estimate a synthetic rating based upon the companys financial ratios.
231、In its simplest form, you can estimate a synthetic rating for a firm based upon its interest coverage ratio. By estimating a default spread based upon this synthetic rating and adding it to the risk free rate, you can estimate an updated pre-tax cost of debt for this firmWhile many analysts assume t
232、hat book debt is equal to market debt to get over the fact that most debt is not traded, there is a reasonable approximation that you can use to estimate market value of debt. Consider the book debt to be the equivalent of a coupon bond, with the book value of the debt representing face value, the i
233、nterest payments comprising the coupon and the weighted average maturity of the debt representing the maturity of the bond. Using the pre-tax cost of debt from the synthetic rating as the interest rate, you can compute the market value of this bondb. How do you get a market value of equity for a pri
234、vate business?You can do it in one of two ways. One is to use a multiple of earnings or book value, based upon what publicly traded firms in the business trade at, to get an estimate of market value of equity. The second is to use the iterative process, where you use your estimated values of debt an
235、d equity to compute the weights in the cost of capital. The one thing you should avoid doing is using book value weightsDCF Q&ADocument number115WACC (4/18)Can the weights change from year to year in computing the cost of capital?Not only can the weights on debt and equity change, but so can the oth
236、er components - cost of equity, cost of debt and tax rate. In fact, you should expect the cost of capital to change for most firms, and especially so for young firms or firms in transition. Generally, firms that are young and risky have high costs of equity and debt, little or no debt and high costs
237、 of capital. As you expect these firms to grow and mature over time, you would expect the costs of equity and debt to come down, the debt ratio to increase and the cost of capital to declineThe practical question that one will face is in coming up with these target debt ratios and costs of funding.
238、There are two solutions. One is to look at industry averages, especially the averages for mature firms in the business for all of these components. The other is to compute the optimal debt ratio (with all the components) for your firmIn conventional practice, firms are often valued with a constant d
239、ebt ratio and cost of capital over time. This is why there is much debate about whether one should use actual debt ratio weights or target weights, with many analysts arguing for the latter. Either extreme will be incorrect, with the former leading to too low a value for young and risky firms and th
240、e latter to too high a value (since you are assuming that the firm will do tomorrow what it cannot really do for another 5 or 10 years). The best compromise is to start with the actual debt ratio and move to your target debt ratio over timeDCF Q&ADocument number116WACC (5/18)There are a number of di
241、fferent risk and return models in finance used to compute the cost of equity but they all assume that the marginal investor is well diversified. If you use these models to estimate costs of equity for private or closely held firms, are you likely to under or over estimate the cost of equity ? How wo
242、uld you fix the bias?When you use conventional risk and return models (such as the CAPM, APM and multi-factor models) to estimate costs of equity for a private firm, you will tend to under estimate the risk in the firm. This is because these models look at only the portion of the risk that is not di
243、versifiable and assume that the remaining risk will be diversified away. To the extent that private business owners or the investors in closely held firms are not diversified, they will be cognizant of all risk (and not just the market risk). In fact, if you know how much of the risk in the firm is
244、market risk, you can compute a modified beta for the CAPM:Total Beta = Market Beta/ Correlation between stock and the marketFor a private business, both the market beta and the correlation will have to come from looking at publicly traded firms in the same business. For example, assume that you have
245、 to estimate the cost of equity for a private software firm. If the average market beta of software firms is 1.20 and only 25% of the risk in software firms is from the market (correlation with the market), the total beta for the software firm will be:Total beta = 1.20/ .25 = 4.80This total beta can
246、 be used to come up with a much higher cost of equity for a private business. As the owner of the private firm diversifies (either by taking his firm into other business or by withdrawing some of his or her wealth out of the business and investing in an index fund or a pension fund), the total beta
247、will decreaseDCF Q&ADocument number117WACC (6/18)MNCs now operate and trade in different markets and different currencies. Which risk free rate should you use to value a company (Nestle, for instance)?You can value any company in any currency. The risk free rate that you use will reflect the currenc
248、y you decided to do the valuation in. For instance, you would use the U.S. treasury bond rate as your risk free rate if you were valuing Nestle in U.S. dollars. If you decided to value Nestle in Swiss francs, you would use the 10-year Swiss franc government bond rate. If you shift to a Euro valuatio
249、n of Nestle, your risk free rate has to be a Euro risk free rate. Since a dozen different European governments issue 10-year Euro bonds, you should go with the bond with the lowest interest rate since it is likely to be closest to being risk freeExtending this concept, your valuation should not be a
250、 function of which currency you decide to do the valuation in; a company should not go from being over valued in one currency to under valued in another currency at the same point in time. For this proposition to hold, though, your forecasts of future exchange rates (which you will need to convert y
251、our cash flows into a base currency) have to be consistent with your interest rate assumptions. Put simply, valuation will be invariant to currency choices only if you assume purchasing power parityDCF Q&ADocument number118WACC (7/18)Most analysts estimate risk premiums by looking at historical data
252、. What are the perils of historical premiums?The problem is that historical premiums are backward looking when what you really want is the premium for the future. There are also three measurement problems: a) Historical risk premiums come with large standard errors. Even with 75 years of data on sto
253、ck and bond returns, which we can get for the United States, the standard errors remain high (about 2.5%). b) The problem becomes worse in emerging markets with less data. c) If you go further back in time (to 1871, for example), you run the risk of getting a risk premium that means very little at t
254、he current timeIf you decide to use historical data in the United States because you have a long and easily accessible history, you run into a problem of selection bias. After all, the U.S, market was the most successful market of the twentieth century; as a consequence, the premium you get will be
255、too high as a forward-looking estimate. A more reasonable estimate would require you to look across a number of different equity markets over the twentieth century and compute an average premium over the marketsMarkets are priced based upon investor assessments of how risky stocks are and how much o
256、f a premium they should charge for investing in stocks. In bullish times, stock prices rise as investors become more optimistic about the future and reduce their required risk premiums. As stock prices rise and deliver high positive returns, historical risk premiums go up. In other words, historical
257、 risk premiums rise just as investors expected risk premiums decreaseThere is an alternative to historical premiums. Based upon how stocks are priced collectively (looking at a broad equity index) and the expected cash flows you would get from buying these stocks (present value of expected dividends
258、), you can back out the risk premium that investors are demanding. This risk premium is called an implied equity risk premium. The historical risk premium form 1928-2002 in the United States was 4.53%. The implied equity risk premium declined to 2% at the height of the bull market in 1999 and has av
259、eraged about 4% over the last 40 yearsDCF Q&ADocument number119WACC (9/18)What is a predicted Beta?Beta measures the expected response of a stock, bond, or portfolio to movements in an overall market index. For example, if the market is up 10 % over the risk-free rate, then- other things held equal-
260、 we would expect a stock with a beta of 1.5 to be up 15% over the risk-free rate. Beta measures exposure to market risk. In the Capital Asset Pricing Model (CAPM), expected returns depend on betaDCF Q&ADocument number120WACC (10/18)What Beta should you use for valuation? historical or predicted? lev
261、ered or unlevered?Different companies offer access to betas series. For example Barra calculates historical beta after the fact by regressing stock excess return- defined as the return above the risk-free rate- against market index excess return. There are two important problems with this simple his
262、torical approach: It does not recognize fundamental changes in the companys operations. For example, when UAL Corporation sold off its hotel and rental car businesses in 1987 and 1988, the companys risk characteristics changed significantly. Historical beta would recognize this change only slowly, o
263、ver timeIt is influenced by events specific to the company that are unlikely to be repeated. For example, the December 1984 Union Carbide accident in Bhopal, India, took place in a bull market, causing the companys historical beta to be artificially lowPredicted beta, the beta Barra derives from its
264、 risk models, forecasts a stocks sensitivity to the market before the fact. Predicted beta is also known as fundamental beta, because Barras risk models depend on fundamental risk factors. These risk factors include industry exposures as well as various style attributes- such as size, volatility, mo
265、mentum and value factors. Because we re-estimate these risk factors monthly, the predicted beta reflects changes in the companys underlying risk structure in a timely manner. Additional information is available on how the predicted beta of a portfolio is Computed. As many studies have demonstrated,
266、predicted betas significantly outperform historical betas as predictors of future stock behaviorDCF Q&ADocument number121WACC (11/18)Companies are exposed to both business risk and financial risk. Business risk is the risk associated with the operations of the company. Financial risk is the risk ass
267、ociated with having debt in the capital structure. Levered beta presents a picture of the total risk of the companys equity given the existing financial leverage. Unlevered beta measures only the business risk of the firm by removing the risk associated with financial leverageBarras predicted beta i
268、s levered in that asset returns used in risk model estimation (from which predicted beta is derived) are total returns which reflect the existing capital structure of the company, which may or may not include debt. That is, the returns are not adjusted for the different capital structures of the com
269、panies. Capital structure differences will also be reflected in factor exposures used to calculate predicted betaUnlevering betas will adjust the betas for the differences in relative debt between companies by removing the risk of financial leverage. The equation to unlever betas is: Beta (Unlevered
270、) = Beta (Levered)/(1+(1-Tc) D/E) where: Tc = corporate marginal tax rate D/E = Debt/Equity ratioDCF Q&ADocument number122WACC (12/18)How can specific risk be defined?The forecast idiosyncratic risk of the security, expressed as the annualized standard deviation of the assets specific return distrib
271、ution. Ideally one need to separate each assets return into a common factor component and a specific component. Events affecting many securities (e.g. industry movements or movements of large versus small stocks) drive the common factor component of returnEvents affecting only one security (e.g. the
272、 selection of a new CEO) drive the specific return. In the context of risk models, specific return is that component of return which common factors cannot explain. Usually specific risk is forecasted using a distinct proprietary financial risk model model based on company fundamentalsDCF Q&ADocument
273、 number123WACC (13/18)What do you do when a company has multiple exposure?First use your judgment to see if your best option is not to take the equity market risk premium in general. For companies involved in more than one industry, some companies computes a weighting in each industry up to a maximu
274、m of five industries. The computation is based on a companys assets, sales and operating income. The resultant multi-industry exposure is recalculated every quarter and gives a more nuanced view of industry risk than single-industry exposureDCF Q&ADocument number124WACC (14/18)Increasingly, we are c
275、alled upon to value companies in emerging markets in Asia and Latin America and we have to estimate risk premiums therea. Should there be an additional country risk premium for investing in a Brazilian or a Chinese company?b. If yes, how would you go about estimating it?c. Once you estimate the coun
276、try risk premium, should the same premium be added on for all companies in that country? If you dont think so, how would you go about estimating a companys exposure to country risk?a. Should there be an additional country risk premium for investing in a Brazilian or a Chinese company? It is easy to
277、make the argument that there is more risk in investing in China and Brazil than there is in investing in a developed market. It is much more difficult to show that this translates into an additional country risk premium. This is because the only risk that should affect the discount rate is non-diver
278、sifiable risk. If we assume that stocks in emerging markets are lightly correlated with each other and with developed markets, the risk in these markets should be diversifiable (by investors in companies, even if companies cannot do it themselves) and there should be no country risk premium. If, on
279、the other hand, these markets are highly correlated with each other, there will be a country risk premium that reflects how sensitive that market is to global shocksEmpirically, which view of the world is right? Two decades ago, when most investors had not discovered emerging markets, the argument t
280、hat country risk could be diversified away had solid backing. Partly as a result of globalization (both in product and financial markets), the correlation between markets has steadily risen over time, making it imperative that we consider country risk explicitlyDCF Q&ADocument number125WACC (15/18)b
281、. If yes, how would you go about estimating it?There are three approaches that are commonly used. One is to find a dollar or euro denominated bond issued by a country (such as the Brazilian dollar denominated C-Bond) and comparing the interest rate on this bond to the interest rate on a risk less bo
282、nd in the same currency (such as the U.S. treasury bond). The resulting difference is called a country bond default spread and is added on to the mature market risk premium (from the United States). The second is to take the premium that you charge in the U.S. equity market and scale it by the relat
283、ive volatility of the emerging market (volatility of the emerging market / volatility of the US market). Thus, if the Brazilian market is twice as volatile as the US market, you would double the risk premium used in the US. The third is a blended approach, where you multiply the country bond default
284、 spread by the relative volatility of the equity market in that country to the country bond (volatility of the equity market/ volatility of the country bond)The country risk premium that you estimate should not be frozen over time. In other words, if you have a ten-year time horizon in your valuatio
285、n, your country risk premium can and often should change over time reflecting your views of that countryDCF Q&ADocument number126WACC (16/18)c. Once you estimate the country risk premium, should the same premium be added on for all companies in that country? If you dont think so, how would you go ab
286、out estimating a companys exposure to country risk?While it is the conventional practice to add the country risk premium as a constant to every companys cost of equity, it seems unfair. After all, some companies in an emerging market (especially those that get the bulk of their revenues from outside
287、 the emerging market) should be less exposed to country risk that others. One simple way of measuring a companys exposure to country risk is to look at the percent of revenues it derives from that market and scale it to what the average company in the market derives as revenues. This estimate (which
288、 we called lambda) can then be applied to the country-specific premium to estimate a cost of equityDCF Q&ADocument number127WACC (17/18)Should we use acquiring Companys Or target Companys WACC?To properly value an entity, you must choose the discount rate which reflects the level of risk in the cash
289、 flows. Since investors require higher returns for accepting greater risks, it would be inappropriate to discount two sets of cash flows at the same rate if one set is riskier than the other. If we were to do this, we would calculate too large a present value for the entity which generates the riski
