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DES Chapter 9 The Starting Point for Corporate Valuation: Historical Financial Statements

DES Chapter 9 The Starting Point for Corporate Valuation: Historical Financial Statements. Overview of Valuation Process - Home Depot. Input historical financial statements into the file: Home Depot (for Ch 9-11, WACC, default inputs).xls . (This file will be called Home Depot.xls for short.)

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DES Chapter 9 The Starting Point for Corporate Valuation: Historical Financial Statements

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  1. DES Chapter 9The Starting Point for Corporate Valuation: Historical Financial Statements DES Chapter 9

  2. Overview of Valuation Process - Home Depot • Input historical financial statements into the file: Home Depot (for Ch 9-11, WACC, default inputs).xls. (This file will be called Home Depot.xls for short.) • Provide projections for key performance drivers. • Obtain preliminary intrinsic value estimate. • Refine projections and perform sensitivity analysis to determine impact of plausible alternative performance scenarios. DES Chapter 9

  3. Steps to Estimate Value Using the Corporate Valuation Spreadsheet The valuation spreadsheet has seven interrelated worksheets, each of which performs an essential function: (1) Proj & Val (2) Inputs (3) WACC (4) Hist Analys (5) Condensed (6) Comprehensive (7) Actual (next slide) DES Chapter 9

  4. Steps to Estimate Value (Continued) DES Chapter 9

  5. Steps to Estimate Value (Continued) Step 1: Find the actual historical financial statements for a company, and insert them into the Actual worksheet. (Chapt 9) Step 2: Put the actual financial statements into a standardized format using the Comprehensive worksheet. The comprehensive format has just about all the entries needed to capture variations in the formats of most companies’ financial statements. (Chapter 9 and appendix) (continued) DES Chapter 9

  6. Steps to Estimate Value (Continued) Step 3: The spreadsheet will condense the standardized format into statements on the Condensed sheet. These sheets have enough detail to accurately value a firm but do not have so much detail that the analysis becomes overly complicated. (Chapter 10 and appendix) Step 4: The Hist Analys worksheet begins the analysis by calculating the historical free cash flows and key ratios. (Chapter 10) (continued) DES Chapter 9

  7. Steps to Estimate Value (Continued) Step 5: The WACC worksheet is structured to lead you through the calculation of the firm’s cost of capital. (Chapter 11) Step 6: Project the financial statements by choosing key inputs, such as the growth rate in sales, the ratio of costs/sales, interest rates, etc., on the Inputs worksheet. (Chapter 12 and appendix) (continued) DES Chapter 9

  8. Steps to Estimate Value (Continued) • Step 7: The Proj & Val worksheet takes your chosen inputs for the key ratios and projects the financial statements, calculates free cash flows and performs a valuation analysis. (Chapter 13) DES Chapter 9

  9. The “Actual” Worksheet • Get historical data for a company. The best sources are Thomson ONE - Business School Edition, or Thomson Research (formerly Global Access Disclosure). • Income Statements • Balance Sheets • Statement of Cash Flows • Paste the data into the “Actual” worksheet • This has already been done for Home Depot.xls. DES Chapter 9

  10. The “Comprehensive” Sheet • A fact - details of financial statement formats vary from one company to another, and even from one year to the next for the same company. • The problem - to “standardize” financial information across firms and years so it can be used in analysis. • The solution - “mapping” the financial data into a common format that contains only the essential level of detail necessary for valuing a company. (continued) DES Chapter 9

  11. The “Comprehensive” Sheet (continued) • The Comprehensive sheet is long and has many items, but this enables it to “capture” Actual data in virtually any format (see next slide). • Even though the Comprehensive sheet is long, it is in a standardized format. (continued) DES Chapter 9

  12. The “Comprehensive” Sheet (continued) • To link “Actual” to “Comprehensive,” we “map” the data from the Actual Worksheet into the Comprehensive Worksheet. • Find an entry on the “Comprehensive” sheet that matches an “Actual” entry. • Enter a formula on the “Comprehensive” sheet that refers to the appropriate “Actual” cell. • But we’ve already done this for you! (continued) DES Chapter 9

  13. The “Comprehensive” Sheet (continued) Consider the “NON-OPERATING INC” item in cell B70 of Home Depot’s “Actual” income statement: DES Chapter 9 (continued)

  14. The “Comprehensive” Sheet (continued) The item is “mapped” into cell B31 of the “Comprehensive” worksheet by entering the formula “=Actual!B70” in that cell (next slide): (continued) DES Chapter 9

  15. formula “=Actual!B70” (continued) DES Chapter 9

  16. The “Comprehensive” Sheet (continued) • Data from either Thomson ONE - Business School Edition, or Thomson Research has up to 10 years of annual data in a standardized format. • The mapping in the valuation spreadsheet is already developed for this format. • Should you use data from another source, you will adjust the formulas accordingly. • Detailed guidelines for this task are provided in Exhibits 9-4 through 9-7 and elsewhere. DES Chapter 9

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