...different discounted cash flow valuation methods. Different alternatives for determining the discounted value of tax shields and their implications for the valuation∗ Pablo Fernández PricewaterhouseCoopers Professor of Corporate Finance IESE Business School, University of Navarra Camino del Cerro del Aguila 3. 28023 Madrid, Spain. E-mail: fernandezpa@iese.edu Abstract This paper addresses the valuation of firms by cash flow discounting. The first part shows that the four most commonly used discounted cash flow valuation methods (free cash flow discounted at the WACC; cash flow for equityholders discounted at the required return on the equity flows; capital cash flow discounted at the WACC before taxes; and Adjusted Present Value) always give the same value. The disagreements in the various theories on the valuation of the firm arise from the calculation of the discounted value of tax shields (VTS). The paper shows and analyses 7 different theories on the calculation of the VTS: Modigliani and Miller (1963), Myers (1974), Miller (1977), Miles and Ezzell (1980), Harris and Pringle (1985), Ruback (1995), Damodaran (1994), and Practitioners method. The paper also shows the changes that take place in the valuation formulas when the debt's market value does not match its book value. JEL Classification: G12, G31, M21 October 16, 2008 (First version: July 2, 1999) Another version of this paper may be found in chapters 17, 18, 19 and 21 of the author's book Valuation Methods...
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...Discounted Cash Flow Valuation: Basics Aswath Damodaran Aswath Damodaran 1 Discounted Cashflow Valuation: Basis for Approach t = n CF t Value = ∑ t t = 1( 1 +r) where CFt is the cash flow in period t, r is the discount rate appropriate given the riskiness of the cash flow and t is the life of the asset. Proposition 1: For an asset to have value, the expected cash flows have to be positive some time over the life of the asset. Proposition 2: Assets that generate cash flows early in their life will be worth more than assets that generate cash flows later; the latter may however have greater growth and higher cash flows to compensate. Aswath Damodaran 2 Equity Valuation versus Firm Valuation n n Value just the equity stake in the business Value the entire business, which includes, besides equity, the other claimholders in the firm Aswath Damodaran 3 I.Equity Valuation n The value of equity is obtained by discounting expected cashflows to equity, i.e., the residual cashflows after meeting all expenses, tax obligations and interest and principal payments, at the cost of equity, i.e., the rate of return required by equity investors in the firm. t=n Value of Equity = CF to Equity t ∑ (1+ k )t t=1 e where, CF to Equityt = Expected Cashflow to Equity in period t ke = Cost of Equity n The dividend discount model is a specialized case of equity valuation, and the value of a stock is the present value of expected future dividends...
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...Chapter 7: Prospective Analysis: Valuation Theory and Concepts Copyright (c) 2008 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Chapter 7: Prospective Analysis: Valuation Theory and Concepts Palepu & Healy Key Concepts in Chapter 7 • Forecasts (Ch. 6) are converted into estimates of value. • Discounted future dividends, cash flows, and abnormal earnings may be used to estimate value. • Price-based multiples may also be used as value estimates. • No method by itself dominates any of the others. Copyright (c) 2008 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Chapter 7: Prospective Analysis: Valuation Theory and Concepts Palepu & Healy Discounted Dividends Valuation • The present value of future cash flows to shareholders is the basis of the discounted dividends method. • This method is the basis for most theoretical approaches to stock valuation, including the other methods discussed in this chapter. Where re is the cost of equity capital Copyright (c) 2008 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Chapter 7: Prospective Analysis: Valuation Theory and Concepts Palepu & Healy Discounted Abnormal Earnings • Abnormal earnings are...