290、er flow and too small a present value for the entity that generates the less risky flow. This would bias us to accept riskier venturesIn order for an investment to be attractive, then, it must have a positive present value when its cash flows are discounted at a rate which reflects the riskiness of
291、the particular flow. In other words, we should analyze the entity which produces the cash flows as if it were operating on a stand-alone basisEXERCISE:1. Conglomerate Corp. is considering divesting its steel business. It has developed a set of forecasted Free Cash Flows for the division. At what rat
292、e would you discount these flows:A.Conglomerates WACC?B.The steel divisions WACC?2. Apple Corporation is considering acquiring Tangerine Corporation. Apples CFO, Mr. Smith, needs a rate to use to discount Tangerines projected Free Cash Flows in order to value Tangerine. Would you advise Mr. Smith to
293、 use:A.Apples WACC?B.Tangerines WACC?ANSWERS:1. B Since the division generate the cash flow, we will discount by its WACC2. B Since Tangerine generates the cash flows, we will discount by its WACCDCF Q&ADocument number128WACC (18/18)Current Or Target Capital Structure?A firms capital structure is th
294、e combination of debt and equity it uses to finance its asset baseAt any particular point in time, the current and target capital structure may differ; however, the company will make decisions directed toward achieving the target capital structure. Therefore, in calculating WACC, the target capital
295、structure, rather than the current capital structure, should be usedo Current Capital Structure is the combination of debt and equity that a company has at any given timeo Target Capital Structure is the combination of debt and equity that a company plans to move toward and maintain in the futureHis
296、torical Cost Or Todays Cost Of Debt?The cost of debt component of WACC should reflect the return that debt holders in target company require if the company is financed at the target capital structureAcquiring Companys Or Target Companys Cost of Equity?Since we are going to calculating Target company
297、s WACC, we need the cost of equity for target company, together with the target capital structure and the cost of debt of targetDCF Q&ADocument number129Terminal Value (1/4)How do you decide which approach to use to estimate terminal value?Of the 3 approaches (multiple, liquidation, going concern),
298、the one that is least defensible is the use of a multiple to estimate terminal value. Since this multiple comes from looking at how comparable companies trade in the market, it effectively converts the discounted cash flow valuation into a relative valuation Liquidation value, which in practice ofte
299、n becomes equated with book value, and terminal value, which comes from assuming a stable growth rate forever, will converge if we assume that the firm makes no excess returns in perpetuity. If you do assume that a firm can make excess returns in perpetuity, liquidation value will generally yield a
300、more conservative estimate of value than the stable growth modelIf you are valuing a private company where you are uncomfortable assuming that the firm will be a going concern forever, liquidation value is the more sensible choiceIf you are valuing a publicly traded company with significant competit
301、ive advantages and potential excess returns, it is best to stick with a going concern assumption and value the firm assuming a constant growth rate foreverDCF Q&ADocument number130Terminal Value (2/4)How do you define the Terminal Value, what does it stand for?In a discounted cash flow valuation, th
302、e cash flow is projected for each year into the future for a certain number of years, after which unique annual cash flows cannot be forecasted with reasonable accuracy. At that point, rather than attempting to forecast the varying cash flow for each individual year, one uses a single value represen
303、ting the discounted value of all subsequent cash flows. This single value is referred to as the terminal valueThe terminal value can represent a large portion of the valuation. The terminal value of a piece of manufacturing equipment at the end of its useful life is its salvage value, typically less
304、 than 10% of the present value. In contrast, the terminal value associated with a business often is more than 50% of the total present value. For this reason, the terminal value calculation often is critical in performing a valuation. The terminal value can be calculated either based on the value if
305、 liquidated or based on the value of the firm as an ongoing concernIs there a Liquidation Terminal Value, does that make sense?If the firm is to be liquidated, the liquidation value can be based on book value, salvage value, or break-up value, but liquidation value usually understates the terminal v
306、alue of a healthy business. One must make assumptions about the salvage value of the assets and net working capital. The net working capital may have a certain recovery rate since it might not be readily liquidated at balance sheet values. In the pro forma projections, one often may assume that net
307、working capital will grow at the same rate as cash flow. The terminal value if the firm is liquidated then is the sum of the discounted value of the cash flow, the recovered net working capital, and the salvage value of the long-term assets, including any tax benefitsDCF Q&ADocument number131Termina
308、l Value (3/4)What is the Terminal Value of the Ongoing Firm?For an ongoing firm, the terminal value may be determined by either using discounted cash flow (DCF) estimates or by using multiples from comparable firmsFor the DCF method, if the unlevered free cash flow is growing at a rate of g per year
309、 for a set number of years, the terminal value can be calculated by modelling the cash flow as a T-year growing perpetuity. At the end of T years, one can assume a different growth rate (possibly zero) or liquidation. If multiples from comparable firms are used, the price/earnings ratio, market/book
310、 values, or cash flow multiples are commonly usedThe unlevered terminal value is calculated using the return on assets (rA) as the discount rate. The levered terminal value is calculated using the weighted average cost of capital (WACC) as the discount rateAssuming that you use the perpetual growth
311、model, can the stable growth rate be negative?The only problem related to a stable growth rate is that it may be less than the growth rate of the economy in which you operate. If you are working with nominal cash flows, this would be a nominal growth rate in the economy; with real growth rates, it w
312、ould be a real growth rate for the economyThe growth rate can be 0% or negative. In fact, given what we know about firm life cycles where firms peak and then become smaller over time, you can argue that assuming a negative growth rate is more realistic than assuming that your firm will keep getting
313、larger over timeDCF Q&ADocument number132Terminal Value (4/4)What effect will increasing the growth rate in perpetuity have on terminal value?One of the easiest ways to increase the value of a company is to nudge up the stable growth rate towards your cost of capital. At first sight, therefore, it l
314、ooks like increasing the stable growth rate will always increase terminal value. However, this is only true if you are internally inconsistent in your assumptions. If you estimate the reinvestment rate as a function of your expected growth and return on capital, you set up a trade offReinvestment ra
315、te = Stable growth rate/ Return on capitalThe trade off is as follows. If you increase the stable growth rate, the reinvestment rate will go up. Thus, while you gain from growth, you will lose in cashflows:Terminal value = EBIT (1-t) (1 - Reinvestment rate)/ (Cost of capital -g)In the special case w
316、here you assume that the return on capital is equal to your cost of capital, your gain from increasing growth will exactly be offset by the loss from having a higher reinvestment rate, nullifying the effect of growth. In that case, the terminal value will always beTerminal value = EBIT (1-t) / Cost
317、of capitalIf you assume that the firm will earn more than its cost of capital in perpetuity, increasing growth will increase value. If you assume that it will earn less than its cost of capital in perpetuity, increasing growth will reduce terminal valueDCF Q&ADocument number133C.ComparableC1. Compar
318、able methodologyC2. Listed peer comparableC3. Transaction comparableDocument number134Applying multiples from comparable companies or transactions to the valuation of companiesBasic stepsSelect appropriate multiplesSelect multiples relevant for the industrySelect multiples accepted by investors comm
319、unityDerive multiple-values of comparable companies / transactionsSelect companies of the same industrySelected companies viewed as “comparable” by capital marketsIdentify required financial figures of company to be valuedAdjust figures for extraordinary itemsAdjust for international differences in
320、accountingCalculate implied range of equity valuesDepending on multiple the equity value is calculated directly or indirectlyEstimate combined value range ofthe companyTry to find a value-range that fits with the various valuation-methodsCriticalissuesDocument number135In comparable valuation, the v
321、alue of an asset is compared to the values assessed by the market for similar or comparable assetsSource: Roland Berger AnalysisComparable is arguably the most prevalent method used in the real worldIt looks simple to apply and relies on experience and “real” mantel juice-It plays to the strength of
322、 most experienced and less quantitatively sophisticated analystsAlthough short, simple and sweet, connecting valuation based on comparables to the theory of valuation was often difficultIdentify comparable assets and obtain market values form those assetsConvert these market values to standardized v
323、alues, since the absolute prices cannot be comparedCompare the standardized value for the asset being analyzed to the standardized value or for comparable asset, controlling for any differences between the firms that might affect the comparable, to judge whether the asset is under or over valuedKey
324、valuation stepsComparable valuationDocument number136In reality, there are difficulties for selecting the right comparable firms and defining the best valuation sampleSource: Roland Berger AnalysisA comparable firm is one with similar cash flows, growth potential, and business risk to the firm being
325、 valuedIdeally: Reality: A comparable firm is another firm in the valued firms business or businessesAssumption:firms in the same sector have similar cash flows, growth and risk, therefore can be compared with more legitimacyDifficulties:Few real proxies in the sector definedFirms in same sector may
326、 have different cash flow, growth and risk profileComparable firmsDocument number137Comparable multiples can be standardized by using a set of common variablesGeneral used comparable multiplesSource: Roland Berger AnalysisPrice / Earning ratio (PE)Value / EBITValue / EBITDAValue / Cash FlowPrice / S
327、ales per share (PS)Value / SalesPrice / Book Value (of equity) (BPV)Value / Book Value of AssetsValue / Replacement Cost (Tobins Q)Earning multiplesBook value multiplesRevenuesmultiple123Non-financial multiple4Number of staffNumber of subscriberDocument number138There are some comparable multiples t
328、hat are specific to a sectorSector specific comparable multipleNotes: 1) Market ValueSource: Roland Berger AnalysisReasons for use and limitationsReasons for useLinked firm value to operating details and outputComputed with no reference to accounting statements and measures (unavoidability)Employed
329、in desperation because none of the other multiples can be estimated or usedLimitationsSince they cannot be computed for other sectors or for the entire market, these multiples can result in persistent over of under valuations of sectors to the rest of the marketIt is far more difficult to relate the
330、se multiples to fundamentals (cash flow, growth and risk,) which is essential ingredient to using multiples well.Sector specific multiple examplesCommodity sector:Manufacturing sector:Subscription-based sector (telecom):Internet portal sector:Value per commodity unit =MV1) of equity + MV of debtNumb
331、er of units of commodity in reserves Value per unit product =MV of equity + MV of debtNumber of units produced (or capacity) Value per subscriber =MV1) of equity + MV of debtNumber of subscribersValue per site visitor =MV1) of equity + MV of debtNumber of visitors/sites Document number139There are 4
332、 steps to help us to get the most out of comparable multiple and avoid misuseFour steps to understanding multiplesSource: Roland Berger Analysis4Apply the multipleSelecting the right comparable firms and understanding differences between target firms requires valuation practice1Define the multipleTh
333、e same multiple can be defined in different ways by different users; when comparing and using multiples, it is critical to understand how the multiples have been defined.Consistency and uniformity are important2Describe the multipleHaving a large benchmark sample size by industry help to use multipl
334、e to identify under or over valued firmsIt is always useful to have sense of what a high, low or typical value for that multiple is in the market.3Analyze the multipleIt is critical to understand the fundamentals that drive each multiple, and the nature of the relationship between the multiple and e
335、ach variable.Document number140and one need to ask questions at each stepsSource: Roland Berger Analysis4Application questions1Definitional questions2Descriptive questions3Analytical questionsGiven the firm that we are valuing, what is a comparable firm?Given the comparable firms, how do we adjust f
336、or differences across firms on the fundamentals?Is the multiple consistently defined?Is the same multiple definition?What is the average and standard deviation for this multiple, across the market?What is the industry median for this multiple?How large are the outliers to the distribution, and how d
337、o we deal with the outliners?How has this multiple changed over time?What are the fundamentals that determine and drive these multiples?How do changes in these fundamentals change the multiples?Selected questions to ask about comparable multipleDocument number141There are three common techniques to
338、help us to control the differences between comparable companies Source: Roland Berger AnalysisSubjective adjustmentsTo evaluate the firm, comparison between the firm and the industry average is made; if it is significantly different, a subjective judgment about whether the firms individual character
339、istics (related to cash flow, growth and risk) has to be made, to explain the difference. The weakness in this approach is that judgments are often made based on once experiences, and can be biases about the company.Modified comparablesTo modify the multiples to take in to account the most important
340、 variable determining it, the companion variable. Two assumption has to be made:These firms are comparable on all the other measures of value, other than the one being controlled for.The relationship between the multiples and fundamentals is linear.Statistical techniquesTo run sector regressionWe tr
341、y to explain differences across firms on a multiple (PE ration, EV/EVITDA) using fundamental variables (cash flow, growth and risk)Key questions to ask:How to defined the sector?-Narrowly: under cut the usefulness of the regression-Broadly: entail risksHow to find the right independent variables to
342、use?Document number142Comparable valuation offer a quick and reasonable value of asset, but it has its limitationsSource: Roland Berger AnalysisAdvantageDisadvantageValuation based upon comparable firms can be completed with far fewer assumptions and far more quickly than a discounted cash flow valu
343、ationComparable valuation is simpler to understand and easier to present to clients and customers than a discount cash flow valuationComparable valuation is much more likely to reflect the current mood of the market since it is an attempt to measure relative and not intrinsic valueParticularly impor
344、tant for those whose job it is to make judgments on relative value, and who are themselves judged on a relative basisDifficulties for putting together a group of comparable firms, can result in inconsistent estimates of value The fact that comparables reflect market mood also implies that using comp
345、arable valuation to estimate the value of an asset can result in over value, when the market is over valuing comparable firms, or the other way around The lack of transparency regarding the underlying assumptions in comparable valuations make it particularly vulnerable to manipulation.A biased analy
346、st could pick the comparable firms can essentially ensure that almost any value can be justifiedDocument number143C.ComparableC1. Comparable methodologyC2. Listed peer comparableC3. Transaction comparableDocument number144Understanding listed peer comparableCompany report spreadsheet123Data definiti
347、onsFully diluted calculations4ObjectivesRatio definitions5Data collection template6Document number145Getting started with trading multiplesSource:Provides detailed definitions of the ratios to be usedDefines the computations necessary to calculate these ratiosDefines the data sources to be usedDefin
348、es a methodology and collect information needed for building a trading multiple tableDocument objectivesDocument number146Understanding trading multiplesCompany report spreadsheet123Data definitionsFully diluted calculations4ObjectivesRatio definitions5Data collection template6from JasonDocument num
349、ber147Building a comparable listed peers table requires a precise information packSource:Company informationABCRatio AnalysisNotesDGeneral economy and business informationDilution calculationsEDocument number148Information from company reports (1/3)NotesSource:Afrom BloombergGeneral InformationThis
