...Aswath Damodaran 1 Sony: Background on Japanese firms n Japanese firms have proved to be among the most difficult to value for several reasons: • The earnings in 1999 for most Japanese firms was depressed relative to earnings earlier in the decade and in the 1980s, reflecting the Japanese economy • Japanese accounting standards tend to understate earnings and overstate book value of equity, as firms are allowed to set aside provisions for unspecified expenses • The earnings of many export oriented Japanese firms tends to be heavily influenced by exchange rate movements • The cross holdings that Japanese firms have in other firms, and the lack of transparency in these holdings, makes it difficult to value these holdings. Aswath Damodaran 2 Valuing Sony: August 2000 n n n n Sony had net income of 31 billion JPY in 1999, down from 76 billion JPY in 1997 and 38 billion in 1998. The return on equity at Sony dropped from 5.25% in 1997 to 2.13% in 1999. The firm paid out dividends of 21 billion JPY in 1999. Capital expenditures in 1999 amounted to 103 billion JPY, whereas depreciation is 76 billion JPY. Non-cash working capital at Sony in 1999 was 220 billion JPY on revenues of 2593 billion yet, yielding a non-cash working capital to revenue ratio of 8.48%. The long term government bond rate in Japan was 2% at the time of this valuation. Aswath Damodaran 3 Sony: Rationale for Model n n n n n We will normalize earnings to reflect...
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...1. Respond true or false to the following statements relating to the calculation and use of FCFE. A. The free cash flow to equity will generally be more volatile than dividends. B. The free cash flow to equity will always be higher than the dividends. C. The free cash flow to equity will always be higher than net income. D. The free cash flow to equity can never be negative. 2. Kimberly-Clark, a household product manufacturer, reported earnings per share of $3.20 in 1993 and paid dividends per share of $1.70 in that year. The firm reported depreciation of $315 million in 1993 and capital expenditures of $475 million. (There were 160 million shares outstanding, trading at $51 per share.) This ratio of capital expenditures to depreciation is expected to be maintained in the long term. The working capital needs are negligible. Kimberly-Clark had debt outstanding of $1.6 billion and intends to maintain its current financing mix (of debt and equity) to finance future investment needs. The firm is in steady state and earnings are expected to grow 7% a year. The stock had a beta of 1.05. (The treasury bond rate is 6.25%.) a. Estimate the value per share, using the Dividend Discount Model. b. Estimate the value per share, using the FCFE Model. c. How would you explain the difference between the two models and which one would you use as your benchmark for comparison to the market price? 3. Ecolab Inc. sells chemicals and systems for cleaning, sanitizing and maintenance...
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...Executive Summary Share valuation plays an important role and analyzing the value of a company before making an investment decision is essential for an investor. There are cases where a stock may be overvalued or undervalued. It is not worthwhile to buy and hold an overvalued stock as they will not generate any positive return to the investor and vice versa in case of an undervalued stock. It is essential to estimate the value of a company based on their future growth and earning potential. As a shareholder, it is essential to know the return that an equity investor will generate by investing in a company. Free Cash Flow to Equity (FCFE) provides the actual return that equity shareholder can expect from the company. Six-year projection of income statement, balance sheet and cash flow statement are being made to determine the FCFE. Future FCFE is used for the determining the value of the firm. It indicates about the intrinsic value of the company based on which an investor can determine whether a stock is undervalued or overvalued. In this case, McDonald’s performance is expected to fall during 2015 and 2016. There is an expectation of slow revamps from 2017 in a stable phase. The determined value clearly indicates that the stock is currently overvalued, and it will not be a worthy decision to invest in this stock. Key Details of the Valuation Model It is essential to make an investment in a stock only after making a detailed analysis of the company and after...
