...Free Cash Flows For Equity Valuation: Pitfalls and Possible Solutions by Juliet Estridge and Barbara Lougee, provides a guide to cash flows definition that aims to helps inventors avoid common pitfalls while providing inside to corporate performance and value. This article looks at two different valuation methods along with corresponding studies and evidence. The article begins with the definition of value and “free cash flow”. Miller and Modigliani demonstrate that the value of the company is the present value of its future expected operating profits net of the new capital investment required to sustain the business. Using this basic analytical framework, M&M came up with two valuation approaches: discounted cash flow approach and investment opportunities approach. Joel Stern recognizes the term “free cash flow” as net operating profits after taxes minus the amount of new capital invested. However, accounting methodologies pose limits on valuations metrics: inconsistency, misclassification, ease of manipulation, and measurement errors. The article provides an example of the difference measures used for cash flow among various companies such as P&G, The Gap, and others. The first valuation method is multiples, which include only recurring or sustainable cash flows and excludes discretionary cash flows. The article shows an example of the price to free cash flow multiple (P/FCF) and “cash flow to yield” (FCFfY) as an increasingly popular valuation tool. However, the...
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...Company Name INCOME STATEMENT 2007 Revenue Cost of sales Gross profit Share of profit/ loss from associates Other Revenue Other Income Other expenses Income before tax and net financing Finance income Finance costs Profit before income tax Income tax expense Royality related-taxation expenses Net profit for period Profit attributable to minority interest Profit attributable to the members of the parent company Dividends distributed RESTATED 2008 $’m 2,762.0 -1,423.0 1,339.0 0.0 43.0 1,735.0 -493.0 2,624.0 63.0 -154.0 2,533.0 -730.5 -115.0 1,687.5 0.0 1,687.5 765.8 2009 $’m 2,181.0 -1,423.0 758.0 -1.0 70.0 254.0 -351.0 730.0 85.0 -98.0 717.0 -79.0 -78.0 560.0 0.0 560.0 307.0 2010 $’m 2,228.0 -1,462.0 766.0 -2.0 78.0 344.0 -400.0 786.0 140.0 -133.0 793.0 -179.0 -51.0 563.0 -2.0 565.0 340.0 2011 $’m 2,530.0 -1,562.0 968.0 -9.0 98.0 545.0 -411.0 Formula -2.88% -61.03% -0.16% 3.04% 27.86% -17.04% 2012 $’m 2457.1 -1499.6 957.5 -4.0 74.6 684.6 -418.6 1294.1 122.7 -177.8 1238.9 -348.0 -83.7 807.2 0.0 807.2 2013 $’m 2386.3 -1456.4 929.9 -3.9 72.4 664.8 -406.5 1256.8 119.1 -164.9 1211.0 -345.9 -81.3 783.7 0.0 783.7 371.7 2014 $’m 2317.5 -1414.4 903.1 -3.8 70.3 645.7 -394.8 1220.5 115.7 -147.3 1188.9 -345.3 -78.9 764.7 0.0 764.7 362.6 2015 $’m 2250.7 -1373.6 877.1 -3.7 68.3 627.1 -383.4 1185.4 112.4 -130.1 1167.6 -344.7 -76.7 746.2 0.0 746.2 353.9 2016 $’m 2185.9 -1334.1 851.8 -3.6 66.3 609.0 -372.4 1151.2 109.1 -113.4 1146.9 -344.1 -74.5 728.4 0.0 728.4 345.4 ...