350、section includes the currency used, year end (identified from the latest annual report) and the companys major activities (both by line of product and countryCompany InformationThe company information section documents the soured data:earnings per sharegross dividends per sharenet dividends per shar
351、ewith information on Bloomberg, Reuters:latest share pricesno. of sharessummary income statement from latest Annual Reportsummary balance sheetBDocument number149Information from company reports (2/3)NotesSource:Price/Reported Earnings T0*Price/Adjusted Earnings T0Price/ Earnings T1*Price/ Earnings
352、T2*Price/Reported Earnings Relative T0Price/Adjusted Earnings Relative T0Price/ Earnings Relative T1Price/ Earnings Relative T2Price/Cash Flow T0Price/Book Value T0Price/Adjusted Book Value T0Firm Value/Sales T0Firm Value/EBDIT T0Firm Value/EBIT T0Firm Value/Capital Employed T0Gross Dividend Yield T
353、0Gross Dividend Yield T1Gross Dividend Yield T2Gross Dividend Yield Relative T0Gross Dividend Yield Relative T1Gross Dividend Yield Relative T2CRatiosDocument number150Information from company reports (3/3)NotesSource:DNotesThis section should explain any unusual steps taken in calculating figures o
354、r ratios for example why a proforma is calculated. It should include and explain any adjustments made as well as the procedure followed to calculate the proforma figuresDilution CalculationsA back-up sheet provides a format for entering convertibles, options and warrants information Proforma fully d
355、iluted ratios can be calculated and fed automatically to the ratio analysis sectionEDocument number151Understanding trading multiplesCompany report spreadsheet123Data definitionsFully diluted calculations4ObjectivesRatio definitions5Data collection template6Document number152DATA DEFINITIONSSource:R
356、eported Earnings per Share: usually provided in the annual report. In those cases where it is not provided id defined as: Reported Earnings Report Earnings per share = Weighted average number of all classes of ordinary sharesThere are some countries where ratios are calculated using year end number
357、of shares and not the weighted average since this is not disclosedAdjusted earnings per share: is reported earnings (defined above) with the contribution from after-tax exceptional or extraordinary gains stripped-out and fully diluted where dilution is material. This is also consistent with the defi
358、nitions used by a market consensus for prospective earnings. We use it in addition to reported earnings for the latest financial statements (T0) and also for two prospective years (T1 and T2) where a market consensus provides consensus estimatesAdjusted EPS is defined as:(Reported earnings extraordi
359、nary gains exceptional gains) Weighted average no. of shares outstandingAdjusted earnings per share should be calculated using the weighted average number of shares. In those cases where there have not provided it will be equal to year end number of sharesSome companies report an “adjusted number of
360、 shares” which does not correspond to the weighted average number of shares. In the absence of better information we use this figureEarnings T1 and (4) T2: MARKET consensus estimates, which are claimed to be calculated on a fully diluted basisEarnings per shareDocument number153DATA DEFINITIONSSourc
361、e:Gross/net dividendThe gross dividend is the net dividend declared by the company plus any tax credits paid to the shareholder by the government/tax authorities. There are countries where there are no tax credits (see table below)Gross Dividend * (1 Tax Credit) = Net DividendMarket consensus estima
362、tes usually report the gross dividend, but there are exceptions where the number provided is net. It is important to cross-check with the annual Report to confirm that the gross dividend id being usedLatest Share PriceThis is the share price at previous days close for each class of stock (identify e
363、ach)Document number154DATA DEFINITIONSSource:It is necessary to identify the weighted average number of shares outstanding for each class of stock from the most recent annual report available and also identify the current number of shares outstanding for the current year T0, year T1 and year T2. The
364、se will be the same unless stock was issued during the current year. We need to be careful about stock splitsThere are 2 different types of stock: ordinary and preferred. Within the ordinary type, and depending on the countries, we can find different classes. In Switzerland, for example, there are t
365、hree different types of ordinary: registered, bearer and participation certificatesSometimes, especially in Germany, shares are issued with a different par value. Earnings and dividends per share are provided using a single share basis (usually DM-50). The total number of shares has to be adjusted t
366、o the same basis, e.g. one DM100 share is equivalent to 2DM50 sharesIt is also important to check that the corresponding number of shares and share prices are used. The easiest way is to make sure the market capitalization corresponds to the figures in The Estimates DirectoryIn those cases where con
367、vertibles, options or warrants outstanding could dilute DPS by more than 5%, it is necessary to state the diluted number of sharesNumber of shares by class of stockDocument number155DATA DEFINITIONS Source:This is the share price at previous days close for each class of stock (identify each)Latest s
368、hare pricePrice used in P/EPrice, as used in the calculation of P/E ratios, is defined:Price = latest price of one share of the class of ordinary shares with the largest market capitalizationFor most companies which have only one class of ordinary shares, this is a straightforward exercise but, wher
369、e are more than one class of ordinary shares, the class of shares used in this calculation will have to be determined and recorded for each company we follow. The reason for selecting the class of shares with the largest capitalization is that we are trying to measure the P/E of the most liquid form
370、 of stock rather than three P/Es for the company. There will be different prices for each class (which need to be recorded to calculate market capitalization) but there is only one earnings per share figure for the company as a whole for each yearDocument number156DATA DEFINITIONSSource:Market capit
371、alization equals the latest share price multiplied by the weighted average number of shares outstanding in the latest reported fiscal year, totaled for all types of common stock, i.e.n=nMarket capitalization = (Price of class n x weighted average no. of class n shares outstanding)n=0Note that some a
372、nalysts calculate market capitalization as price of most liquid stock times total number of shares outstanding. This is inaccurate and should not be usedThere are two possible exceptions to this general principle:Where the ordinary stock is privately owned and only the preferred stock has a market p
373、rice. In this case to calculate the market capitalization we have to use the preferred stock price and the total outstanding number of shares (preferred and common). Although this is not strictly accurate, there is no alternative in this caseWhere preferred stock possesses the same characteristics a
374、s the common stock (i.e France where dividends vary depending on the ordinary dividend), it is also included in the calculation. We explain later the procedure used to calculate the ratios when preferred stock is taken into accountMarket capitalization (1/2)Document number157DATA DEFINITIONSSource:I
375、t is also necessary to look out for rights issues and stock splits. If either has happened since the year end the weighted average number of shares should be restated. For example if this was a one-four four rights issue and last years number of shares was 100MM then these should be increased by 25%
376、 to 125MM. If this adjustment was not made, earnings per share would be overstated and because the share price would tend to be lower, it would result in a distorted P/E ratio. Other ratios would be similarly distorted. We also need to increase historic interest income to reflect the increased cash
377、balance which results from the rights issue. This income should be taxed at the effective tax rateThus historic earnings will increase and the number of shares will increase but the share-price will adjust downwards depending on the discount and number of new shares issued. The trading multiples mod
378、el will make these adjustments given the necessary inputsMarket capitalization (2/2)Document number158DATA DEFINITIONSSource:The income statement is spread into the format shown starting at reported profit and working up the income statement to EBDITItems falling outside these categories, e.g. assoc
379、iated company income, should be ignored so that they are implicitly included in EBDIT. Adjusted earnings may differ from Reported Profit due to stripping out exceptional and extraordinary itemsCONSOLIDATED SALESFINISHEBDIT- Depreciation= EBIT+ Interest Income= NBIT- Interest Expense+/- Exceptional I
380、tems= NBT- Tax = NAT+/- Extraordinary Items- Minorities= Reported Profit STARTPreference DividendsAvailable for OrdinaryOrdinary DividendsAdjusted EarningsIncome StatementDocument number159DATA DEFINITIONS Source:Sales Sales are defined as net revenues of consolidated subsidiaries, i.e. excluding af
381、filiated company revenue. Sales should not include:royalty incomeinterest income taxes such as petroleum, alcoholic beverage and tobacco duties where these are immediately payable to the tax authoritiesSales attributable to discontinued operations should be included in the calculation of net revenue
382、s. This is because the corresponding breakdown of the balance sheet is not usually provided and the proceeds from the sale of the discontinued items are also not likely to be disclosed or knownEBITEBIT is calculated back from reported profit as:Reported Profit+ Minorities- Extraordinary Items+ Tax+
383、Interest Expense- Exceptional Gains + Exceptional Losses- Interest Income= EBITDocument number160DATA DEFINITIONS Source:Depreciation and AmortisationDepreciation should include all forms of depreciation and amortization i.e. on fixed assets, financial assets, trademarks and patents and goodwillEBIT
384、DAEBDIT is calculated back from reported profit rather than down from operating profit because there is no commonly recognized definition of operating profit while there is for reported profitReported Profit+ Minorities- Extraordinary Items+ Tax+ Interest Expense- Exceptional Gains + Exceptional Los
385、ses- Interest Income+ Depreciation & Amortisation= EBDITDocument number161DATA DEFINITIONS Source:Interest IncomeInterest Income is the gross interest receivable from cash, deposits and securities. The figure is usually provided in the annual report, and if not, we should try to find it in the “Fina
386、ncial Income” Account. This account will usually include the following items:Items IncludeIncome from financial fixed assets or marketable securities YesIncome from current assets YesOther financial income NoUnrealised gains from marketable securities NoRealised gains from marketable securities YesO
387、f which subsidiaries NoInterest ExpenseInterest expense as stated in the statutory accounts is interest expense paid on borrowings and finance leases and should be gross and not net of stated interest income. In some countries, as happen with interest income, interest expense is not specifically ide
388、ntified in the annual report. We may have several accounts classified as financial charges and we have to take account only of the charges on borrowings and capital leases but not other financial charges. Capitalized interest is subtracted where companies report it in there income statements because
389、 this is common practice (if we adjusted earnings per share by adding it back, we may be inconsistent with market consensus forecasts)Document number162DATA DEFINITIONS Source:NBTNBT is shorthand for “net before taxes” or pre-tax profitIt is widely recognized as a consistent benchmark in the income
390、statement. It should always be taken as stated in the annual report unless there are other items below pre-tax profits, such as profit-sharing in France, which we would regard as an operating cost (this should be subtracted from NBT, EBIT, EBDIT etc. as another operating cost)NBT should always inclu
391、de “equity in net earnings of associated companies”. In those countries where this item appears as an after-tax income, we have to recalculate NBT and taxes so it appears before tax, applying the effective tax rate if the taxes related are not specifiedNBITNBIT is included here as a definition becau
392、se it is used in credit calculations of interest cover (NBIT/Interest Expense) and to draw attention to the fact that it differs from EBIT. NBIT is defined as:Pre-tax Profit (NBT)+ Interest Expense- Exceptional/Gains + Exceptional/Losses= NBITDocument number163Source:DATA DEFINITIONS Taxes Taxes are
393、 corporate taxes from profit on ordinary activities and include Advance Corporation Tax or similar divided-related taxes, double taxation relief, overseas taxes, provisions for deferred tax and tax charges arising in related/affiliated companies. The taxation figure reported in the income statement
394、is the figure which should be used in the summary income statement in order to arrive at the same number for NAT as reported in the Annual ReportNATNAT is net profit after taxes or profit on ordinary activities after taxation company accounts. NAT is before deduction of minority interests. It also i
395、ncludes both continuing and discontinued operationsDocument number164Source:DATA DEFINITIONSPrudent definition of adjusted earnings requires that these are stated excluding the after tax impact of all exceptional and extraordinary items. It should be noted whether the exceptional or extraordinary it
396、ems are before or after tax and whether there is any disclosure of related tax payments. Non-recurring items stated gross of tax should be treated as exceptional where they have not been classified as exceptional or extraordinary. Where an exceptional item is reported as exceptional by virtue of its
397、 size alone, it should be treated as normal maintainable earnings and not excluded according to the general principle described above. An example might be a company which wins an unusually large contract. This would be reported in the annual accounts as an exceptional itemExceptional and extraordina
398、ry items have a variety of definitions. We include both, as well as the related tax effects, to calculate NAT and Reported Profits, but exclude them to calculate adjusted earningsIn eliminating exceptional or extraordinary items we need to also take out any tax effects relating to these items. The t
399、rading multiplies spreadsheet makes these adjustments by computing the companys apparent effective tax rate and adjusting the tax charge accordinglyIn some countries, some companies provide a breakdown of extraordinary items but include tax credits. As a result we have to recalculate the NBT and tax
400、 figures provided in the Profit and Loss account, while maintaining the same reported earnings figureExceptional and extraordinary itemsDocument number165Source:DATA DEFINITIONS MinoritiesMinority interests in consolidated after-tax profits/reported profits are shown as a deduction from NAT. this is
401、 because, under the parent company theory, minority interests are not considered part of stockholders equity and are disclosed in the consolidated balance sheet between the liability section and the stockholders equity section. Note that earnings per share date must be presented after the deduction
402、of minority interestsReported ProfitReported profit is included in the spreadsheet income statement because clients usually want to see figures which they recognize. These should reconcile back to NBT and are historic figures only. Projected earnings per share exclude extraordinary items and excepti
403、onal items and are on a fully diluted basis and so are more consistent with our adjusted earnings definitionDocument number166Source:DATA DEFINITIONS Preference DividendsDividends on all preference shares are subtracted from reported profits to calculate reported profit available for ordinary. Divid
404、ends are net of (i.e. excluding) any tax creditsOrdinary DividendsOrdinary dividends are either reported in the consolidated income statement or can be calculated as:(Year end number of shares) x Net dividend per shareWe always calculate ordinary dividends as in some countries the dividend figure th
405、at appears on the Cash Flow statement (or Sources and Uses of Funds) relates to the precious years dividends and so is different to the current years dividendTo calculate ordinary dividends the number of shares should exclude those shares held in treasury by the company. The net dividend per share i
406、s the amount paid out by the company excluding any tax credits received by the shareholderReported Available for OrdinaryReported available for ordinary is reported profit less any preference dividends, and is the numerator for the earnings per share calculationDocument number167Source:DATA DEFINITI
407、ONS Adjusted EarningsWe define adjusted earnings as reported profits after minorities but excluding exceptional and extraordinary items. These have the same basis as IBES/TED earnings Reported Profits+ Exceptional/Extraordinary Items - Exceptional/Extraordinary Gains= Adjusted EarningsWhere exceptio
408、nal/extraordinary items are stripped out, the related tax charge should also be removed. If no information is provided for taxes on exceptional/extraordinary items, we arbitrarily assume that it is calculated at the particular years effective tax rate, i.e. Tax ChargeEffective tax rate = NBTThis can
409、 result in a different NBT to that reported by the companyDocument number168Source:DATA DEFINITIONS Summary Balance SheetThe following items should be extracted from the latest balance sheet and presented in the Company Information Section of the Company Report:Cash and Short Term InvestmentsShort T