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...Valuing Coca-Cola Using The Free Cash Flow To Equity Valuation Model John C. Gardner, University of New Orleans, USA Carl B. McGowan, Jr., Norfolk State University, USA Susan E. Moeller, Eastern Michigan University, USA ABSTRACT In this paper, we provide a detailed example of applying the free cash flow to equity valuation model proposed in Damodaran (2006). Damodaran (2006) argues that the value of a stock is the discounted present value of the future free cash flow to equity discounted at the cost of equity. We combine the free cash flow to equity model with the super-normal growth model to determine the current value of Coca-Cola. At the time of this paper, we determined a value of Coca-Cola at $161 billion using the free cash flow to equity model, and the actual market value of Coca-Cola was $150 billion. Keywords: Coca-Cola; Free Cash Flow to Equity; Equity Valuation; Super-normal Growth Model CORPORATE FINANCIAL MANAGEMENT AND STOCK VALUATION C orporate financial management encompasses the efficient acquisition and allocation of funds. The objective of corporate financial management is to maximize the value of the firm. Solomon (1963, page 22, Chapter II) argues that wealth maximization should be the goal of corporate financial management because this criterion maximizes the wealth of the owners of corporations and maximizes the wealth of a society by maximizing economic output. The value of the firm is measured by the market capitalization of the firm. The...
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...P&L Sales Operating Expenses (sin depreciaciones) EBITDA Depreciation EBIT Interest expenses Profit before taxes Taxes Net Profit 31/12/2004 310 218 92 30 62 14 48 19 29 Balance-Sheet Assets Cash Accounts Receivable Invetories Current Assets Net Fixed Assets Total Assets 5 31 66 102 208 310 Liabilities & Equity Accounts Payable & other Long Term Debt Equity Total Liability & Equity 35 140 135 310 1) P&L Sales Operating Expenses (sin depreciaciones) % de ventas WK % Ventas EBITDA % de ventas Depreciation % de ventas EBIT % de ventas Interest expenses % de ventas Profit before taxes % de ventas Taxes % de ventas Net Profit % ventas EBIT - taxes % ventas Balance-Sheet Assets Cash Accounts Receivable Invetories Current Assets Net Fixed Assets Total Assets 0 31/12/2004 310,0 -218 -70,32% 62,00 20,00% 92,0 29,68% -30 -9,68% 62,0 20,00% -14 -4,52% 48,0 15,48% -24,8 -8,00% 23,2 7,48% 37,2 12% 1 31/12/2005 328,6 -231,08 -70,32% 65,72 20,00% 97,5 29,68% -31 -9,43% 65,7 20,00% -11,2 -3,41% 54,5 16,59% -26,3 -8,00% 28,2 8,59% 39,4 12% 2 31/12/2006 348,3 -244,9448 -70,32% 69,66 20,00% 103,4 29,68% -32 -9,19% 69,7 20,00% -11,2 -3,22% 58,5 16,78% -27,9 -8,00% 30,6 8,78% 41,8 12% 3 31/12/2007 365,7 -257,19204 -70,32% 73,15 20,00% 108,5 29,68% -33 -9,02% 73,1 20,00% -11,2 -3,06% 61,9 16,94% -29,3 -8,00% 32,7 8,94% 43,9 12% 4 5 31/12/2008 31/12/2009 384,0 395,5 -270,051642 -278,1531913 -70,32% -70,32% 76,80 79,11 20,00% 20,00% 114,0 29,68% -34 -8,85% 76,8 20,00%...
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...a firm with expected annual after-tax cash flows, before debt payments, of $100 million a year in perpetuity. The firm has a cost of equity of 10%, a market value of equity of $750 million and a market value of debt of $500 million (this is also the book value). The debt is perpetual and the after-tax interest rate on debt is 5%. The company has no non-operating activities. d. In practice, what needs to happen for the two valuation approaches (FCFF and FCFE) to give the same estimate of value? a. Using the financial statements and other information that you have for MPR, and assuming a 5% perpetual growth rate in the FCFE, value the equity using the FCFE method. b. Does this value equal the estimated value using the FCFF method? Why or why not? IO Taxes Inc. is a large but privately-held all-equity firm in the tax planning industry. The firm has been enjoying a nice 20% annual growth in its FCFE due to the highly anticipated increase in taxes related to the massive baby-boomers retirement wave. IO’s FCFE is expected to be $5 million next year. The growth rate is expected to be the same for an additional year after that and then management expects the FCFE’s growth rate to cool down to 4% in perpetuity. IO Taxes has 10 million shares outstanding and it has $10 million in non-operating cash (invested mostly in Treasury bills). While IO Taxes is not publicly traded, its close competitor, H&R Rock Inc., is and has an unlevered and unadjusted equity beta...