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...PLEKHANOV RUSSIAN UNIVERSITY OF ECONOMICS INTERNATIONAL BUSINESS SCHOOL COURSE WORK « Business Valuation on the basis of Damodaran model » Corporate Finance Student: Pavel Terefera Supervisor: Irina Sokolnikova Moscow 2015 Contents Introduction _____________________________________________ 3 Chapter 1. Valuation______________________________________ 4 1.1 Valuation in portfolio management_________________________ 7 1.2 Valuation in acquisition__________________________________ 10 1.3 Valuation in corporate finance_____________________________ 10 Chapter 2. Approaches to Valuation___________________________ 11 2.1 Profitable Approach_____________________________________ 12 2.1.2 Income capitalization approach __________________________ 12 2.1.3Method of discounted cash flows__________________________ 14 2.1.4 Discounted Cash Flow Valuation on example of JSC NLMK____ 20 2.2 Relative Valuation Approach______________________________ 23 Conclusion _______________________________________________ 28 Bibliography ______________________________________________ 29 Introduction. Knowing the value of an asset may not be a guarantee for success for investor, but it does help us make more informed judgments. A postulate of sound investing is that an investor does not pay more for an asset than its worth. In conditions of market economy when all transactions are made "on fear and risk" their participants, both seller...
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...rP os t 9-206-095 REV: OCTOBER 31, 2006 ROBIN GREENWOOD LUCY WHITE Introduction to Valuation Multiples Table 1 op yo A multiple is a market price per unit, which, when multiplied by the number of units, gives the value of those units. We use multiples regularly in our everyday lives without even realizing it. For example, to determine the value of a bag of fish, we multiply the price of fish per pound (the multiple) by the weight of fish in the bag (the number of units). Below are some more examples of multiples you may have used. Everyday Multiples Quantity X Pounds of fish Bushels of apples Gallons of gasoline Number of square feet X X X X Multiple $ per pound $ per bushel $ per gallon $ per square foot = Value = = = = Cost of fish Value of apples Price of tank of gas Value of property No tC In real estate transactions, realtors often make a first estimate of the value of a property based on the number of square feet times the prevailing price per square foot in the locality. For example, if the average price per square foot in your neighborhood is $500, you might think you got a good deal if you acquired a 1000-square-foot apartment for less than $500,000. Although multiples present an efficient way to value an item, they also pose risks. Not all 1000-square-foot apartments in a particular neighborhood sell for the same price. Other factors, such as supply, condition, and location of the...
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...Financial Analysis & Management Discounted cash flow techniques Discounted cash flow is a method used to evaluate a company based on the concept of time value of money, cash flows of the future are estimated then discounted to their present value, There are four discounted cash flow techniques which are; Net present value technique(N.P.V), Internal rate of return technique(I.R.R), Discounted payback technique and The profitability index technique (P.I) and every one of those techniques has its own purpose(Alfred, et al, 1971) DCF Advantages|DCF Disadvantages| · Theoretically, it’s the most rational method of valuation.· It depends on future estimations rather than historical results.· It focuses on cash flow generation and less affected by accounting practices.· It allows for the different business components to be valued separately or to value the whole business.· Ease of use· Convenient for both equity shareholders and debt holders.|· Accuracy of valuation highly depends on the quality of the assumption; any wrong inputs will result in wrong outputs, "Garbage in, Garbage out".· Any slight changes in inputs can cause large changes in the outputs.· Depends on the ability of user to predict future cash flows accurately or not.| (www.macabacus.com, valuation, 5/4/2013) The Discounted cash flow method is better than compounding cash flow because discounting cash flows gives us the Present value of the money, and the present value of money is more useful in finance...
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...gas fields apparently isn’t one of them. This is a chance to unload some properties that because of their high cost structure, Amoco can’t manage profitably. Apache, on the other hand, has low costs and is an efficient operator of small- to medium-sized properties. The company has grown significantly in recent years by acquiring less well-run properties and applying its “rationalize and reconfigure” strategy. The MW Petroleum properties appear to offer the opportunity to continue this strategy. If Amoco can strike a price wherein Apache shares some of its operating savings with Amoco, both parties can generate positive net present values from the transaction. Acquisition of MW Petroleum may also reduce the volatility of Apache’s cash flows by making them less dependent on gas. Although this may not benefit shareholders directly, it will likely enable management to sleep better and might increase Apache’s borrowing capacity, thereby benefiting shareholders indirectly. 2. (10 points.) Whose projections appear in the case exhibits? From Apache’s perspective, is there any reason to believe these numbers might be biased one way or another? Does the value of MW Petroleum derived from...
