【正文】 lue of the firm Value of firm’s debt + Value of firm’s cash = Value of firm’s equity Discount free cash flows at the weighted average cost of capital. The result is the present value of both debt and equity, or the value of the firm Document number 25 Discounted cash flow analysis provides an estimate of Intrinsic value Analytical process ? Develop business analysis ? Evaluate risk and target capital structure ? Other adjustments Results ? Projected annual free cash flows ? Estimated terminal value ? Appropriate weighted average cost of capital ? Risk adjusted present value of free cash flows and terminal value Total firm value ? Net present value of nonoperating and offbalance sheet assets Value of Common ? Less debt ( of cash) and preferred stock Document number 26 DCF requires indepth business analysis Industry outlook Competitive position Reinvestment needs Expansion opportunities ? Anticipated industry growth ? Major opportunities/risks ? Pricing flexibility ? Possible market share changes ? Cost structure ? Working capital ? required capital expenditures ? Discretionary investments ? New products/stores/format ? Development costs ? Economies of scale Document number 27 The DCF method is based on three key value drivers + TV FV = ? n i=1 FCFi (1 + WACC)i Firm value (FV) 1 Free cash flow to firm (FCF) Weighted average costs of capital (WACC) Terminal value (TV) 2 3 The DCF Model estimates a firm’s value by discounting the firm’s expected cash flows at a rate which reflects the riskiness of the flows. Document number 28 B. Discount cash flow (DCF) B1. Cash flow B2. Discount rate and WACC B3. Terminal value B4. Common DCF Qamp。 Change of provisions 177。A Document number 36 Valuations are highly sensitive to the discount rate Based on a recent valuation [165。 better to have a ―marketdriven‖ justification ? Do not take account of probability distribution of potential outes Document number 40 Noheless do not ignore hurdle rates ? Can account for risk by running base, upside, and downside cases and attaching probability to each oute ? To ease ―political issues‖ high level decisions can limit availability of capital to disfavored businesses。 (um rf) Document number 47 Beta measures the sensitivity of a pany’s stock to movements in the market as a whole. ? Since the only risk in the marker is systematic risk, the marker risk premium rewards the investor in the market for assuming systematic risk. ? The investor in a pany‘s stock should only be pensated for holding the systematic risk of his investment A pany’s Beta = level of systematic risk in its stock Document number 48 Company risk premium are determine by market risk premium and beta 223。 Market risk premium Document number 49 Selecting the ―right‖ Beta may lead to heated discussions ? When available, use BarraAlacra prospective ??s (if not historical ?), and use parables for unquoted entities ? Always check beta against those of parables, remembering to adjust for leverage by paring unlevered Betas. If very different use those of parables ? Remember to check if Betas are levered or unlevered Betas. To unlever use the formula: ?u=?I/(1+(D/E (1t)) and relever at the target capital structure using the same formula rearranged: ?I=?u (1+(D/E (1t)) Document number 50 In order to choose the proper Beta to put into the CAPM equation, we must incorporate the effect of debt, or financial leverage ? As a firm takes on more debt, and therefore higher fixed costs, the profitability of the firm bees more variable – This is likely to make the pany stock‘s price, and return of the equity, more volatile – More debt in a firm39。s own projected cash flows with the current share price ? Should be used when trying to determine the market value of a cash flow stream BUT, – Beware of ―hockey stick‖ projections – You may not have the projections – Only possible for quoted panies Document number 56 When to use which approach ? Use marketbased approach, but make sure premium is sensible ? Always crosscheck that DCF is in line with Trading Multiples valuation, and if not be able to explain why (often difficult) ? On sellside if Transaction multiplesDCF/Trading multiples then equity market is best route . IPO/spinoff ? Remember DCF value is full, fair value. Buyer can add synergies to cash flows but does not create shareholder value if DCF value (including synergies) is paid ? Always step back and ask, how synergies will best be realized? Document number 57 Be wary of cash rich panies In such cases use a different formula, but be wary of whether clients will like this: (1) WACC=Kd(1T)(D/V)+Ke(E/V) Cc(C) where, Kd=pretax market expected yieldtomaturity of fixed rate debt T=marginal tax rate D=market value of GROSS interestbearing debt E=market value of equity C=cash V=market value of entity being valued, where V=D+EC Ke=cost of equity Cc=―cost of cash‖=Govt. long bond Some panies have negative debt (.. excess cash) Unlevering and relevering beta needs to be done with debt not gross This does not work for very extreme levels of leverage, wither positive or negative Document number 58 Multicurrency issues ? Where does the pany generate its cash flows? ? Where does the pany raise its capital? ? Use local tax rates? Document number 59 There are some general rules of thumb ? Discount each business/capital proposal in local currency, then translate DCF value to parent pany currency if necessary ? Use a local cost of capitalgeneral businesses fund themselves locally ? Use local tax rates but bear in mind the likely duration of tax differentials between jurisdictions Document number 60 …but it’s not mechanistic 1. BOC bo