410、erm DebtLong Term DebtConvertiblesTotal DebtProvisions or Pension LiabilitiesMinority InterestsPreference SharesOrdinary Shareholders Funds includingReservesCumulative Goodwill written offDocument number169Source:DATA DEFINITIONS Debt (short and long term)Debt is the sum of short and long term inter
411、est-bearing debt and finance leases. Note that debt must be interest-bearing and be either borrowings from banks or in the form of bonds. Care should be taken to ensure that the definition of debt which includes all liabilities is not usedThe data used should be taken from the latest published finan
412、cial statements and the accounts that are normally considered are found under the following captions:Bills/notes payableLoansLiabilities due to banksBonds/debenturesConvertible debtFinance leases and hire purchase agreementsThe accounts “Liabilities due to subsidiaries” and “Liabilities due to compa
413、nies in which a participating interest is held” are tradables and not considered when computing net debtCash and Short Term InvestmentsCash and short term investments are defined as cash and marketable securities including short term loans (assets) when their maturity is less than a month. Also, fal
414、ling within the definition of cash should be bills/notes receivableHowever, unlisted securities should not be included in the calculation of cashDocument number170Source:DATA DEFINITIONS Minority InterestsMinority interests are the book values of third party investors shareholdings in consolidated s
415、ubsidiaries where these investors hold less than 50% of the shares. Care should be taken to ensure that these are separated from shareholders equityBook ValueBook value, as used in ratio calculations, refers to the reported value of shareholders funds excluding preference shares. Where companies hav
416、e preference shares these will usually need to be subtracted from reported shareholders funds to calculate book valueIn a nut shall , it could also be defined as total equity excluding minority interests and preference sharesPreference SharesPreference shares are to be stated in the summary balance
417、sheet at their reported nominal or book value, including any share premium account related to themDocument number171Source:DATA DEFINITIONS Net DebtNet debt is defined as: Short Term Debt+ Long Term Debt+ Finance Leases- Cash- Marketable Securities= Net DebtNote that we call negative net debt “net c
418、ash”Adjusted Book ValueIn companies where goodwill has been written off directly to reserves, Adjusted Book Value is calculated by adding back the cumulative goodwill written off (CGWO) to achieve better comparability with companies which have not written off goodwill directly to reserves. But this
419、part may sometime be difficult to documentBook Value + Cumulative Goodwill Written Off = Adjusted Book ValueCumulative goodwill written off is disclosed in a note to the accounts but this information may not be available in all countries. This is a simple measure of underlying net assets and we do n
420、ot attempt further adjustments such as including amortization which would have been charged in the accounts if the goodwill had not been written offDocument number172Source:DATA DEFINITIONS Cash FlowCash flow is the sum of adjusted earnings, depreciation and amortization. It excludes exceptional/ext
421、raordinary itemsAdjusted Earnings+ Depreciation+ Amortisation= Cash FlowCapital employedCapital employed is defined as:Net Debt+ Minority interests+ All Provisions (including Pension Liabilities or Provisions if these are on-balance sheet)+ Nominal Book Value of Preference Capital+ Nominal Book Valu
422、e of Ordinary Shares and Reserves= Capital EmployedCapital employed is computed and identified on the spreadsheetDocument number173Source:DATA DEFINITIONSNet worth is disclosed in financial statements but we do not use it in any ratio calculations since market capitalization excludes preference shar
423、es. Instead we use book value or adjusted book value. Net worth is defined as ordinary shareholders funds plus preferred shares and excluding minority interestsMarket Capitalization+ Net Debt/- Net Cash+ Long Term Liabilities (Including Provisions or Pension liabilities but excluding debt)+ Minority
424、 interests+ Preference capital = Firm valueFirm value is identified separately on the spreadsheet. Here market capitalization should be fully diluted and should use the weighted average number of shares outstanding in T0 to be consistent with other definitions and ratios e.g. fully diluted earnings
425、per share. Note that we include all other long term liabilities as part of firm value as ultimately these will become debt if the provision is used or shareholders funds if it is not used. Also these are part of the funding of the companys capital employed. Strictly speaking, the cost of creating ot
426、her long term liabilities should be stripped out of the income statement, i.e. out of EDBIT, but we cant do this consistently, so we leave it in unless it is large and disclosedFirm value is a particularly important definition which is often misunderstood. For example, a company with a market cap of
427、 1000 and net debt of 300 has a firm value of 1300 but a company with a market cap of 1,000 and net cash of 300 has a firm value of 700Net WorthFirm ValueDocument number174Understanding trading multiplesCompany report spreadsheet123Data definitionsFully diluted calculations4ObjectivesRatio definitio
428、ns5Data collection template6Document number175Source:FULLY DILUTED CALCULATIONS This section outlines the issues involved in calculating fully diluted data and fully diluted ratiosThe fully diluted calculation is necessary when the conversion of one or more of three types of instrument results in ea
429、rnings per share dilution of 5% or more. In other words the current shareholder may find his share in the earning power of the company reduced in the future. This calculation quantifies what earnings per share would have been had this conversion taken place in year T0, T1 and T2. dilution can arise
430、from the exercise of options and warrants and the conversion of convertible debt or convertible preference shares. It is effectively caused by the resulting issue of new shares at below market price or the replacement of low cost convertible debt by more expensive new shares which are usually issued
431、 at around the market priceTo make the fully diluted calculation we have to inspect the notes to the financial statement to identify all options, warrants and convertibles. For each we have to identify how many new shares will be issued and at what price. We assume that any option, warrant or conver
432、tible which has exercise or conversion terms at up to two times the current share price will convert into new shares at some point in the future An indication of whether 5% dilution may occur is to calculate the total number of shares which would be issued from the exercise or conversion of options,
433、 warrants or convertibles. If this represents 5% or more of the current number of issued shares then the fully diluted calculation should be made. If this does not result in at least a 5% reduction in earnings per share then the ordinary undiluted calculation is made. The fully diluted number of sha
434、res generally equals the number of ordinary shares outstanding during the yearDocument number176Source:FULLY DILUTED CALCULATIONS Options and WarrantsTo calculate impact of any future exercise of options or warrants we first identify the number and exercise prices of all options or warrants which ar
435、e priced up to two times the current share price. We then make the following adjustments to the summary financial statements:Option or warrant exercise proceeds, O or W = n. PeThe balance sheet impact is as follows:Increase in cash = n.Pe = Increase in share capitalThe income statement impact is:Inc
436、rease in interest income = n.P.i and the increases market capitalization = n.PMWith these adjustments we can calculate fully diluted earnings per share and all other ratioswhen the n = number of shares created by exercise of options or warrants. We assume that these are outstanding for the full fina
437、ncial year; Pe = exercise pricewhere I is the yield to maturity of long term government bonds at the beginning of the relevant yearwhere PM is the current share priceDocument number177Source:FULLY DILUTED CALCULATIONS Convertible Debt To calculate the impact of any further conversion of debt into eq
438、uity we identify the number of shares which will be issued where conversion terms are up to two times the current share price. No cash is raised from the conversion. For example, HK$200 million of debt convertible at HK$20 per share will eliminate HK$200 of debt from the balance sheet and create HK$
439、200 million nominal share capital comprising 10 million shares. We can then use the term C for the face value of convertible debt convertedDebt converted, C = n.PC n = number of shares issued PC = convertibleThe balance sheet impact is as follows:Reduction in debt = n.PC = Increase in share capitalT
440、he income statement impact is:Reduction in interest expense = n.PC . iC where iC is the coupon on the convertible and the increase in market capitalization = n.PM where PM is the current share priceDocument number178Source:FULLY DILUTED CALCULATIONS Convertible Preference ShareThe convertible prefer
441、ence share dilution calculation is the same as for convertible debt except that preference capital is reduced and ordinary share capital is increased by the normal value of the convertible preference shares. Interest expense does not change but preference dividends are reduced which increases the ea
442、rnings available for ordinary sharesReduction in preference capital, P = n. Pc = Increase in share capital Reduction in preference dividends = n. Pc. Cp where Cp is the dividend coupon on the convertible Pref The increase in market capitalisation = n. PM as for convertible debtGovernment Bond Yield
443、To calculate the increase in income which would have resulted from conversions to equity capital at the beginning of 2003, long term government bond yields from January 2007 should be usedDocument number179Understanding trading multiplesCompany report spreadsheet123Data definitionsFully diluted calc
444、ulations4ObjectivesRatio definitions5Data collection template6Document number180Source:RATIO DEFINITIONS From the above share price, income statement and balance sheet information, we compute the following ratios:Price/Reported Earnings T0Price/Adjusted Earnings T0Price/Earnings T1Price/Earnings T2R
445、eported P/E Relative T0P/Adjusted Earnings Relative T0P/E Relative T1P/E Relative T2Price/Cash Flow T0Price/Book Value T0Price/Adjusted Book Value T0Firm Value/Sales T0Firm Value/EBDIT T0Firm Value/ EBIT T0Firm Value/Capital Employed T0Gross Dividend Yield T0Gross Dividend Yield T1Gross Dividend Yie
446、ld T2Gross Dividend Yield Relative T0Gross Dividend Yield Relative T1Gross Dividend Yield Relative T2Document number181Source:RATIO DEFINITIONS Price/Reported Earnings T0 Price of most liquid stockPrice/Reported Earning T0= Reported earning per share T0Price/Earnings T0, T1, T2 Price of most liquid
447、stockPrice/Earnings T0, T1, T2 = Fully diluted earnings per share T0, T1, T2This fully diluted earnings per share figure should be compared with annual report and the market consensus actual figure. Any differences should be notedReported Price/Earnings Relative T0Reported Price/Earnings T0Reported
448、Price/Earning Relative T0= Local Country Market Price/Earnings T0In those companies where the fiscal year does not finish in December, the local country market price used will depend on the month that the local year ends. A simple solution is if the fiscal year ends before June 30 we use T-1, and if
449、 it ends after June 30, we use T0Document number182Source:RATIO DEFINITIONS Price/Earning Relative T0, T1, T2Price/Earnings T0, T1, T2 Price/Earning Relative T0, T1, T2 = Local Country Market Price/Earnings T0, T1, T2 Price/Book Value T0 (Price of most liquid stock x fully diluted no of ordinary sha
450、res) Price/Book Value = Fully Diluted Book Value T0Price/Cash Flow T0, T1, T2Price of most liquid stock x fully diluted no of ordinary sharesPrice/Cash Flow T0 = Fully Diluted Cash Flow T0Important Note: the price of the most liquid stock is used to be consistent with the P/E calculation rather than
451、 calculate a weighted average price/cash flow. The fully diluted number of ordinary of shares is the number of shares resulting from convertible , option or warrant exercise plus the weighted average number of shares outstandingDocument number183Source:RATIO DEFINITIONS Price/Adjusted Book Value T0P
452、rice and book value here are identical to those in Price/Book Value T0 except that Book Value T0 is increased by adding back cumulative goodwill which was written off in the past, i.e. (Price of most liquid stock x fully diluted no of ord. Shares)Price/Adjust Book Value T0=(Fully Diluted Book Value
453、T0 + CGWO)Firm Value/Sales T0Fully Diluted Firm ValueFirm Value/Sales T0 = Sales T0Firm value is used in total rather than on a per share basis because such a calculation is not meaningful given that all types of capital (preference, minorities, debt, etc) have to be included in the numeratorFirm Va
454、lue/EBDIT T0 Firm Value/EBIT T0 Fully Diluted Firm Value Fully Diluted Firm ValueFirm Value/EBDIT T0 = Firm Value/EBIT T0 = EBDIT T0EBIT T0Document number184Source:RATIO DEFINITIONS Firm Value/Capital Employed T0Fully Diluted Firm ValueFirm Value/Capital Employed T0 = Fully Diluted Capital Employed
455、T0 Gross Dividend Yield T0, T1, T2 Gross dividend of most liquid stock in T0, T1, T2 Gross dividend Yield T0, T1, T2 = Price of most liquid stockGross Dividend Yield Relative T0, T1, T2 Gross dividend yield of most liquid stock in T0, T1, T2Gross dividend yield relative T0, T1, T2 = Gross dividend y
456、ield of local country market in T0, T1, T2Document number185Understanding trading multiplesCompany report spreadsheet123Data definitionsFully diluted calculations4ObjectivesRatio definitions5Data collection template6Document number186Listed peer comparable checklistSource: Roland Berger AnalysisMacr
457、oeconomic informationAnnual ReportHalf-year reportIPO prospectusCompany news Analysis reportMarket capital & capital structureTrading platformNumber of shares & percentage of share tradingHistorical BetaStock trading chart, price and volumeAnnual reportHalf-year report (last 12 months)Quarterly repo
458、rt (last 12 months)IPO prospectusCompany newsAnalysis reportTransaction summaryTrading platformNumber of shares & percentage of share tradingHistorical BetaStock trading chart, price and volumeValuation target company informationPeer company informationCheckCheck231Corporate aggregated tax rateMoney
459、 market fund rate (short term cash deposit: 1 & 3 month)CheckDocument number187C.ComparableC1. Comparable methodologyC2. Listed peer comparableC3. Transaction comparableDocument number188Understanding transaction comparablesTransaction report spreadsheet123Data definitions4ObjectivesRatio definition
460、s5Data collection templateDocument number189Getting started with transaction comparablesSource:Provides detailed definitions of the ratios to be usedDefines the computations necessary to calculate these ratiosDefines the data sources to be usedDefines a methodology and collect information needed for
461、 building a comparable transaction tableDocument objectivesDocument number190Understanding transaction comparablesTransaction report spreadsheet123Data definitions4ObjectivesRatio definitions5Data collection templateDocument number191Internal sources: acquirerDatePrice paid% of equity acquiredOther
462、commentsExternal sources: acquirerPress release and journalist articleEquity analysis reportInformation from acquirerNotesSource:General Information on transactionThis section includes the currency used, year end (identified from the latest annual or quarterly report) and the companys major activiti
463、es (both by line of product and countryNote that information may be limited on the transactionResearching transactions information is some what difficult and time consumingThe quality of available information can be very variableCompany Information (acquirer)from: Bloomberg and financial reportingDo
464、cument number192Internal sources: targetDatePrice paid% of equity acquiredOther commentsExternal sources: targetPress release and journalist articleEquity analysis reportInformation from targetNotesSource:from: Bloomberg and financial reportingGeneral Information on transactionThis section includes
465、the currency used, year end (identified from the latest annual or quarterly report) and the companys major activities (both by line of product and countryNote that information may be limited on the transactionResearching transactions information is some what difficult and time consumingThe quality o
466、f available information can be very variableCompany Information (target)Document number193Information from company reportsSource:Price/Reported Earnings T0*Price/Adjusted Earnings T0Price/ Earnings T1*Price/ Earnings T2*Price/Cash Flow T0Price/Book Value T0Price/Adjusted Book Value T0Firm Value/Sale
467、s T0Firm Value/EBDIT T0Firm Value/EBIT T0Firm Value/Capital Employed T0RatiosDocument number194Understanding transaction comparablesTransaction report spreadsheet123Data definitions4ObjectivesRatio definitions5Data collection templateDocument number195DATA DEFINITIONS Source:This is the share price
468、at previous days close for each class of stock (identify each)Latest share pricePrice used in P/EPrice, as used in the calculation of P/E ratios, is defined:Price = latest price of one share of the class of ordinary shares with the largest market capitalizationFor most companies which have only one
469、class of ordinary shares, this is a straightforward exercise but, where are more than one class of ordinary shares, the class of shares used in this calculation will have to be determined and recorded for each company we follow. The reason for selecting the class of shares with the largest capitaliz