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...significantly in recent years by acquiring less wellrun properties and applying its “rationalize and reconfigure” strategy. The MW Petroleum properties appear to offer the opportunity to continue this strategy. If Amoco can strike a price wherein Apache shares some of its operating savings with Amoco, both parties can generate positive net present values from the transaction. Acquisition of MW Petroleum may also reduce the volatility of Apache’s cash flows by making them less dependent on gas. Although this may not benefit shareholders directly, it will likely enable management to sleep better and might increase Apache’s borrowing capacity, thereby benefiting shareholders indirectly. 2. (10 points.) Whose projections appear in the case exhibits? From Apache’s perspective, is there any reason to believe these numbers might be biased one way or another? Does the value of MW Petroleum derived from these numbers represent Apache’s maximum acquisition price? Explain. The story appears to be a mixed one. Although Apache is capable of making its own cash flow...
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...Ventures Professor Gilles Business Valuation Report The Business Valuation report will discuss how these companies compare and which companies are performing. The report will give and in depth analysis for the financial forecasting and the business valuation models. The four companies Alex and Ani, I.T. source, Mastero technologies, and Veteran Corps of America. The first company Alex an Ani cost of capital and the weighted average for the cost of equity and the cost of debt for each corporation. The cost of capital rate should be used as the discount rate for present value (PV) of the free cash flow (FCF) and terminal value (TV) of the business.The business valuation calculation for Alex an Ani show that the company is profitable and estimates for the company include the present value of the free cash flow (FCF) from the 5-year revenue and earnings forecast and the present value of the terminal value (TV) based on the free cash flow (FCF) in the fifth year using the cost of capital. The combination of present values from discounted cash flows and discounted terminal values would represent the total business values for each of the four privately-held corporation.While this valuation was generated considering as many company, industry and location specific details as available, the value presented in this report is an automated estimation of the assets and liabilities. Some events and circumstances that might impact the overall valuation of a specific business Alex and...
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...uncertain at best and this was key for Arcadian getting its products into the market. Importance of Terminal Value The final steps in Chu’s analysis were to estimate a terminal value for Arcadian. In order to evaluate the market price of a firm, one of the methods involves discounting future dividends at the cost of equity (dividend discount model). After discounting projected 5 year dividends for 19 randomly picked firms it was established that resulting prices were considerably lower than actual market prices for that time. The average percentage of market price not attributable to dividends of these 19 firms equated to 93%. This discrepancy is largely due to the terminal value, which is the lump-sum of cash flow at the end of a stream of forecasted cash flows. Thus, terminal value proves to be a huge value driver. The unexplained part of the share price could also be...
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...stock during one of the most difficult periods in capital-raising history. The case outlines Rosetta Stone’s unique language-learning strategy and its associated strong financial performance. Students are invited to value the stock and take a position on whether the current filing range is appropriate. The case is designed to showcase corporate valuation using discounted cash flow and peer-company market multiples. Answer the following questions in your report: 1. What is going on at Rosetta Stone? 2. Describe the economics of the Rosetta Stone business. Is this a business that you expect will generate interest among investors? What do you think the current market price is for Rosetta Stone shares? Justify your valuation on a discounted-cash-flow basis and a market multiples basis. • What are the pros and cons of using a market-multiples approach in valuation? • Consider a discounted-cash-flow model for valuing Rosetta Stone. Are you comfortable with the financial forecast in case Exhibit 8? What are the key assumptions? Is the length of the forecast period reasonable? • What discount rate is appropriate for the cash-flow forecast? • What was your approach for terminal value? How do your terminal value assumptions affect the estimated value of Rosetta Stone shares? 3. What is an IPO and why is it such a big deal? Is this a good idea for Rosetta Stone? 4. What offer price would you set for the Rosetta Stone...