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...7-1 a. A proxy is a document giving one person the authority to act for another, typically the power to vote shares of common stock. If earnings are poor and stockholders are dissatisfied, an outside group may solicit the proxies in an effort to overthrow management and take control of the business, known as a proxy fight. A takeover is an action whereby a person or group succeeds in ousting a firm’s management and taking control of the company. The preemptive right gives the current shareholders the right to purchase any new shares issued in proportion to their current holdings. The preemptive right may or may not be required by state law. When granted, the preemptive right enables current owners to maintain their proportionate share of ownership and control of the business. It also prevents the sale of shares at low prices to new stockholders which would dilute the value of the previously issued shares. Classified stock is sometimes created by a firm to meet special needs and circumstances. Generally, when special classifications of stock are used, one type is designated “Class A”, another as “Class B”, and so on. Class A might be entitled to receive dividends before dividends can be paid on Class B stock. Class B might have the exclusive right to vote. Founders’ shares are stock owned by the firm’s founders that have sole voting rights but restricted dividends for a specified number of years. b. Some companies are so small that their common stocks are not actively...
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...VALUATION Outline Page Valuation overview 1 DCF valuation 7 47 Comparable transactions analysis 59 LBO analysis 68 Appendix VALUATI O N Comparable companies analysis 74 VAIDYA NATHAN 1 Overview “Price is what you pay. Value is what you get” VALUATI O N O V E R VI EW Value ! Price Do not confuse Price and Value. They are not the same If the Price paid is less than the Value derived, it’s a good investment VAIDYA NATHAN 2 Overview Why valuation is important? Divestitures Acquisitions How much should we pay to buy the company? How much should we sell our company/division for? Fairness opinions Research Is the price offered for our company/division fair (from a financial point of view)? Should our clients buy, sell or hold positions in a given security? Valuation Public equity offerings Hostile defense For how much should we sell our company/division in the public market? Is our company undervalued/vulnerable to a raider VALUATI O N O V E R VI EW Debt offerings New business presentations Various applications What is the underlying value of the business/assets against which debt is being issued? VAIDYA NATHAN 3 Overview The valuation process Determining a final valuation recommendation is a process of triangulation using insight from each of the relevant valuation methodologies (1) Discounted Cash Flow VALUATI O N ...
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...Chapter 18 —— Equity Valuation Models 1. Models to uncover mispriced securities Fundamental analysts: use information concerning the current and prospective profitability of a company to assess its fair market value 2. Quantitative tools: dividend discount model (DDM) 3. P/E (price-earnings ratio) 4. Free cash flow models 1. Valuation by Comparables P/E, price-to-book value, price-to-sales value, price/cash flow ratio Comparative valuations ratios are used to assess the valuation of one firm vs. others in the same industry Limitations of book value Liquidation value per share Replacement cost of its assets – liability 2. Intrinsic Value vs. Market Price * 第一种方法 Investor’s expectation= cash dividends + capital gains/ loss (price appreciation/ depreciation) Expected (HPR) holding-period return= EP1-P0+E D1P0 = EP1-P0P0+E D1P0 = capital gains yield (expected rate of price appreciation) +expected dividend yield 是你期待从这个投资里得到的 Required rate of return: k 是根据CAMP算出来的 如果k= expected return, 则说明price correctly (market capitalization rate) 如果k< expected return, 则说明overpriced （会想要更多的此股票） 是opportunity cost, 是我投资这个项目应该得到多少钱。 如果expected> required, 则投资( positive alpha) * 第二种方法 Intrinsic value (V0) of a share of stock to its market price V0是present value of all cash payments= all dividends + 从卖股票里得到的proceeds, 再discounted V0=D1+P11+k 然后比较V0和P0, 如果V0>P0，说明这支股票underpriced (positive-alpha...