470、ation is that we are trying to measure the P/E of the most liquid form of stock rather than three P/Es for the company. There will be different prices for each class (which need to be recorded to calculate market capitalization) but there is only one earnings per share figure for the company as a wh
471、ole for each yearDocument number196DATA DEFINITIONSSource:Market capitalization equals the latest share price multiplied by the weighted average number of shares outstanding in the latest reported fiscal year, totaled for all types of common stock, i.e.n=nMarket capitalization = (Price of class n x
472、weighted average no. of class n shares outstanding)n=0Note that some analysts calculate market capitalization as price of most liquid stock times total number of shares outstanding. This is inaccurate and should not be usedThere are two possible exceptions to this general principle:Where the ordinar
473、y stock is privately owned and only the preferred stock has a market price. In this case to calculate the market capitalization we have to use the preferred stock price and the total outstanding number of shares (preferred and common). Although this is not strictly accurate, there is no alternative
474、in this caseWhere preferred stock possesses the same characteristics as the common stock (i.e France where dividends vary depending on the ordinary dividend), it is also included in the calculation. We explain later the procedure used to calculate the ratios when preferred stock is taken into accoun
475、tMarket capitalization (1/2)Document number197DATA DEFINITIONSSource:It is also necessary to look out for rights issues and stock splits. If either has happened since the year end the weighted average number of shares should be restated. For example if this was a one-four four rights issue and last
476、years number of shares was 100MM then these should be increased by 25% to 125MM. If this adjustment was not made, earnings per share would be overstated and because the share price would tend to be lower, it would result in a distorted P/E ratio. Other ratios would be similarly distorted. We also ne
477、ed to increase historic interest income to reflect the increased cash balance which results from the rights issue. This income should be taxed at the effective tax rateThus historic earnings will increase and the number of shares will increase but the share-price will adjust downwards depending on t
478、he discount and number of new shares issued. The trading multiples model will make these adjustments given the necessary inputsMarket capitalization (2/2)Document number198DATA DEFINITIONSSource:The income statement is spread into the format shown starting at reported profit and working up the incom
479、e statement to EBDITItems falling outside these categories, e.g. associated company income, should be ignored so that they are implicitly included in EBDIT. Adjusted earnings may differ from Reported Profit due to stripping out exceptional and extraordinary itemsCONSOLIDATED SALESEBDIT- Depreciation
480、= EBIT+ Interest Income= NBIT- Interest Expense+/- Exceptional Items= NBT- Tax = NAT+/- Extraordinary Items- Minorities= Reported ProfitIncome StatementDocument number199DATA DEFINITIONS Source:Sales Sales are defined as net revenues of consolidated subsidiaries, i.e. excluding affiliated company re
481、venue. Sales should not include:royalty incomeinterest income taxes such as petroleum, alcoholic beverage and tobacco duties where these are immediately payable to the tax authoritiesSales attributable to discontinued operations should be included in the calculation of net revenues. This is because
482、the corresponding breakdown of the balance sheet is not usually provided and the proceeds from the sale of the discontinued items are also not likely to be disclosed or knownEBITEBIT is calculated back from reported profit as:Reported Profit+ Minorities- Extraordinary Items+ Tax+ Interest Expense- E
483、xceptional Gains + Exceptional Losses- Interest Income= EBITDocument number200DATA DEFINITIONS Source:Depreciation and AmortisationDepreciation should include all forms of depreciation and amortization i.e. on fixed assets, financial assets, trademarks and patents and goodwillEBITDAEBDIT is calculat
484、ed back from reported profit rather than down from operating profit because there is no commonly recognized definition of operating profit while there is for reported profitReported Profit+ Minorities- Extraordinary Items+ Tax+ Interest Expense- Exceptional Gains + Exceptional Losses- Interest Incom
485、e+ Depreciation & Amortisation= EBDITDocument number201DATA DEFINITIONS Source:Interest IncomeInterest Income is the gross interest receivable from cash, deposits and securities. The figure is usually provided in the annual report, and if not, we should try to find it in the “Financial Income” Accou
486、nt. This account will usually include the following items:Items IncludeIncome from financial fixed assets or marketable securities YesIncome from current assets YesOther financial income NoUnrealised gains from marketable securities NoRealised gains from marketable securities YesOf which subsidiarie
487、s NoInterest ExpenseInterest expense as stated in the statutory accounts is interest expense paid on borrowings and finance leases and should be gross and not net of stated interest income. In some countries, as happen with interest income, interest expense is not specifically identified in the annu
488、al report. We may have several accounts classified as financial charges and we have to take account only of the charges on borrowings and capital leases but not other financial charges. Capitalized interest is subtracted where companies report it in there income statements because this is common pra
489、ctice (if we adjusted earnings per share by adding it back, we may be inconsistent with market consensus forecasts)Document number202DATA DEFINITIONS Source:NBTNBT is shorthand for “net before taxes” or pre-tax profitIt is widely recognized as a consistent benchmark in the income statement. It shoul
490、d always be taken as stated in the annual report unless there are other items below pre-tax profits, such as profit-sharing in France, which we would regard as an operating cost (this should be subtracted from NBT, EBIT, EBDIT etc. as another operating cost)NBT should always include “equity in net e
491、arnings of associated companies”. In those countries where this item appears as an after-tax income, we have to recalculate NBT and taxes so it appears before tax, applying the effective tax rate if the taxes related are not specifiedNBITNBIT is included here as a definition because it is used in cr
492、edit calculations of interest cover (NBIT/Interest Expense) and to draw attention to the fact that it differs from EBIT. NBIT is defined as:Pre-tax Profit (NBT)+ Interest Expense- Exceptional/Gains + Exceptional/Losses= NBITDocument number203Source:DATA DEFINITIONS Taxes Taxes are corporate taxes fr
493、om profit on ordinary activities and include Advance Corporation Tax or similar divided-related taxes, double taxation relief, overseas taxes, provisions for deferred tax and tax charges arising in related/affiliated companies. The taxation figure reported in the income statement is the figure which
494、 should be used in the summary income statement in order to arrive at the same number for NAT as reported in the Annual ReportNATNAT is net profit after taxes or profit on ordinary activities after taxation company accounts. NAT is before deduction of minority interests. It also includes both contin
495、uing and discontinued operationsDocument number204Source:DATA DEFINITIONSPrudent definition of adjusted earnings requires that these are stated excluding the after tax impact of all exceptional and extraordinary items. It should be noted whether the exceptional or extraordinary items are before or a
496、fter tax and whether there is any disclosure of related tax payments. Non-recurring items stated gross of tax should be treated as exceptional where they have not been classified as exceptional or extraordinary. Where an exceptional item is reported as exceptional by virtue of its size alone, it sho
497、uld be treated as normal maintainable earnings and not excluded according to the general principle described above. An example might be a company which wins an unusually large contract. This would be reported in the annual accounts as an exceptional itemExceptional and extraordinary items have a var
498、iety of definitions. We include both, as well as the related tax effects, to calculate NAT and Reported Profits, but exclude them to calculate adjusted earningsIn eliminating exceptional or extraordinary items we need to also take out any tax effects relating to these items. The trading multiplies s
499、preadsheet makes these adjustments by computing the companys apparent effective tax rate and adjusting the tax charge accordinglyIn some countries, some companies provide a breakdown of extraordinary items but include tax credits. As a result we have to recalculate the NBT and tax figures provided i
500、n the Profit and Loss account, while maintaining the same reported earnings figureExceptional and extraordinary itemsDocument number205Source:DATA DEFINITIONS MinoritiesMinority interests in consolidated after-tax profits/reported profits are shown as a deduction from NAT. this is because, under the
501、 parent company theory, minority interests are not considered part of stockholders equity and are disclosed in the consolidated balance sheet between the liability section and the stockholders equity section. Note that earnings per share date must be presented after the deduction of minority interes
502、tsReported ProfitReported profit is included in the spreadsheet income statement because clients usually want to see figures which they recognize. These should reconcile back to NBT and are historic figures only. Projected earnings per share exclude extraordinary items and exceptional items and are
503、on a fully diluted basis and so are more consistent with our adjusted earnings definitionDocument number206Source:DATA DEFINITIONS Preference DividendsDividends on all preference shares are subtracted from reported profits to calculate reported profit available for ordinary. Dividends are net of (i.
504、e. excluding) any tax creditsOrdinary DividendsOrdinary dividends are either reported in the consolidated income statement or can be calculated as:(Year end number of shares) x Net dividend per shareWe always calculate ordinary dividends as in some countries the dividend figure that appears on the C
505、ash Flow statement (or Sources and Uses of Funds) relates to the precious years dividends and so is different to the current years dividendTo calculate ordinary dividends the number of shares should exclude those shares held in treasury by the company. The net dividend per share is the amount paid o
506、ut by the company excluding any tax credits received by the shareholderReported Available for OrdinaryReported available for ordinary is reported profit less any preference dividends, and is the numerator for the earnings per share calculationDocument number207Source:DATA DEFINITIONS Adjusted Earnin
507、gsWe define adjusted earnings as reported profits after minorities but excluding exceptional and extraordinary items. These have the same basis as IBES/TED earnings Reported Profits+ Exceptional/Extraordinary Items - Exceptional/Extraordinary Gains= Adjusted EarningsWhere exceptional/extraordinary i
508、tems are stripped out, the related tax charge should also be removed. If no information is provided for taxes on exceptional/extraordinary items, we arbitrarily assume that it is calculated at the particular years effective tax rate, i.e. Tax ChargeEffective tax rate = NBTThis can result in a differ
509、ent NBT to that reported by the companyDocument number208Source:DATA DEFINITIONS Summary Balance SheetThe following items should be extracted from the latest balance sheet and presented in the Company Information Section of the Company Report:Cash and Short Term InvestmentsShort Term DebtLong Term D
510、ebtConvertiblesTotal Net DebtDocument number209Source:DATA DEFINITIONS Debt (short and long term)Debt is the sum of short and long term interest-bearing debt and finance leases. Note that debt must be interest-bearing and be either borrowings from banks or in the form of bonds. Care should be taken
511、to ensure that the definition of debt which includes all liabilities is not usedThe data used should be taken from the latest published financial statements and the accounts that are normally considered are found under the following captions:Bills/notes payableLoansLiabilities due to banksBonds/debe
512、nturesConvertible debtFinance leases and hire purchase agreementsThe accounts “Liabilities due to subsidiaries” and “Liabilities due to companies in which a participating interest is held” are tradables and not considered when computing net debtCash and Short Term InvestmentsCash and short term inve
513、stments are defined as cash and marketable securities including short term loans (assets) when their maturity is less than a month. Also, falling within the definition of cash should be bills/notes receivableHowever, unlisted securities should not be included in the calculation of cashDocument numbe
514、r210Source:DATA DEFINITIONS Minority InterestsMinority interests are the book values of third party investors shareholdings in consolidated subsidiaries where these investors hold less than 50% of the shares. Care should be taken to ensure that these are separated from shareholders equityBook ValueB
515、ook value, as used in ratio calculations, refers to the reported value of shareholders funds excluding preference shares. Where companies have preference shares these will usually need to be subtracted from reported shareholders funds to calculate book valueIn a nut shall , it could also be defined
516、as total equity excluding minority interests and preference sharesPreference SharesPreference shares are to be stated in the summary balance sheet at their reported nominal or book value, including any share premium account related to themDocument number211Source:DATA DEFINITIONS Net DebtNet debt is
517、 defined as: Short Term Debt+ Long Term Debt+ Finance Leases- Cash- Marketable Securities= Net DebtNote that we call negative net debt “net cash”Adjusted Book ValueIn companies where goodwill has been written off directly to reserves, Adjusted Book Value is calculated by adding back the cumulative g
518、oodwill written off (CGWO) to achieve better comparability with companies which have not written off goodwill directly to reserves. But this part may sometime be difficult to documentCumulative goodwill written off is disclosed in a note to the accounts but this information may not be available in a
519、ll countries. This is a simple measure of underlying net assets and we do not attempt further adjustments such as including amortization which would have been charged in the accounts if the goodwill had not been written offDocument number212Source:DATA DEFINITIONSNet worth is disclosed in financial
520、statements but we do not use it in any ratio calculations since market capitalization excludes preference shares. Instead we use book value or adjusted book value. Net worth is defined as ordinary shareholders funds plus preferred shares and excluding minority interestsMarket Capitalization+ Net Deb
521、t/- Net Cash+ Long Term Liabilities (Including Provisions or Pension liabilities but excluding debt)+ Minority interests+ Preference capital = Firm valueFirm value is identified separately on the spreadsheet. Here market capitalization should be fully diluted and should use the weighted average numb
522、er of shares outstanding in T0 to be consistent with other definitions and ratios e.g. fully diluted earnings per share. Note that we include all other long term liabilities as part of firm value as ultimately these will become debt if the provision is used or shareholders funds if it is not used. A
523、lso these are part of the funding of the companys capital employed. Strictly speaking, the cost of creating other long term liabilities should be stripped out of the income statement, i.e. out of EDBIT, but we cant do this consistently, so we leave it in unless it is large and disclosedFirm value is
524、 a particularly important definition which is often misunderstood. For example, a company with a market cap of 1000 and net debt of 300 has a firm value of 1300 but a company with a market cap of 1,000 and net cash of 300 has a firm value of 700Net WorthFirm ValueDocument number213Understanding tran
525、saction comparablesTransaction report spreadsheet123Data definitions4ObjectivesRatio definitions5Data collection templateDocument number214Source:RATIO DEFINITIONS From the above share price, income statement and balance sheet information, we compute the following ratios:Price/Reported Earnings T0Pr
526、ice/Adjusted Earnings T0Price/Earnings T1Price/Earnings T2Price/Cash Flow T0Price/Book Value T0Price/Adjusted Book Value T0Firm Value/Sales T0Firm Value/EBDIT T0Firm Value/ EBIT T0In most cases, all the required information will not be available. One needs to focus on basic valuation ratio for the y
527、ear of the transaction.P/EFV/EBITFV/EBITDAP/Sales or FV/SalesDocument number215Source:RATIO DEFINITIONS Price/Reported Earnings T0 Price of most liquid stockPrice/Reported Earning T0= Reported earning per share T0Price/Earnings T0, T1, T2 Price of most liquid stockPrice/Earnings T0, T1, T2 = Fully d
528、iluted earnings per share T0, T1, T2This fully diluted earnings per share figure should be compared with annual report and the market consensus actual figure. Any differences should be notedDocument number216Source:RATIO DEFINITIONS Price/Earning Relative T0, T1, T2Price/Earnings T0, T1, T2 Price/Ea