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...Estimate the value of the firm and the value of the equity based upon this value. b. Estimate the value of equity, by discounting the cash flows to equity at the cost of equity. c. Now assume that you had been told that the market value of equity was $850 million and that all of the other information remained unchanged. Answer parts a and b, using these new values. d. In practice, what needs to happen for the two valuation approaches (FCFF and FCFE) to give the same estimate of value? Exercise 2 a. Using the financial statements and other information that you have for MPR, and assuming a 5% perpetual growth rate in the FCFE, value the equity using the FCFE method. b. Does this value equal the estimated value using the FCFF method? Why or why not? Exercise 3 IO Taxes Inc. is a large but privately-held all-equity firm in the tax planning industry. The firm has been enjoying a nice 20% annual growth in its FCFE due to the highly anticipated increase in taxes related to the massive baby-boomers retirement wave. IO’s FCFE is expected to be $5 million next year. The growth rate is expected to be...
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...Question 1a Net Income2009 = (EBIT – Interest) (1-Tax rate) = ($240,000 - $12,000) (1 - 0.20) = $228,000 * 0.80 = $182,400 Net Income2010 = (EBIT – Interest) (1-Tax rate) = ($280,000 - $16,000) (1 - 0.20) = $264,000 * 0.80 = $211,200 Net Income2011 = (EBIT – Interest) (1-Tax rate) = ($365,000 - $20,000) (1 - 0.20) = $345,000 * 0.80 = $276,000 Dividend2009 = Net Income2009 – (Retained Earnings2009 – Retained Earnings2008) = $182,400 – ($182,400 - $0) = $0 Dividend2010 = Net Income2010 – (Retained Earnings2010 – Retained Earnings2009) = $211,200 – ($393,600 - $182,400) = $0 Dividend2011 = Net Income2011 – (Retained Earnings2011 – Retained Earnings2010) = $276,000 – ($669,600 - $393,600) = $0 Question 1b Capital Investment2009 = ΔGFA2009 = GFA2009 – GFA2008 =$800,000 - $700,000 = $100,000 ΔWorking Capital2009 = ΔAR2009 – ΔInventory2009 – ΔAP2009 = ($200,000 - $0) + ($180,000 - $50,000) – ($150,000 - $0) = $180,000 ΔNet Borrowings2009 = ΔLong-Term Debt2009 + ΔShort-Term Debt2009 = ($200,000 - $150,000) + ($0 - $0) = $50,000 FCFE2009 = NI2009 – (Capital Investment –Depreciation) 2009 – ΔWorking Capital2009 + ΔNet Borrowings2009 = $182,400 – ($100,000 - $60,000) - $180,000 + $50,000 ...
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...Estimate the value of the firm and the value of the equity based upon this value. b. Estimate the value of equity, by discounting the cash flows to equity at the cost of equity. c. Now assume that you had been told that the market value of equity was $850 million and that all of the other information remained unchanged. Answer parts a and b, using these new values. d. In practice, what needs to happen for the two valuation approaches (FCFF and FCFE) to give the same estimate of value? Exercise 2 a. Using the financial statements and other information that you have for MPR, and assuming a 5% perpetual growth rate in the FCFE, value the equity using the FCFE method. b. Does this value equal the estimated value using the FCFF method? Why or why not? Exercise 3 IO Taxes Inc. is a large but privately-held all-equity firm in the tax planning industry. The firm has been enjoying a nice 20% annual growth in its FCFE due to the highly anticipated increase in taxes related to the massive baby-boomers retirement wave. IO’s FCFE is expected to be $5 million next year. The growth rate is expected to be...
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...Marc Cohen – 000094851 Nathanael Dadoun – 000094992 Dan Taïeb -‐ 006839960 May the 22th, 2013 Corporate Valuation Assignment 3 Question 1: With a market cap close to $60B on December the 31st (and a current market cap of more than $75B on 2013 May the 22th), BOEING is what we call a Gorilla in the global Aerospace and Defense Industry. Symbol of the US hegemony for many years, Boeing has confirmed its leadership in this industry. However, we know that the whole market just faced the subprime crisis of 2008, a fact that affected the growth and the excess return that the company was performing. This fact applies to the whole industry, and thus we believe that it is important to differentiate our company through its magnitude...