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...Gucci Group N.V. Case Brief Group: Synergy BI4242 Global Strategic Management Section 404 Submitted to A. Pattana Boonchoo November 25, 2005 Mission: The mission of the company is to be a successfully managed multi-brand group in the fashion industry, producing luxury products that will be enjoyed by affluent, style-conscious consumers. Internal analysis: Performances: After the new CEO get on the stage, the company starts increase its revenue. Now the company use acquisition strategy to growth. And now they already acquire 2 companies YSL and Sergio Rossi. Current strategies: At the corporate level, the company operates in two directions, which is vertical and horizontal. Horizontally, the company purchased companies in the same industry such as YSL Beaute, Sergio Rossi and YSL couture. This acquisition not only broadens the product lines the company carries; it also provides the company with more specific targets with each of its brands. Vertically, the company has integrated both forward and backwards. It established partnering relationships with some of its suppliers and also tried to gain more control over its DOS (directly operated stores). In integrating vertically, the company is able to more control the entire value adding process, thus able to provide the most value to its customers. Also, they will be able to control costs and the overall image of the brand. Although there are a lot of positive reasons for integration, the company still has to...
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...Dunkin Brands Group, Inc. Intro Dunkin Brands Group, Inc. went public on July 27, 2011 at an offering price of $19.00 per share. Over a year later Dunkin trades around $29.13. This represents an increase of 52.63 % since the company went public. After evaluating the company and preparing a DCF model we found the price to be valued at only $24.17. Dunkin Brands also has a price to earnings ratio of 64.88. These indicators signal a company that is vastly overpriced, however its explosive growth prospects might somewhat justify the high multiples. What is nerve wracking is the lack of financial records stretching back further in time, due to the recent offering of shares. Macroeconomic and Industry Analysis Dunkin’ Brands Group headquartered in Canton, Massachusetts consists of two of America’s most recognizable brands: Dunkin Donuts and Baskin-Robbins. The two brands both have a rich history dating back to the 1940s when Bill Rosenberg founded his first restaurant, subsequently renamed Dunkin’ Donuts, and Burt Baskin and Irv Robbins each founded a chain of ice cream shops that eventually combined to form Baskin-Robbins. Incorporated on November 22, 2005, the combined companies were renamed Dunkin’ Brands Group, Inc. The company went public on July 27, 2011 at an offering $19.00 per share. Dunkin’s plan was to use the money to pay down debt and expand the chain. Upon the completion of the IPO, the common stock became listed on the NASDAQ Global...
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...a multiples analysis, calculating and defending an estimate of Crocs value. Soln: Comparable companies analysis – Done to determine appropriate valuation multiple for Crocs, Inc. • • Selected peer group based on industry, business and financial characteristics Included explosive growth stocks such as Lulelemon & Under Armour having similar prospects for growth and ROIC as Crocs, Inc. and some mature, stabilized businesses with stable industry growth rates – Nike, Deckers & Timberland. This mix will help us provide valuation from an aggressive sales growth and maturing sales context. Some characteristics used in selection include – o Primary or at least significant portion of business revenue comes from footwear & apparel – analogous to Crocs primary business o Has product appeal to large group of customers o Has distinct product attributes (innovative/creative) and differentiation from competition o Has wide range of distribution channels o CAGR Sales growth, COGS to Sales & Significantly less debt exposure on their balance sheets o Have characteristics of high octane growth and show signs of maturity and stabilizing long-term growth similar to well established footwear brands. • Valuation Multiples The objective was to compare operating metrics and valuation multiples in a peer group to that of Crocs, Inc. for equity valuation. The market multiple model is based on the idea that on average, a company, over time would have roughly the same value as its peers. Assumption:...
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...DCF-based valuation variants (FCFF, FCFE, and APV), relative valuation via comps, and relative valuation via trans. Please use exclusively the data in the case. PART A You must compute the Equity Value of Liston Corp., on a stand-alone basis (i.e., pre-acquisition), for Jim Liston, by doing the following: 1. Use DCF via FCFF discounted at constant target WACC to compute the value of the company and equity. 2. Now check: does the actual D/A ratio (i.e., after your valuation) match the target D/A? If not, find the amount of initial debt that should be used to force a match between actual and target D/A. Using that debt value, recompute Equity. 3. Using the amount of debt you calculated in the previous step as a fixed amount over the planning horizon, perform a valuation via FCFE discounted at constant Ce. What could be wrong with this procedure? 4. Now perform APV with constant debt (again at the fixed level computed in Step 2) and include default risk by discounting tax benefits at the unlevered Ce. 5. Perform APV with constant debt (again at same debt level) but this time, account for default risk by discounting tax benefits at Cd AND by adding a negative term equal to 15% of unlevered EV. 6. Using the original debt amount of Liston (i.e., $ 140 million), compute Equity via comps using EV/Sales, EV/EBIT, EV/EBITDA, P/E, and P/Book value of equity. Do not combine the results—i.e., do not obtain a synthetic value for multiples. 7. Compute equity using comparable...