529、rning Relative T0, T1, T2 = Local Country Market Price/Earnings T0, T1, T2 Price/Book Value T0 (Price of most liquid stock x fully diluted no of ordinary shares) Price/Book Value = Fully Diluted Book Value T0Price/Cash Flow T0, T1, T2Price of most liquid stock x fully diluted no of ordinary sharesPr
530、ice/Cash Flow T0 = Fully Diluted Cash Flow T0Important Note: the price of the most liquid stock is used to be consistent with the P/E calculation rather than calculate a weighted average price/cash flow. The fully diluted number of ordinary of shares is the number of shares resulting from convertibl
531、e , option or warrant exercise plus the weighted average number of shares outstandingDocument number217Source:RATIO DEFINITIONS Price/Adjusted Book Value T0Price and book value here are identical to those in Price/Book Value T0 except that Book Value T0 is increased by adding back cumulative goodwil
532、l which was written off in the past, i.e. (Price of most liquid stock x fully diluted no of ord. Shares)Price/Adjust Book Value T0=(Fully Diluted Book Value T0 + CGWO)Firm Value/Sales T0Fully Diluted Firm ValueFirm Value/Sales T0 = Sales T0Firm value is used in total rather than on a per share basis
533、 because such a calculation is not meaningful given that all types of capital (preference, minorities, debt, etc) have to be included in the numeratorFirm Value/EBDIT T0 Firm Value/EBIT T0 Fully Diluted Firm Value Fully Diluted Firm ValueFirm Value/EBDIT T0 = Firm Value/EBIT T0 = EBDIT T0EBIT T0Docu
534、ment number218Understanding transaction comparablesTransaction report spreadsheet123Data definitions4ObjectivesRatio definitions5Data collection templateDocument number219Transaction comparable checklistSource: Roland Berger AnalysisCheckCheck12Macroeconomic informationCorporate aggregated tax rateM
535、oney market fund rate (short term cash deposit: 1 & 3 month)Valuation target informationAnnual ReportHalf-year reportIPO prospectusCompany news Analysis reportMarket capital & capital structureTrading platformNumber of shares & percentage of share tradingHistorical BetaStock trading chart, price and
536、 volumeCheckCheck34Information of acquiring company of comparable transactionInformation of targeted company of comparable transactionAnnual reportHalf-year reportQuarterly reportCompany newsAnalysis report and M&A detailsTransaction summaryAnnual reportHalf-year reportQuarterly reportCompany newsAn
537、alysis report and M&A detailsTransaction summaryDocument number220E.Real Option Document number221The real option valuation approach makes it possible to quantify value effects that may arise from the managements flexibility in modifying decisions madeCapital projects may, for instance, be postponed
538、, altered, expanded or reduced due to new information real options limit the down-side risk without reducing the up-side potentialReal option pricing and DCF valuation are compatible the total value of an investment is composed of the (static) DCF value and the (dynamic) option valueReal options may
539、 be used in the case of acquisitions the value of the acquisition is determined on the basis of the value of the assets in place as well as strategic and operative real optionsThe options are valued in four steps; the binomial option pricing model is an adequate tool for the valuation of real option
540、sDespite its many benefits, the real option approach also has its limitations, and being a relatively new method of valuation, in practice, is still not widely used and acceptedReal options are dynamic value components of investments and acquisitionsDocument number222The main weakness of the DCF met
541、hod is that it does not sufficiently take management flexibility and the strategic potential into accountThe DCF method fails to take into account the flexibility (possibilities of choice and action) of the management to adjust its decision at a later date due to new information (e.g., changes in th
542、e market)DCF is based on now-or-never decisions; assuming the irrevocability of the entire investmentCapital projects may, however, be discontinued, delayed or changedThe DCF method fails to adequately take into account the value of strategic potential, e.g.So-called platform investments contain opt
543、ions for making additional investmentsThese options have a certain valueUsing the DCF method of valuation may result in an undervaluation of investments/acquisitionsCritical assessment of DCF valuationDocument number223Real optionOptionparametersCall option on stocks(financial option)Mapping an inve
544、stment opportunity onto a call optionThe known option pricing models can be used, perhaps in modified modelsSXTrfStock priceVolatility of the share priceExercise / Strike priceTime to expiration of optionRisk free interest rateComparison of option parametersPresent value of a projects operating asse
545、ts to be acquiredRiskiness of the project assetsExpenditure required to acquire the projects assetsLength of time the decision may be deferredTime value of moneyDocument number224Linking NPV and option value: when are conventional NPV and option value identical?Conventional NPV and option value are
546、identical when the investment decision can no longer be deferredConventional NPVOption valueNPV = (value of project assets) (expenditure required)This is S.This is X.So: NPV = S X.When t = 0, 2 and rf do not affect call option value. Only S and X matterAt expiration, call option value isS X or 0,whi
547、chever is greaterHere, we must decide “go” or “no go”Here, its “exercise” or “not”Document number225Linking NPV and option value: when are conventional NPV and option value different?Conventional NPV and option value diverge when the investment decision may be deferredThe traditional NPV misses the
548、extra value associated with deferred because it assumes the decision cannot be put offIn order to value the investment, we need to develop two metrics that capture the extra sources of valueFirst source of additional value:“modified” NPV and NPVqTakes the interest into account you can earn on the re
549、quired capital expenditure by investing later rather than sooner.Second source of additional value:Cumulative volatility Takes the uncertainty of future returns into account. tDocument number226Quantifying extra value: Modifying the traditional NPV1Conventional NPV: NPV = S - X3“Modified” NPV: NPV =
550、 S PV(X)2Deferral of investment: PV(X) =X(1 + rf)t 4Converting negative values to decimals between zero & one: NPVq =SPV(X)Document number227Substituting NPVq for NPVWe can rank projects on a continuum according to values for NPVq, just as we would for NPV. When a decision can no longer be deferred,
551、 NPV and NPVq give identical investment decisions, but NPVq has some mathematical advantagesWhen time runs out, projects here are rejected (option is not exercised)When time runs out, projects here are accepted (option is exercised)NPVNPVqNPV 00.0NPV = S - XNPVq 11.0NPVq = S PV(X)Document number228L
552、inking the metrics to the Black-Scholes modelOur two new metrics together contain all five variables in the Black-Scholes model. Combining five variables into two lets us locate opportunities in two-dimensional spaceOption value metricsNPVqInvestment opportunityPresent value of a projects operating
553、assets to be acquiredExpenditure required to acquire the project assetsLength of time the decision may be deferredTime value of moneyRiskiness of the project assetsCall optionStock priceExercise priceTime to expirationRisk-free rate of returnVariance of returns on stockVariableSXtrf2 tDocument numbe
554、r229Locating the option value in two-dimensional spaceWe can locate investment opportunities in these two-dimensional spaceHigher valuesLower valuesLower valuesHigher valuesNPVqCall option value increasesin these directions1 tDocument number230The value of real options based on capital or acquisitio
555、n projects is determined in a four-step processStepsIdentify real optionsCheck for real options and determine whether the application of option models makes senseIdentify and describe existing options (types of options)Where applicable, prioritize and select most important optionsClarify interaction
556、 between existing optionsChoose valuation methodDecide on application of an option pricing procedureSelect suitable modelImplement modelValue option(s)Assess option parametersUse traditional valuation methods for the valuation of static componentsValue optionsFine-tune and conduct plausibility check
557、sAnalyze option value sensitivities in terms of changes of option parametersExamine inter-dependencies between several optionsAssess the impact of interaction on valueConduct plausibility checks1234Document number231In the context of a company valuation there are three basic types of optionsValue of
558、 existing assets (NPV of future cash flows)Flexibility in terms of future assetsFlexibility in terms of existing assetsFlexibility in terms of equity and debt determines the proportion of capital provided by shareholders and by lendersStrategicoptionsStatic valueDynamic valueEquity valueNet Debt val
559、ueCompany valueOperativeoptionsAssets in placeOption types Finance options Source: Koch (1999); sometimes other classifications are used in literature; see Hommel/Pritsch (1999)Asset-based optionsCapital-based optionsDocument number232AcquisitionoptionsGrowth optionsDivestiture optionsStrategic opti
560、ons value of the flexibility of making additional future investments Viewing entire company as an optionBuyer has the (economic) right to acquire the target companyThe total company value consists of the internal value of the option (present value of the cashflows) and of the net present value (flex
561、ibility in terms of buying decision) Growth options are options based on an acquisitionValuation as compound optionsE.g., acquisition of an Internet company to expand e-commerce servicesPossibility of valuing multi-stage sequential options by using the binomial modelAnalogous to the acquisition opti
562、on, divestiture options award the right to sell a company or parts of itServes to limit the down-side risk of an acquisitionImportance of strategic real optionsDocument number233Operative options value of flexibility of the management of existing assets (operative hedging)ProcessingProductsInputsFle
563、xibility of input(Input options)Process flexibility(Process options)Flexibility of output(Output options)Flexibility of readjustment (Operative readjustment options)Flexibility of capacity (Expansion option, reduction option)Identification scheme for operative optionsDocument number234The real optio
564、n valuation is based on an extended version of the binomial option pricing model developed by Cox/Ross/RubinsteinBasis: Time discreet binomial model by Cox, Ross, Rubinstein (1979)Binomial option pricing formulaSwap optionsW(X1,X2) = Wu(d2 d1) + Wd(u1 u2)u1 d2 u2 d1Call optionsC(V,X) = Cu Cdu ddCu u
565、Cdr(u d)Put optionsP(V,X) = uPd dPur(u d)u dPd PuRepresents the value of a swap option that allows the holder to swap an asset X2 (stochastic) for another asset X2 (stochastic)Wu and Wd represent the value of the option at the of its term in the event of positive (u1 and u2) and negative (d1 and d2)
566、 value developmentRepresents the value of an option on the purchase of an asset V (stochastic) against payment of a fixed exercise price XCu and Cd represent the value of the call option at the end of its term in the event of positive (u) and negative (d) development; r represents the riskless inter
567、est rate Represents the value of an option on the sale of an asset V (stochastic) against a fixed payment XPu and Pd represent the value of the put option at the end of its term in the event of positive (u) and negative (d) development; r represents the risk-free interest rateOption valuation proced
568、ureDocument number235Asset returns (near-dividend cash outflowsExercise dateProcess specificationsSequential options (compound options)A range of specifications have to be taken into consideration in real option valuationSometimes, the underlying assets have cash outflows that affect the value of th
569、e optionAsset returns reduce the value of call option Asset returns increase the value of a put optionAmerican-type call options can be exercised any time before the expiration day; European-style call options have to be exercised on one specific day at the end of the termHence, the exercise of opti
570、ons is governed by different termsThe value development of the option can be determined by stochastic processes that require the adjustment of the underlying parameters(1) Diffusion processes (2) Jumps and (3) Mixed processesSequential options are options on optionsThe corresponding valuation method
571、ology can be incorporated into the option pricing modelSpecifications of the option pricing modelDocument number236The valuation parameters for real options have be to estimated on the basis of plausible assumptionsThe project value is the present value of the discounted free cashflows of the invest
572、ment (statistical present value)For companies, this is the DCF enterprise valueUse of the traditional valuation methodology (CAPM, WACC, DCF)Is equivalent to the investment cost or the acquisition price paid for a companyIs usually assumed to be safe; the swap option model allows stochastic exercise
573、 prices in option pricing to be mapped (e.g. asset swaps)The procedures to determine the volatility of the project value: (1) Measure historical volatility, (2) Implied volatility or (3) Cashflow simulationDefine the most important risksEstimate the time period during which the option can be exercis
574、edCompetitive effects or technological developments have a major impact on the term of the optionCashflows withdrawn by the project or company during the term of the optionMapping of competitive effectsEstimates requiredAssessment of parametersValue of the underlying asset (project value)Exercise pr
575、iceVolatility of the project valueTerm optionDividend payment1) Determining the riskless rate is not a problemDocument number237Potential pitfalls of real option valuation although theoretically founded, the formula is not yet readily accepted in practiceThe real option formula and the related model
576、s which are, in part, mathematically rather complex, are not easy to understand (black box)The formula is not yet being broadly applied by the financial/corporate community; in practice, it lacks acceptance Difficulties arise in particular in terms of the specification of the relevant option paramet
577、ers (value of the basic variables, duration, volatility, etc)Due to the parameters wide value spectrums, wide margins for valuation may ensue which may make the value of the option appear rather arbitraryComplex models and lack of methodological understandingDifficult specification of option paramet
578、ersIdentification and interaction of optionsModel premises do not correspond to realityIn the case of investments and acquisitions, there may be several real options, the identification and prioritization of which may present a problemAlso, the interaction (effects on value) between the options is d
579、ifficult to assessLike all economic models, the real option formula is based on a variety of assumptions, some of which cannot be upheld in reality Ultimately, the values can only serve as an indicationExternal impact on value (e.g. by competition) are difficult to quantify Key problem areasDocument
580、 number238F.Other valuation topicsF1. Investment process and managementF2. Data gatheringF3. Define a relevant valuation rangeF4. Sensitivity analysisF5. Industry specific valuation insightDocument number239Integrating the valuation process deeper in the investment process is the ultimate challengeB
581、usinessplanNon financial assessmentInvestmentCommitteeGo / No GoValuation- DCF- Comparables- Real optionsValuationCommitteeNo goDetailed analysis neededInvestment assessment processInvestment requires aligning business plan and valuationStructuring may complicate the final valuation (share holders i
582、mpact) Potential InvestmentOpportunitiesSource: Roland BergerDocument number240Valuations have different purposes at different steps of the investment processInitial valuationInvestment valuationNegotiation &final valuationExit valuation Initial valuation Investment core valuation Final valuation Cu
583、rrentissuesForwardlookingissuesUnderstanding targetBase caseValuation as a going-concernNegotiation rangeExpected IRRConditionsWalk away priceNegotiation marginTimingIRR on investmentInvestment managementStrategic and financial issuesPreparation of negotiationSensitivity factors / risk matrixExit pr
584、ice & acquirersDue diligence issuesSize of investmentStructuring issuesIRR protectionPost investment issuesValue creation actionsImpact on investment strategySource: Roland BergerDocument number241Valuation is an iterative tool designed to help investors make the right decision and protect IRRValue
585、/IRRDCFCompareBCEsRealoptionsXANo dealAInitialRecommendationof investmentcommitteeNegotiationStructuringcontractingExitPIMValuation over timeTarget IRRAdditional value creation due to post investment management (PIM)Min expected return Source: Roland BergerDocument number242The valuation committee h
586、as a key responsibility in trouble shooting valuation mistakes and making recommendationsValuation committee (1-3 staff)Senior investment expertsSenior corporate finance expertsResponsible for knowledge sharingProvide an “external” and expert advice on valuationCheck valuation processValuation troub
587、leshooting & checksDocumentation inputMajor assumptionsModelsOutputRecommendationsSensitivity analysisKey valuation issuesIRR protectionSource: Roland BergerDocument number243The investment committee (IC) needs to rely on the opinion of the valuation committee (VC) to make appropriate decisionsIC ne
588、eds a reference valuation to take decisionsQuality control and key valuation issuesSet target investment priceSet walk away priceVC keeps the internal “knowledge” regarding valuation issuesStandardize checks and controlsRecurring key valuation issues (cases, troubleshooting)Knowledge bases, informat