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...| | |Methods of Valuation for Mergers and Acquisitions: Arcadian Microarray Technologies, Inc. | |Written Case Analysis | Methods of Valuation for Mergers and Acquisitions: Arcadian Microarray Technologies, Inc. Case Summary The case is about a private equity investment of Sierra Capital Partners in Arcadian Mircroarray Technologies, Inc. Arcadian Microarray Technologies is a company of the gene diagnostics industry. In August 2005, Arcadian proposed to sell a 60% interest to Sierra Capital for $40 million. Its business consisted of two segments, which are DNA microarrays and human therapeutics. Sierra capital has $2 billion under management and a portfolio consistent of 64 investments. The managing director of Sierra Capital, Rodney Chu, bases his negotiation strategy on the assessment of Arcadian's economic value and structures the interest of Sierra Capital and Arcadian to create high incentives for the value creation. Chu determines the value of the investment through the terminal value, which is the value of a company at a specified future valuation date. In assessing Arcadian's value, Chu looked toward the companies Affymetrix, Inc. and Illumina, Inc. Simon will assist in the final stages of preparing for the negotiations and...
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...Gator Electronics Inc. an electronics manufacturer that sells electronic products to third-party retail centers has identified its reporting units as geographical regions in which it operates: United States, South America, Canada, Asia, Europe, Africa, and the Middle East. Gator Electronics elected not to perform the qualitative assessment for determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount and proceeded with Step 1 of the quantitative two-step goodwill impairment test for all reporting units. On the basis of the valuation prepared by Management’s Expert, Gator estimated that the fair value of all of the reporting units exceeded their respective carrying values and no Step 2 analysis was required or prepared. Fair value, as defined by the Financial Accounting Standards Board (FASB), is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Although GAAP does not prescribe the methods for measuring the fair value of an item, it expresses a preference for the use of observable market prices to make that determination. In the absence of observable market prices, GAAP requires fair value to be based on the best information available in the circumstances, which is inherently imprecise due to the underlying assumptions about future conditions, transactions, or events whose outcome is uncertain and will, therefore...
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...Capital Budgeting Process These are the six steps that organizations use when they are issuing bonds. These steps are: 1. The healthcare provider plans and prepares for the issuance process. (Cleverley, Chapter 21) 2. The healthcare provider gets evaluated by a credit rating agency. (Cleverley, Chapter 21) 3. The bond is rated by a bond rating agency. (Cleverley, Chapter 21) 4. The healthcare provider provides a note or lease to the governmental authority, the issuer of the bonds, via a trustee. (Cleverley, Chapter 21) 5. The governmental authority delivers the bonds to one or more investment banking firms. (Cleverley, Chapter 21) 6. The investment banking firms sell the bonds to investors at the public offering price, and the trustee provides the healthcare provider with the net proceeds. (Cleverley, Chapter 21) An alternative to traditional equity and debt financing is leasing. Leasing is undertaken primarily for what purposes? Leasing is undertaken for the primary purpose of protecting the organization from having to buy equipment that depreciates. Another reason is that it creates safe harbors for investment in healthcare entities, certain discounts for products, and for waiver of coinsurance or deductibles, among others. (Cleverley, chapter4) The two major types of leases are operating and financial. With an operating lease, sometimes called service leases, is a lease for a period shorter than the equipment’s economic life, usually cancelable. (Cleverley, pg...
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...| Macy’s Inc. Valuation Report | | Table of Contents Objective 2 External Sources of Information 2 Company Identification 2 History 3 Executive Management 3 Financial Overview 4 Stock Classes and Ownership 5 Market Data and Analysis 5 Overview of Valuation Approach and Method 7 Valuation Results 9 Appendix A 10 Appendix B 11 Macy’s Valuation Report Objective Our objective is to estimate the Free Cash Flow (FCF) value of Macy’s Inc. as of July 24, 2011 (date of valuation). Macy’s Inc. is a C-Corporation organized under the laws of Delaware. It is primarily engaged in the business of premier retail fashion. The standard of value was Free Cash Flow Value, which measures the company’s ability to generate cash after accounting for capital expenditures, which is a fundamental basis for stock pricing. FCF provides a viable indication of Macy’s ability to develop new products, buy back stock, pay dividends, or reduce its debt depending on the amount of cash the company has to expand. Since FCFs indicate the financial health of a company in its current environment, this valuation’s purpose is to determine Macy’s ability to increase stock prices and maximize shareholder wealth. External Sources of Information We have used various external sources of economic and industry data to assess the condition of the general economy, trends in the fashion retail industry, and the condition of the securities markets. Among those sources, we used Plunkett Research...
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