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...The case “JetBlue Airways IPO Valuation” outlines JetBlue’s innovative strategy and the associated strong financial performance over the initial two years, in order to determine the price of initial public offering of its stock on April 2002. To the whole industry of Airlines, the terrorist attacks of September 2001 caused a challenge, especially to large numbers of low-fare U.S. airlines. However, JetBlue remained profitable and grew aggressively. From 2002, the low-fare business model gained momentum in the U.S. airline industry. The dominant player among low-fare airlines, Southwest Airlines, has been going so successfully with its stable growth rate of revenue (Exhibit 8) and increasing operating margin forecasts (Exhibit 5). As a relatively new company, JetBlue had made significant progress in establishing a strong brand by seeking to be identified as a safe, reliable, low-fare airline. In addition, a solid Neeleman’s management team, with David Barger and John Owen joining, was formed to enhance the success of going public. Therefore, to support JetBlue’s growth trajectory, going public and raising financing for the company is appropriate at this moment. Going public has both advantages and disadvantages. Advantages The main purpose of going public is to increase capital for the issuer. A public offering would place a value on the company's stock and insiders who retain stock may be able to sell their shares or use them as collateral. Going public also...
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...Blue Sky University Student Research FedEx Corporation Tanan Jargalsaikhan Table of Contents Key Information 3 Business Description 4 Industry Overview and Competitive Positioning 5 Porter’s Five Forces model 5 SWOT analysis 7 Financial Analysis 8 Cash Flows 8 Common size statements 9 Evaluating Internal Liquidity 11 Evaluating Operating Performance 12 Valuation 14 Dividend Discount Model 14 Present Value of Free Cash Flow to Equity 15 Present Value of Operating Free Cash Flow 17 Relative Valuation 19 Investment Risks 20 Investment Summary 21 Conclusion 22 * Key Information Company name: FEDEX CORPORATION Exchange: New York Stock Exchange (NYSE) Ticker symbol: FDX Sector: Services Industry: Air Delivery and Freight Services Price: $166.11 (as of 30 January, 2015) Price Target: $189.13 Recommendation: HOLD / BUY * * Business Description FedEx Corporations (“FedEx”) is one of the largest operating delivery service companies within the United States as well as globally. The company was first founded in 1971 and today operates in over 220 countries with its headquarters based in Memphis, Tennessee. The company has over 300,000 employees worldwide. The revenue for 2014 was $45,6 billion and the net income was $2,1 billion. The firm is the prevailing leader within the delivery and freight service industry. This is substantiated through sales, profit, and growth. FedEx’s revenue is one...
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...10/6/2010 1. Timeline of the free cash flows for the 10 years of the project. (all numbers are in millions) |year |0 |1 |2 |3 | |Long Term Debt | 75.079,3 | 63.799,4 | 59.706,0 | 53.165,0 | |Cash and Equivalents | 24.170,3 | 25.204,6 | 16.255,0 | 16.130,0 | |D | 109.748,9 | 102.553,4 | 105.614,0 | 86.821,0 | | | | | | | |Basic Weighted Shares Outstanding | 1.568,0 | 1.570,1 | 1.574,6 | 1.605,2 | |Stock price | 80,4 | 63,3 | 100,9 | 128,2 | |E | 126.097,8 | 99.385,4 | 158.865,4 | 205.723,7 | |EV (D+E) | 235.846,6 | 201.938,8 | 264.479,4 | 292.544,7 | |D/EV |46,5% |50,8% ...