589、ion gathering /sharingVC provides IC with a valuation “security belt”VCCheck reference valuationIdentify key financial issuesShare knowledgeICMake investment decision based on IRRValidate key investment parametersAnticipate on value creation actionsSource: Roland BergerDocument number244The valuatio
590、n committees mission must be to smooth the investment processVCMission:smooth investmentprocess Better clarity and comfort on methodologyProvide additional assistance to the valuation /investment teamAct as an “outsider” in the investment process (external eye)Cannot provide the guarantee that the i
591、nvestment will be a successShall have the mission to help and not antagonize theinvestment teamMust not complicate the investment process or act as a gatewaySource: Roland BergerDocument number245Investment must be the result of a smooth interaction with the objective to maximize IRR and customer sa
592、tisfactionInvestmentTeamInvestmentCommitteeValuationCommitteeBOC corporate imageMax IRRBOC StaffInvestorsCustomer &SavingsPotentialInvestorsSource: Roland BergerDocument number246F.Other valuation topicsF1. Investment process and managementF2. Data gatheringF3. Define a relevant valuation rangeF4. S
593、ensitivity analysisF5. Industry specific valuation insightDocument number247Why do we need to organize information? (1/2)Numerous mergers and acquisitions transactions day in and day out, we read about these transactions but never take note of themSource: Reuters; Roland BergerDocument number248Why
594、do we need to organize information? (2/2)information is valuable only if well organizedComparing and contrasting: noting similarities and differences between and among entitiesClassifying perceptions: grouping and labeling entities on the basis of their attributesOrdering perceptions/events: sequenc
595、ing entities according to a given criterionRepresenting ideas/perceptions: changing the form but not the substance of informationIn todays world, information is being generated at such a pace that it takes almost no time for any piece of information to become obsolete. Thus we must have the skills t
596、o deal with this generation of information, make sense of it, and implement it effectively. To do this, information needs to be organizedSource: Roland BergerDocument number249What kind of information do we need to organize? (1/2)It is often thought that information can be organized only after it is
597、 collected. This is only partially true. Collecting information randomly without organizing your thoughts about it has its negative falloutOrganization skills need to be applied much before the information collection process begins. You need to identify what information you need. To do this we shoul
598、d: Understand the objective of the taskWrite it downSimplify itTalk to people about it to know its constituentsBe specific about the information neededSource: Roland BergerDocument number250What kind of information do we need to organize? (2/2)Two types of databaseTransactionDatabaseCaseDatabaseInte
599、rnal KnowledgeCase study Problem solving 12Valuation referenceInternal information from past BOC transactionsSource: Roland BergerDocument number251DATA STRUCTUREOften in valuation, we need at least the following informationDatabase structureRather than each person creating and managing their own fi
600、ling structure and guiding others to information, were trying an agreed, standardized information structure based on a taxonomy IndexAcquirerAcquirers country of OriginTarget companyTargets countryIndustry - 1Industry - 2Transaction dateTransaction amount% of capitalDerived market valueSeries of mul
601、tiplesLast financial year (Y0)RevenueEBITDAP/ENet Asset Value (NV)Current year (Y1)RevenueEBITDAP/ENet Asset Value (NV)1Source: Roland BergerDocument number252Internal M&A knowledge sampleSample database - mining AcquirerIndustry 1TargetAmountDate12345678910.Liuzhou Chemical Heilongjiang Tianlun Rea
602、l Est.Smart Union Group Zhaojin Mining Zijin Mining Group Co., LtdWest MiningGrade Crystal Investment Ltd.TeBian Electric Apparatus China Mining Resources Gp.Central African Mining & Exp.Guizhou Xinyi MiningTianyang Jiaoman MiningChina Mining CorporationXinjiang Xingta Mining Heilongjiang Duobaoshan
603、 Copper Tibet Yulong Copper Inner Mongolia Yize MiningXinjiang Tiandi EnergyHarbin Songjiang CopperZhejiang Galico Ltd.Mining (except Oil & Gas)Mining (except Oil & Gas) Mining (except Oil & Gas) Gold Ore Mining Mining (except Oil & Gas) Mining (except Oil & Gas) Mining (except Oil & Gas) Mining (ex
604、cept Oil & Gas) Mining (except Oil & Gas) Mining (except Oil & Gas).2007-6-112007-10-222007-10-182007-8-272007-8-142007-8-132007-10-82007-5-292007-5-272007-3-22.11.365.0639.772.767.9314.047.9223.09236.742.5.90.0%55.0%49.0%100.0%20.0%17.0%100.0%51.0%75.1%100.0%.Stake1Source: ISI, Roland BergerDocumen
605、t number253Content of the one page case library 2PurposeSampleOne page summary of previous acquisition transaction for experience sharingInformation to be included in case summary: Target companySector / IndustryDescription of difficulties encountered in the valuationDescription of how the issues we
606、re resolvedContact person for the caseRestaurant with 50 years concession (i.e no terminal value)Distressed company (bankrupt company)Target sold 1/3 stake to another investor during the acquisition processCompetitor came up with a new product that target wont be able to response within the short to
607、 mid term futureSource: Roland BergerDocument number254How do we organize our information? Choose the right toolSelection of software toolCharacteristic of SolutionEase of ImplementationDatabase SophisticationServer databases: Microsoft SQL Server, Oracle and IBM DB2Flexible: Server-based databases
608、can handle just about any data management problem you can throw at themPowerful: efficiently utilize just about any hardware platform, e.g multiple high-speed processors, clustered servers, high bandwidth connectivity and fault tolerant storage technologyScalable: handle a rapidly expanding amount o
609、f users and/or dataDesktop database: Microsoft Access, FoxPro, FileMaker Pro, Paradox and Lotus ApproachInexpensive: Most desktop solutions are available for around US$100User-friendly: offer easy-to-navigate graphical user interface. Web solutions: Many modern desktop databases provide web function
610、ality to enable data publishing on the web in a static or dynamic fashion PC application: Microsoft Excel, Lotus 123Inexpensive, user-friendly, however, slow and unable to handle mass amount of dataLimit to only 15,000 rows of recordsSource: Roland BergerDocument number255How do we contribute to our
611、 databases? BoC needs to populate internal knowledge base with internal know-howPlenty of of 3rd party M&A database availableDeficits of public M&A sourcesSome M&A case information are not disclosed to publicMay not have all relevant Chinese M&A casesDifficult to validate information - sources can n
612、ot be checkedCustomized information that tailor to BoCs needsPopulate the database with valuable in-house transaction not known to publicFurther BoC in-house information that are not available in public sourcesSource: Roland BergerDocument number256For a non-listed company like Oriental Plaza, much
613、of the information required for valuation are not publicly availableStatus on Oriental Plaza case study as of 2007-11-12 Source: BOCGI; Roland BergerDocument number257How do we bridge the gap with information deficiency? Why are we gathering information on the company? ReferenceValuationChange the r
614、eferenceCheck parents companiesMake contact to request information with the consensus of investors (non-disclosure agreement may be needed) BenchmarkingValue of assets“Blind reconstruction of value” - take your yardstick and go measure - on the ground valuationExpert opinionSource: Roland BergerDocu
615、ment number258Information source must be documented for traceability & accountability. Hence, information from credible sources ONLYSources of informationQuestionable sourcesWhen in doubt, better not use them:Credible ?Source: Roland BergerDocument number259F.Other valuation topicsF1. Investment pr
616、ocess and managementF2. Data gatheringF3. Define a relevant valuation rangeF4. Sensitivity analysisF5. Industry specific valuation insightDocument number260DCF and comparables (Listed peers and transaction) must be used for all valuationsCompany ValueDCF methodDiscountedDividendmethodComparable comp
617、anies methodAsset-based methodsDifferentvaluation methodsReal option methodComparable transactions methodTraceable Data Input Process Multiple output Document number261But defining a fair valuation range is the ultimate objectiveModels are not always “stable”, sensitivity analysis helps understandin
618、g value driversTerminal value and volatility have a huge impact on final resultsData need to be refined until value convergeDifficult situationIdeal situation5001,0001,500ComparablesDCFReal Options5001,0001,500DCFReal OptionsComparablesSource: Roland BergerDocument number262The valuation range must
619、be calculated using mostly comparables and DCF (1) Comparables provide “real” market informationMarket information reflects what people are ready to payCheck the size and the characteristics of your samples: better have a smaller well chosen set of proxies than too broad a reference sampleDo not mix
620、 in the same sample proxies from emerging markets and proxies from mature marketsCheck your numbers again for key valuation multiplesComparables (listed and transactions) will always be the best valuation referenceDocument number263The valuation range must be calculated using mostly comparables and
621、DCF (2) DCF must provide a credible reconstruction of the target companyBuild the DCF as an extension of past operations and spend time on defining the revenues growth rateWork to define a a base case = a reasonable and a credible picture of the company in the futureRemember that setting up large bu
622、sinesses take time and energy (human resources, capital)Always review the terminal value assumptionsDo not run synergies in the base case DCF is a great tool to understand how a market value is created, but relies on a set of assumptions that may change over timeDocument number264For both comparable
623、s and DCF make sure you understand the underlying value driversCompany ABC valuationIndustry peersAverage growth rateAverage profitabilityAverage gearingDCF (ABC)+/- Industry growth rate+/- Industry profitability+/- GearingCompare to company ABCAssess comparability with peers otherwise explainKey va
624、lue driversValue is convergingDocument number265Asset driven methodologies or real options can help solving the valuation of hidden assets (1) Asset driven methodologies are short sighted but cash drivenCan help to capture the value of hidden assets e.g.: real estate, intangibles (brand)A missing pa
625、rt of the value can then be added back to DCF or comparable valuationAsset driven methodologies must be used in the context of terminating a business (e.g.: fine sale in case of bankruptcy risk)Read carefully the balance sheet to make sure that you have identified any extraordinary asset and adjust
626、DCF or comparables valuationDocument number266Asset driven methodologies or real options can help solving the valuation of hidden assets (2) Real options are mostly used for mapping a corporate investment opportunityReal options typically apply to capital invest decisions like a call option on an in
627、vestment opportunityReal options apply well to specific business segment such as pining, oil & gas or pharmaceuticalsThey are compatible with DCF and can complement a DCF valuation (e.g. valuing an option on an oil field)Real options are more seldomly used to value a whole company Use real options a
628、s needed in valuing investment opportunity that DCF can not captureDocument number267Mixing valuation techniques requires a rigorous methodology First start with modeling a “base case”Model the valuation with an increasing level of complexity: start with base case, finish with options on business op
629、portunitiesLock in the key value driver with industry trends (otherwise explain)Check wall and discount rate assumptionsAdd any value embedded (hidden) in the balance sheetAdjust market value of such asset for any revenue generated to avoid double countingWork on a separate model and feed output int
630、o the main modelDont forget to save your work step by stepDocument number268Frequent source of errors-important checksMacroeconomic dataIs the growth rate realisticBeware of interest rate variationCheck interest rates for cashWhat tax rate did you used for the wallCorporate dataHow is profit evolvin
631、gAre investment realisticWhat is the terminal growth rateCheck terminal valueDCFComparablesListed peersSample reflect value for minority share holdersSample is too broadSample is inconsistent (e.g. mixing cars and trucks manufactures)Check number of sharesCheck latest news and latest accountsTransac
632、tionsConsideration reflects firm value or enterprise valueIs the information doubled checked?Are multiples calculated on the year of the transactions?Remember: there is no perfect information, use your judgmentDocument number269F.Other valuation topicsF1. Investment process and managementF2. Data ga
633、theringF3. Define a relevant valuation rangeF4. Sensitivity analysisF5. Industry specific valuation insightDocument number270We recommend to finish any company valuation by running sensitivity analysisDCFComparable listed companiesComparable transactionsReal optionsValue sensitivityPrice rangeXXX-YY
634、YRMBMarket conditionsPrice equilibriumManagement decisionWeightDocument number271Sensitivity analysis is key for investment purposesSensitivity analysis helps focusing on key valuation and applies to:Market conditionsInterest ratesInflationPrice equilibrium - most delicate but useful to fine tune va
635、luationBusiness cycle impact on price (check historical price charts)Liquidity (check volumes, is trading price meaningful)Market momentum (crash, bubble?)Management decisionsValue creation plan (post merger integration)Post investment managementAcceleration of synergiesDocument number272How to run
636、sensitivity analysis in an effective waySensitivity analysis is key to better understand the value driversRun sensitivity analysis once the DCF base case is finishedIt is a good idea to start first with absurd numbers to check the consistency of the modelOnce you are confident with the base case sta
637、rt checking the model sensitivity+/- 0, 5% to +/- 1% variation of the key value driversSave your work for each sensitivity analysis on a different modelCreate a log of the sensitivity output and a table (see model) Running a DCFDocument number273Mandatory checkSensitivity analysis value driversPrepa
638、re sensitivity analysis table template Make a conclusion based on your observationUseful for better assessing risk of risk of investmentMandatory to prepare investment negotiationInterest rate (risk free rate used for wall)Inflation rateCash flow growth rateTerminal growth rate Test sensitivity of o
639、ther key business drivers e.g. oil price, forex, salariesValuation output million-0.5%-1.0%+0.5%+1.0%xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxCase by case basis checkDocument number274Pay attention to the stock market price of comparable listed peersComparable listed peers should
640、be valuedOn the same trading sayAt the closing price or daily average priceAlways check the trading pattern of the comparablesUse a historical chartIf the stock has high volatility (high beta) consider using average price1 week to 1 month average price is usually acceptableCheck for abnormal trading
641、 pattern-For example: management crisis, take over-It detected remove this comparable from the sample Always check for trading liquidity (daily trading volumes)In satisfactory factory liquidity news probable price distortion If multiples different from peers, remove from sampleDocument number275Tran
642、saction comparables reflect real world pricesRefine the comparable transaction sample, understand why a transaction is a better proxy compared to anotherCheck the impact on value after modifying the sampleA large sample is not always a good sampleManage the sample in a favorable way for youThe broad
643、er the initial sample, the easier it is to “refine” itHowever dont take out of the sample land mark transactions (or explain why!)Review your transaction sample of comparablesDocument number276Real options are very sensitive to any small variation of option value metricsTest the consistency of your
644、option-value metrics but do not “play” with numbersCheck sensitivity to length of the option (t + / - Half a year)Impact of variance of risk free rate (rf)Make a table of variance of return (2) according to projects-Check in plied volatilities from options on peer stocks to infer for assets -In corr
645、esponding industries-Work on and adjust industry peer sample Test consistency of DCF + real option (if any) with listed comparablesRemember that stock prices adjust quickly for new information mixing real options and valuation based on comparables is likely to be wrong Document number277F.Other valu
646、ation topicsF1. Investment process and managementF2. Data gatheringF3. Define a relevant valuation rangeF4. Sensitivity analysisF5. Industry specific valuation insightDocument number278Valuation methodologies need to be adjusted by industry and corporate maturityIndustryDevelopment stageStart-up eme
647、rging companies & marketsMature companies & marketsGeneric modelsAutomotive consumer goodsSpecific modelsBanksInsuranceReal estateEnergyIncreasing modeling complexityQualitative & judgmentalQualitative & judgmentalQuantitativeDCFComparablesQuantitativeCombination of various methodologiesAsset liabil
648、ity management modelOptionsR-NAVDocument number279Finance services firms (FSS) revenues model is a good illustration of valuation complexityFinancial firms (Banks, insurance) are challenging valuation candidates Need to define both debt and reinvestments, so estimating cash flow is difficultHeavily