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...2 Graduate Thesis By Teia R. Merring Copenhagen Business School Strategic and financial analysis and valuation of B&O 0 1 Executive Summary................................................................................2 Introduction............................................................................................6 1.1Motivation.................................................................................................................. 6 1.2Problem Specification................................................................................................ 8 1.3Problem Identification................................................................................................ 8 1.4Problem Handling .................................................................................................... 10 1.5Structure and Methodology...................................................................................... 12 1.5.1Introduction and Presentation........................................................................... 12 1.5.2Strategic Analysis............................................................................................. 12 1.5.3Financial Statement Analysis ........................................................................... 13 1.5.4Prognoses and Budgets..................................................................................... 14 1.5.5Valuation.......................................
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...on the corresponding valuation date of every Individual; Hindu Undivided Family and Company at the rate of 1% of the amount by which the net wealth exceeds Rs.15 Lakhs. Education Cess of 3% is not leviable on the amount of Wealth Tax. Applicability of wealth tax: 1. Individual: The following persons treated as ‘individual’ u/s 3 of the wealth tax. a) Legal hires of an Individual. b) Holder of an impartible estate. c) Hindu deities (it means formal a god/goddess ) d) Trustees of a trust who are liable u/s 21A. e) Trade unions 2. HUF 3. Company 4. AOP chargeable u/s 21AA : Situation Shares of members of an AOP are determinate or known. Shares of members of an AOP are indeterminate or unknown. Wealth Tax assessment Interest of members in the assets of the AOP shall be valued as per Rule 16 and 17 of Schedule III. Wealth tax is levied on the AOP. It is liable to tax at the rate leviable upon and recoverable from an individual who is any Indian citizen and resident. Valuation Date: Sec.2 (q): It refers to the 31st March immediately preceeding the assessment year. This provision does not apply to – a. Company registered U/s 25 of the companies Act, 1956 b. Cooperative society and c. Any social club d. Any political party e. Any mutual fund U/s 10(23D) CHARGEABILITY Individual HUF / Companies Nationality Residential Status Location of assets as on the valuation date Residential Status Location of assets as on the valuation date Direct Tax...
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...Group Work: Financial Statement Analysis of your selected listed Bangladeshi company Guideline for Term Paper Dear All, Please complete the strategy analysis and accounting analysis based on the following guideline by next 2 weeks for the company allocated to your group for term paper, and give me the update. Topic Specific Topics Key Questions Strategy Analysis Industry Analysis (Five forces Model) Rivalry -How do firms in an industry rivalry compete among themselves? -What are the dimensions of the competition? Threat of new entrants -What are the legal entry barriers for a new firm? -What are the economic entry barriers for a new firm? Threat of substitute products -Is there any substitute products of the industry? -If so, What is the level of price difference with substitute product? Bargaining power of buyers -What is level of buyers’ price sensitivity? -What is the buyers’ relative bargaining power? Bargaining power of suppliers -How many numbers of suppliers? -How much critical the product is to buyers? Competitive Strategy Analysis Which competitive strategy the company has taken? Cost leadership or Differentiation Corporate Strategy Analysis -Are there significant imperfections in the product, labor or financial markets in the industry in which the company is operating? - Does the company have special resources such as brand names, proprietary know how, access to scarce distribution channels, and special organization...
