【正文】 Value (at time T) = FCFT+1/(WACC – g), where g is the longterm growth rate in salesT = Length of the forecast horizon (typically, 7 to 10 years)CFAII_SS18:OptionsHKUSTBusinessSchool53 .JohnWeiSensitivity analysis? Examinesensitivityofvaluationstodifferentassumptionsabout:167。 Sales growth(affectsFCF)167。 Profit marginsoroperatingefficiencyoroperatingcost(affectsFCF)167。 Asset turnover ratios(.,capitalexpenditureorworkingcapitalinvestment)(affectFCF)167。 Weighted average cost of capitalCFAII_SS18:OptionsHKUSTBusinessSchool54 .JohnWeiFundamental Drivers of a Company’s ValueValue DriversCFAII_SS18:OptionsHKUSTBusinessSchool55 .JohnWeiBasics of Value Creation? Afirmcreatesvalueonlyifitearnsareturnonitsinvestedcapitalthatishigherthanthecostoffinancingtheinvestment.Thatis,ROIC WACC? Three value drivers:167。 Growth167。 Abnormal return (ROIC WACC)167。 WACC (risk)CFAII_SS18:OptionsHKUSTBusinessSchool56 .JohnWeiValue CreationAssetsInvested Capital$100 millionAftertaxoperating profit(NOPLAT)$18 millionReturn on Invested Capital18%Debt$50 millionEquity$50 millionCost of Debt(aftertax)6%Cost of Equity16%Invested Capital$100 millionWeighted AverageCost of Capital11%CFAII_SS18:OptionsHKUSTBusinessSchool57 .JohnWeiThe Return Spread? ReturnSpread=ReturnonInvestedCapital(ROIC)–WeightedAverageCostofCapital(WACC)? WhenROICWACC,thefirmcreatesvalue.? WhenROIC=WACC,thefirmneithercreatesvalue,nordestroysvalue.? WhenROICWACC,thefirmdestroysvalue.? EconomicProfitorEVA?=(ROIC–WACC)?InvestedCapitalCFAII_SS18:OptionsHKUSTBusinessSchool58 .JohnWeiValue Metrics? EPS(Earningspershare)? ProfitMargin(ReturnonSales)? BooktoMarket(B/M)? PriceEarningsratio(P/E)? ROIC(ReturnonInvestedCapital)? EconomicProfitorEVA(EconomicValueAdded)? DCF(DiscountedCashFlow)? CFROI(CashFlowReturnonInvestment)? TRS(TotalReturntoShareholders)? …CFAII_SS18:OptionsHKUSTBusinessSchool59 .JohnWeiValue Driver Analysis? EconomicProfit=(ROICWACC)?InvestedCapital? Value drivers:167。 Abnormal return:InvestonlywhenROICWACC167。 Growth:g167。 Risk:WACCCFAII_SS18:OptionsHKUSTBusinessSchool60 .JohnWeiROIC TreeROICEBIT/InvestedCapitalCashTaxRateEBIT/SalesSales/InvestedCapital OperatingWorkingCapital/SalesNetPPE/SalesOtherAssets/SalesCOGS/SalesDepreciation/SalesSGAExpenses/SalesROIC = Profit margin x Asset TurnoverValue GrowthROICWACCCFAII_SS18:OptionsHKUSTBusinessSchool61 .JohnWeiMergers and AcquisitionsCFAII_SS18:OptionsHKUSTBusinessSchool62 .JohnWeiIdentifying Value Creation PossibilitiesWhatmakestwofirmsworthmoretogetherthanapart?? Synergy(relatedness,economiesofscaleandscope):Gillette’sacquisitionofDuracell? Economiesofvertical integration(mergerofpaniesatdifferentstagesofproduction):Time’sacquisitionofWarnerBrothers? Complementaryresources(Thetargetmayhaveauniqueproductbutlacktheengineeringandsalesanizationtoproduceandmarketitonalargescale.)167。 Quickerandcheapertomergewithafirmthatalreadyhasalotoftalentthantodevelopengineeringandsalestalentfromscratch.CFAII_SS18:OptionsHKUSTBusinessSchool63 .JohnWeiEvidence on Value Creation in MA Transactions? Thebinedvalueofpaniesengagedinmergersandtenderoffersincreasesbyabout7percentaroundtakeoverannouncements.? Howisthevalueshared?167。 Targetsgetthebulkofit.167。 Acquirersgetroughlyzero.CFAII_SS18:OptionsHKUSTBusinessSchool64 .JohnWeiReasons For Failures? Overoptimisticappraisalofmarketpotential:skepticalabout167。 Reboundfromacyclicalslump167。 Turnaround167。 Rapidgrowthcontinues? Overestimationofsynergies? Overlookingproblems:duediligence? Overbidding:escalationmitment? PoorpostacquisitionintegrationCFAII_SS18:OptionsHKUSTBusinessSchool65 .JohnWeiValue Creation or EnhancementSummaryCFAII_SS18:OptionsHKUSTBusinessSchool66 .JohnWeiValue Enhancement: Summary? Increasecashflowsfromexistinginvestments(NOPLAT)167。 Poorinvests:keep,divest,orliquidate167。 Improveoperatingefficiency:operatingmargin167。 Reducethetaxburden167。 Reducecapitalexpendituresonexistinginvestments167。 Reducenoncashworkingcapital? Increaseexpectedgrowth(g and ROIC)167。 Tradeoffonreinvestment:reducefreecashflowbutincreaseexpectedgrowth167。 Notallgrowthsaregood:onlyROICWACCisgoodCFAII_SS18:OptionsHKUSTBusinessSchool67 .JohnWeiValue Enhancement: Summary? Prolongtheperiodofhighgrowth(N)167。 Brandnameadvantage167。 Patents,licenses,andotherlegalprotections167。 Switchingcost167。 Costadvantage? Reducethecostoffinancing(WACC )167。 Changeoperatingrisk167。 Reduceoperatingleverage167。 Changethefinancialmix167。 ChangefinancingtypeCFAII_SS18:OptionsHKUSTBusinessSchool68 .JohnWeiValue Creation: Conclusion? Assets in place167。 Restructuring(increaseoperatingefficiency)? Growth opportunity(g)167。 NewinvestmentswithROICWACC(valuecreation)167。 RDandnewopportunity167。 Mergerandacquisition167。 Prolongpetitiveadvantage? ReducingWACC167。 Improvecorporategovernance167。 Reachoptimalcapitalstructure167。 RiskmanagementtoreduceriskValue, Value, and ValueCFAII_SS18:OptionsHKUSTBusinessSchool69 .JohnWeiValue Creation ChartAssets in placeValue CreationGrowth options Cost of capital?Restructuringtoimproveoperatingefficiency?SixsigmatoimprovequalityROIC Growth WACC?InvestmentonlyifROICWACC?MA?Prolongpetitiveadvantage?Othergrowthopportunity?Reachoptimalcapitalstructure?Improvecorporategovernance?ReduceriskbyusingriskmanagementMission: Value, Value,