649、regulated industry, impact of regulatory requirements on value have to be considered Financial services firms have 3 unique featuresDebt is used as a raw material (transformation) or source of capital (money for a bank = iron ore for a steel maker)Heavy regulatory over lay has 3 forms:Requited capit
650、al ratios to keep claimholders or depositors safeLimitations in investment capacitiesEntry of new competitors is restrictedReinvestment includes net capex and working capital but measuring IT (IT or “such reinvestment“) for a financial service firm can be difficultDocument number280Finance services
651、firms (FSS) valuation requires adapting valuation tools due to the unique role of debt in the finance environmentIT makes more sense to value equity rather than the entire firm Estimating cash flows prior to debt payment on a weighted average cost of capital is a problemDebt and debt payment cannot
652、be easily identified with FSSEquity can be valued directly, however, by discounting cash flows to equity at the cost of equity (not at WACC)But there are two practical difficultiesCash flows cannot be estimated without estimating reinvestment (if net capex and changes in WC cannot be identified cann
653、ot estimate cash flows)Estimating future growth is difficult if the reinvestment rate cannot be measuredDocument number281As the DCF cannot be used for valuating the DDM can provide with a satisfactory solutionFree cash flows for banks cannot be estimated Use dividends as cash flows to equity, assum
654、ing FSS overtime payout their FCF to equity as dividends A dept the free cash flow to equity to the FSS type of reinvestment (capital ratio constraint)Then, the DDM methodology is a straight forward fallback solution Work on modeling not earnings and not FCFDefine the payout ration (% of earnings pa
655、id as a dividend every year)Calculate the discount rate i.e. the cost of equity reflecting the portion of the risk in equity that cannot be diversified away by marginal investor in the stockDocument number282Mastering the DDM model requires some initial precautionsCalculations the cost of equity (no
656、t the WACC) Ce=nf+ (mature market premium + country specific risk premium)With = average of peers betas (not adjusted)Defining a payout ratio to derive dividends:Focus first on modeling earnings growth Pay out ratio can be adjusted over time to reflect changes in growth and investment keep in mind t
657、hat FSS tend to have higher pay out than the rest of the ?To consider shares buy back ( added to dividends)Closing on “terminal value”close DDM assuming stable growth at some point in futurewith:P/OS pay out in stable growth = 1-g/ROE stable growthEL: current earnings on last forecasted year Y+1g: g
658、rowth in perpetuity P/OH: historical pay out ratioPresent A/UE of terminal equity PVTE:P/Os EL (1+g)PVTE= CE-g (with CE, cost of equity)Document number283Alternative models for valuating FSSCash flow to equity models:Primary investment is: human capital and regulatory capital other investment: real
659、estate, I.TReinvestment then redefined problem lies with changes in WCDCF methodology can be temptatively usedExcess return models:Value of the firm is the own of equity capital invested currently, plusThe present value of RMB excess returns that the FSS expect to make in the futureDocument number28
660、4Financial services valuation17 point slide titleNotesSource:Analytical toolsValuation rangeMethodologyDDMReal options(R-NAV)Methodology multiplesComparable listed peersComparable transactionNet earningBook valueDividedMethodology based on global peer groupValuation toolsDocument number285Industries
661、 valuation except financial services17 point slide titleNotesSource:Analytical toolsValuation rangeMethodologyDCFReal options(R-NAV)Methodology multiplesComparable listed peersComparable transactionSalesEbitdaEBITNet earningsMethodology based on global peer groupValuation toolsDocument number286Cons
662、iderationsfor ValuationGeneral key sensitivity factors(All industries)Macroeconomic key valuation driversGDPInflationInterest ratesRegulationsTariffsInfrastructureIndustry key valuation driversAvailability and cost of laborAvailability and cost of capital Competitive Structure of IndustryTaxationBe
663、careful in multinational environmentSensitivity to interest rates variationsImpact of commodity priceDocument number287Overview of content1.Automotive 2.Banking (and other Financial Services)3.Chemicals4.Civil engineering and construction5.Consumer goods6.Energy, oil & gas7.Environmental services8.H
664、ealth and pharmaceuticals9.Industrial goods10.Insurance11.Media, broadcasting, and publishing12.Other commodities (minerals, diamonds, gold, copper, etc.)13.Real estate and facility management 14.Retail, hospitality, and restaurants15.Technology16.Telecommunications (services, infrastructure)17.Tran
665、sportation and logistics18.Travel, entertainment, and gaming19.UtilitiesDocument number288Considerationsfor ValuationAutomotiveMacroeconomic key valuation driversSensitivity to economic cyclePricing of raw materials, labor, and manufacturing capacityConsumer-spending patternsForeign exchange risks,
666、when revenues and costs are denominated in different currenciesIndustry key valuation driversProduct differentiationProduct development and innovationCapital-intensityAccess to suppliersIncreased competition leads to downward trend in prices and declining marginsHurdles for entry Consumer credit, le
667、ase scheme, residual valuesInnovation capabilities Level of competition, revenue growth, and capital intensity play a significant role in profit margins and cash generationCapacity to move production to low cost countriesDistribution networkRecycling liabilitiesDocument number289Considerationsfor Va
668、luationBanking (and other Financial services)Macroeconomic key valuation driversSensitivity to business cycle in general Banking regulation (e.g. Banking for international settlement requirements, Basle accords)Monetary policyFinancial markets cyclesExternal shocks and interest ratesIndustry key val
669、uation driversTarget customers and productsBusiness units and income streamsHigh competition, consolidation tendenciesRegulatory framework for lending/deposit ratesRisk managementChina-specific issues (e.g. policy lending, administrative interest rates) Quality of client portfolio and provisionsStru
670、cture of fees and estimation of interest profits (short-, long-term mismatches)Asset Liability ManagementTreatment of off-balance sheet vehicles and risksValuation of asset quality (e.g. loans, NPLs, provisions, interest in suspense)Treatment of Tier I,II,III-CapitalDocument number290Considerationsf
671、or ValuationChemicalsMacroeconomic key valuation driversCyclical industryPricing of raw materials, manufacturing capacity, and laborPortfolio of chemicals (specialty to commodities)Industry key valuation driversBase chemicals undifferentiated commodities, specified only by composition and purityComp
672、lex business cycles dynamics: demand for chemicals varies on the basis of retail and industrial needs, whereas supplies vary on capacity and feedstock availabilityVertical integration dominant; companies in extractive business adding valueAmortization/Investment cycle of industrial toolConsidering c
673、omplex business cycle dynamicsValue of specialty chemicalsRisks: safety, pollutionDocument number291Considerationsfor ValuationCivil engineering and constructionMacroeconomic key valuation drivers Resilient industry not very sensitive to minor change in business cycleRegulatory framework (tendering
674、process for public sector projects is usually governed)Availability of funds, interest ratesPricing of raw materials and laborInventory levels (oversupply, shortage)Industry key valuation drivers Construction of non-residential buildings and non-buildings constructionAverage size of projectsStrong p
675、osition of buyers (zero switching costs, price inelasticity of demand)Moderate threat of new entrantsDegree of rivalry is affected by the rate of market growth (e.g. China vs. Japan)Steady growth forecastQuality of clients credit, measuring probability of defaultCheck market liquidityReal estate bub
676、bles for construction businessTax and transaction costDocument number292Consumer goodsMacroeconomic key valuation driversSensitivity to business cyclePurchasing power, savings patternsConsumer behaviourConsumer confidenceConsumer creditIndustry key valuation driversProduct portfoliosPositioning and
677、quality of productsDemand driven innovation and differentiation pressureIdentification of consumer trendsBrand recognitionVolatility of priceCompetition, substitutionInnovation capabilities Product life cyclesPotential liabilities (product recalls)Product launch costsCost of distributionConsideratio
678、nsfor ValuationDocument number293Considerationsfor ValuationEnergy, oil & gasMacroeconomic key valuation driversQuality, quantity, and economic extractability of resourcesHeavily regulated environment Global consumption-patternsIndustry key valuation driversSeasonality of demandClose connections of
679、private and public sectorPricing and negotiation powerMaintenance of industrial toolTotal reserve life (short- vs. long-term), explorationRobust long-term sales growth prospectsBusiness portfolio (including alternate sources of energy)Unit operating, financing, and overhead costsConcessions and lice
680、nsesRegulations and protection policiesOil & gas specifics (e.g. recycle ratios, exploration reserves)Operational and financial flexibility depends on companies duration of reservesDocument number294Environmental servicesMacroeconomic key valuation driversEnvironmental factors and regulationsDevelop
681、ment of economyDifferent growth figures by geographic zonesCapital intensityGovernmental relationshipsGreenhouse effect, global warmingIndustry key valuation driversRevenues from waste management, facilities management and pollution controlProcess cost and innovationCommodity prices (by products)Lon
682、g-term contracts signed, risks associatedCost of R&DPortfolio of businessConsiderationsfor ValuationDocument number295Considerationsfor ValuationHealth and pharmaceuticalsMacroeconomic key valuation driversEvolution of regulatory environment, (e.g. patent protection, expiry)Overall health condition
683、(Health indicators by countries and worldwide, e.g. World Health Organization indicators)DemographicsRegulatory frameworkIndustry key valuation driversCurrent blockbustersInnovation pipeline by stagePricing power Competition of generic productsMarketing distributionR&D PipelineProduct Life CyclePote
684、ntial Liabilities (drug recalls)Value of research, contracts, and licensesProduct launch costsDocument number296Considerationsfor ValuationIndustrial goodsMacroeconomic key valuation driversSize of target marketPricing of raw materials, labor, and manufacturing capacityConsumer-behaviourForeign exch
685、ange risks, when revenues and costs are denominated in different currenciesHigh capital intensityInfrastructure projectsIndustry key valuation driversHighly responsive to performance of global manufacturingProduct qualityCustomer satisfactionProduct portfolio sensitivity to economic cycleDocument nu
686、mber297Considerationsfor ValuationInsuranceMacroeconomic key valuation driversRegulatory frameworkExternal shocks, risksMaturity of financial markets for refinancing Global interdependencyConsumer behaviourInterest rates yield curve (short-term vs. long-term rates)Industry key valuation driversLife-
687、 and Non-life-insurancesInsurance coverageReliance on re-insurers and risk managementSensitivity to “extreme”, negative eventsAsset-liability matching; duration of outgoing cash flow matches incoming cash flowClient portfolio qualityForecast of future gross written premiums (economic/non-economic fa
688、ctors)Return-density function characteristics: high-kurtosis (leptocurtic)/left-skewness Embedded value (quality of reserves)Document number298Considerationsfor ValuationMedia, broadcasting, and publishingMacroeconomic key valuation driversConsumer-spending patterns and impact on advertising revenue
689、sDemographicsSplit TV/Radio/InternetIndustry key valuation driversNew business modelsInnovative new products and servicesMedia presence in markets Pay TV, home video, internetNew spending streams: online, wireless services, digital distribution of diverse servicesInnovation capabilities of new produ
690、cts and servicesKey segments in the past to play less of a role in the futureForecasting performance of new products and servicesLicenses for digital distribution servicesImpact of piracy via InternetDocument number299Considerationsfor ValuationOther commodities (minerals, diamonds, gold, copper, et
691、c.)Macroeconomic key valuation driversCyclical industryQuality, quantity, and economic extractability of resourcesPhysical infrastructure (extraction, transformation, transportation)Global consumption-patternsMarket structure (Cartel perfect market)Industry key valuation driversStrategic sectorsPric
692、ing and negotiation powerCost of infrastructure-construction, -usage, -maintenanceRobust long-term sales growth prospectsRisk of substitutionInnovationValuation of concessions and licensesEnvironmental issues and potential liabilitiesPolitical risk (as a set of options)Document number300Consideratio
693、nsfor ValuationReal estate and facility managementMacroeconomic key valuation driversDemand and supply structureMarket conditions (inventories)Price of construction materialsRegulatory environment Taxation of capital gainsMarket liquidity and transaction costsIndustry key valuation driversBusiness d
694、rivers: rental prices and cost efficiencySignature of long-term leasesQuality of property locationMaintenance and refurbishing cost management Rising pressure from competition and costsVacancy rate managementDifference between DCF and Net Asset ValueMarket cycles (bubbles and crash)Leverage-gearingD
695、ocument number301Considerationsfor ValuationRetail, hospitality, and restaurantsMacroeconomic key valuation drivers Maturity of economy and purchasing powerConsumer-spending patterns, consumer confidenceUnemployment rateConsumer creditCompetition intensityLabor flexibilityIndustry key valuation driv
696、ersSeasonality and early in the economic cycleHigh competition among big playersLocation (prime,)Maintenance and refurbishing cost managementResilience of businessValuation of the real estate part of the businessSeasonality/volatility of returnsScalability of the business (ex. theme restaurant)Docum
697、ent number302Considerationsfor ValuationTechnologyMacroeconomic key valuation driversAvailability of human- and capital resourcesRegulatory environment, (e.g. patent protection)Research, universities, incubatorAvailability of qualified staffEntrepreneurial spirit and know-how spill-over effects (i.e
698、. Silicon Valley)Investors risk profile, maturity of VC industrySuccess storiesGovernment incentivesIndustry key valuation driversCompetition on innovation (e.g. Value of Mips/$)Current blockbusters, innovation pipeline Product cycles (replacement rates)Robust long-term sales growth prospectsCapital
699、- and Human-resource-intensive Stock market valuation R&D ValuationProduct Life CyclePotential Liabilities (Recall of products)Value of research, contracts, and licensesDocument number303Considerationsfor ValuationTelecommunications (services, infrastructure)Macroeconomic key valuation driversEffect
700、s of economic cycleRegulatory environment, e.g. pricing structure, deregulation, privatizationSize and growth of economyMarket segmentationDeflationary environmentIndustry key valuation driversSimplicity for customers to switch from one supplier to anotherCosts in infrastructure/facility maintenance
701、 and upgrades (Capex)Growth potential: broadband penetration, but with significant price deflation and risk of substitutionAbility to adapt business modelIndustry switch from state regulated environment to competitive environmentKey drivers change in the course of the product life cycle (business mo
702、del, competition, pricing, Capex)Number of subscribers, value of physical networkDocument number304Considerationsfor ValuationTransportation and logisticsMacroeconomic key valuation driversAccess to and availability of physical infrastructure (airport terminal, docks, warehouses)Global consumption-p
703、atternsPrice of fuelTransportation network (slots)Political risksCapital intensity (fleet, warehouses)Highly regulated environmentIndustry key valuation driversCapital-intensiveAccess and capacity to retain customersFleet renewal negotiationsSensitivity to price/yield managementCapacity to provide e
704、nd-to-end serviceBarriers to entryLevel of competition and capital intensity play a significant role in cash generationSustainability of business over the long-term (ex. “low cost airlines”)Investment capabilities and asset managementDocument number305Considerationsfor ValuationTravel, entertainment
705、, and gamingMacroeconomic key valuation driversLeisure timePurchasing PowerRegional economic indicatorsDemographicsAttractiveness, political riskCapital intensityIndustry key valuation driversMarket share, number of competitorsMarket segmentation of product Resilience and consumer satisfactionTechno
706、logy: ability to sell onlineBusiness modelTop down approachAsset management/riskDocument number306Considerationsfor ValuationUtilitiesMacroeconomic key valuation driversSize and growth of economyCompetitive environmentFuel sourcingInvestment capacityDistribution networkRegulatory environment, e.g. p
707、rice structure, deregulation, privatizationIndustry key valuation driversCustomer switching costs (same offer on alternative sources)Capacity utilization, projected capital improvementsCapital-intensive (Capex)Cost, reliability, and quality of serviceMaintenance of equipment and networkPotential liabilities (e.g. environment, quality)Impact of regulatory changesProvision for dismantling old facilities (e.g. power plants)Bad debts and money collectionDocument number307G.Appendix