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...ultimately reduced their business risk. In analyzing the financial risk, the continuous acquisitions have definitely increased the operational risk for the company. Since the case didn’t provide us with the financial statements for Monmouth, we can assume that in order to complete the acquisition they have to issue stocks as they exhausted (or will pretty soon exhaust) their debt capacity. 2. Based on the DCF valuation and using a WACC of 8.25% (the beta assumed to be 1, the average beta of comparable firms and the coupon rate to be 7.96%, the rate for BB rated companies) and a growth rate of 5.5%. The fair price is $40.4 per share for Robertson, lower than the $50 offered by Simmons to sell their stocks but higher than the current market price of $30. As for the peer multiples, and due to the lack of information for the comparable companies we only managed to calculate the EBIAT multiple, the earnings multiple and the book value multiple using the three comparable companies, Actuant Corp, Snap On Inc., and Stanley Works. The result of the multiple valuation showed a fair price of $40.1 per share based on the EBIAT multiple and a value of $29.61 per share based on the earnings multiple. Both prices are below the fair price calculated by the DCF. Only the book value multiple exceeded the DCF fair value with a value of $65.25. The first two multiples failed to capture the future potential and growth of the corporation, where the DCF managed to include it as a factor in the...
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...According to 820-10-35-54-c, it was reasonable to determine that market is not active. Because the adjustments were based on management’s assumption, FFC didn’t used level 1 inputs in the income approach valuation technique (present value technique). In addition, significant adjustment inputs includes credit adjustment (level 3 inputs) and liquidity risk adjustment (level 3 inputs), and implied rate of return (level 2 inputs) under ASC 820-10-35-48/52. According to ASC 820-10-35-37A, when the inputs are categorized within different levels of the hierarchy, the entire instrument should be in the same level of hierarchy as the lowest level inputs that is significant to the entire measurement. So, CDO should be categorized within level 3 of the fair value hierarchy. Instrument 2 There was no significant decrease in the volume and activity for the MBS, because no significant factors occurred. Therefore, the market should be still active, even the market became increasingly volatile with some declined activity in the Q4 2012. In my opinion, FFC should still use market approach valuation because (1) quoted prices were highest priority inputs in accordance with ASC 820-10-35-37 (2) the theoretical income-approach pricing model needed significant assumption. In the market approach valuation, quoted prices for the similar observed transactions was level 2 inputs. Then, FFC should classify the MBS into level 2 of the fair value hierarchy. Instrument 3 According to...
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...• IMPAIRMENT OF ASSETS: A GUIDE TO APPLYING IAS 36 IN PRACTICE. • PUBLISHED IN MARCH 2014. Explanation of the basis of key assumptions and the valuation approach used to determine the recoverable amount (IAS 36.132(encouraged), 134(d)(i)-(v), (e)(i)-(v), 135(d)) • Key assumptions usually left out. • If discussed they were not sufficient. • Key assumptions include gross margin, government bond rates, exchange rate for the period, raw material price, inflation, market share, etc. • Comparative information is required Where goodwill or indefinite life intangibles have been allocated to a CGU (or group of CGUs), but no impairment has been recognized, reasonably possible changes in assumptions if such changes would cause the unit’s carrying amount to exceed its recoverable amount (IAS 36.134(f), IAS 36.135(e)) • Sensitivity Analysis is not provided. • If provided, it is not consistent. • If book value increases, investors would expect a clear sensitivity analysis. • sensitivity analysis should incorporate all key assumptions (beyond discount rate and growth rate) . Description of the entity’s CGU when it recognises or reverses an impairment loss for the CGU during the period (IAS 36.130(d)(i)) • Disclosures did not provide description. • If they did, they lacked substance. • Users did not have an idea of the impact of the impairment on the financial activities. Explanation of the events and circumstances that contributed to the impairment loss or reversal (IAS 36.130(a))...
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