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...Corporate Finance Lecture Note Packet 2 Capital Structure, Dividend Policy and Valuation B40.2302 Aswath Damodaran Aswath Damodaran! 1! Capital Structure: The Choices and the Trade off Neither a borrower nor a lender be Someone who obviously hated this part of corporate finance Aswath Damodaran! 2! First Principles Aswath Damodaran! 3! The Choices in Financing There are only two ways in which a business can make money. • The first is debt. The essence of debt is that you promise to make fixed payments in the future (interest payments and repaying principal). If you fail to make those payments, you lose control of your business. • The other is equity. With equity, you do get whatever cash flows are left over after you have made debt payments. Aswath Damodaran! 4! Global Patterns in Financing… Aswath Damodaran! 5! And a much greater dependence on bank loans outside the US… Aswath Damodaran! 6! Assessing the existing financing choices: Disney, Aracruz and Tata Chemicals Aswath Damodaran! 7! Financing Choices across the life cycle Revenues $ Revenues/ Earnings Earnings Time External funding needs High, but constrained by infrastructure High, relative to firm value. Moderate, relative to firm value. Declining, as a percent of firm value Low, as projects dry up. Internal financing Negative or low Owner’s Equity Bank...
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...投资顾问业务指引(五) 公司估值方法 中信金通证券投资顾问部 二00八年 1 公司估值的意义 公司估值的意义 • • • • • • • 公司估值是上市公司基本面分析的重要内容 基本逻辑：“ 基本面决定价值，价值决定价格” 公司估值 市场价格 差异 高估或者低估 买入、卖出或持有等 2 公司估值的意义 从巴菲特的选股思路看估值作用 • 好公司 • 好价格 • 为股东创造利润的管理层 是不是好价格 公司估值主要解决的问题 3 公司估值方法主要分类 公司估值方法主要分类 • 绝对估值法 –特点是主要采用折现方法，较为复杂 –现金流量折现方法、期权定价方法等 • 相对估值法 –特点是主要采用乘数方法，较为简便 –PE 估值法、PB估值法、PEG 估值法、EV/EBITDA估值 法等 4 现金流量折（贴）现价值评估DCF Discounted Cash Flow 5 现金流折现（DCF）方法 现金流量折现（DCF）方法 • 什么是现金流量折现价值评估？在现金流量折现价值评估中，资产 的价值为该资产未来预计现金流量的当前价值。 • 理性基础：在对资产的现金流量、增长及风险等方面的特征进行分 析的基础上，每一项资产的内在价值都是可以估算的。 • 所需资料：进行现金流量折现价值评估时，你必需： – 估计该项资产的寿命 • 估计该项资产寿命期内的现金流量 – 估计用以计算现金流量的当前价值的折现率 • 市场定价失效：假设市场在跨时期作资产定价时会出错，但随着时 间推移及资产新资料的出现，市场会自行更正过来。 6 现金流折现（DCF）方法 为何要折现 • 现金流量的时间价值－无风险收益 • 现金流量的风险溢价－未来的损失风险 二鸟在林不如一鸟在手 7 DCF价值评估的优点 • 如果操作正确，DCF价值评估是在资产的基础上进行的， 因此，较少受到市场波动及情感因素的影响。 • 如果投资者购买企业而非股票，采用现金流量折现价值评 估就是正确方法，这样做能令你在购入资产时知道自己得 到了什么。 • DCF价值评估促使你去考虑公司的潜在特征和了解该行业。 再不然，它还至少可以令你在以标价买入一项资产时，认 真验证一下你的假设。 8 DCF价值评估的缺点 • 由于这种价值评估方法尝试估计内在价值，所以需要 的数据及资料远远多于其它价值评估方法。 • 这些数据及资料不仅繁杂，难以评估，而且可能被分 析员巧妙处理以便获得他想要的结论。 • 内在价值的估算模型无法保证不出现低估或高估的情 况。所以，一个DCF价值评估模型可能会发现市场上的 每只股票均被高估，这会给下述人员造成困难： –股票研究分析员，他们跟踪调查各类股票，并对被 评估偏差最大的该类股票提出建议。 –股票投资组合经理，他们完全（或几乎完全）投资 在股票上。 9 DCF价值评估方法何时最适用 • 对于下述资产（公司），这个方法最为简单： –当前现金流量为正数者，以及 –对于未来阶段的估计有一定可靠性者，以及 –有能获得折现率的风险委托书时 • 对于以下投资者最为适用： –投资周期较长者，允许市场有足够时间来更正其价 值评估的错误，并令价格回复到“实际”价值水平， 或 –有能力推动价格向价值靠近者，如一个积极投资者 或整个公司的潜在拥有者 10 现金流量折现价值评估的基础 t=n CFt 价值＝∑...
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