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Introduction to Financial Management FIN 102 – 9 th Week of Class. Professor Andrew L. H. Parkes “A practical and hands on course on the valuation and financial management of corporations”. 卜安吉. Funds and Cash Flow. Chapter 7a: Funds Analysis and Planning Financial Management Fall 2007
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Introduction to Financial ManagementFIN 102 – 9th Week of Class Professor Andrew L. H. Parkes “A practical and hands on course on the valuation and financial management of corporations” 卜安吉
Funds and Cash Flow Chapter 7a: Funds Analysis and Planning Financial Management Fall 2007 Shanghai
Reconciliation FY 2003 • Total Cash In from Operations $ 10,595 M • Total Cash Out from Investments 4,526 M • Total Cash Out from Financing 3,586 M*) • Net Cash Position increase $ 2,483 M • Cash position at the end of FY 2002: $ 2, 894 M • Cash increase in FY 2003: 2, 843 M • Cash position at the end of FY 2003: $ 5.377 M (see balance sheet) • Incl. exchange rate changes $ 277 M Intro. to Financial Managment - 10th Week of Class
Cash Flow Projections • Remember the most important parts of Cash Flow: • NOPAT • Depreciation • Change in Working Capital • CAPEX Intro. to Financial Managment - 10th Week of Class
The value of the company • Remember V= FCF/WACC% • The value of a company depends on the endless streams of FCF • These cash flows need to be estimated based on today’s FCF and FCF’s in the past • You have to calculate the Present Value (remember Ch.3) of all these FCF’s • Your discount factor is the WACC% (the cost of capital) Intro. to Financial Managment - 10th Week of Class
Let’s evaluate for J&J (Million $US) Intro. to Financial Managment - 10th Week of Class
Putting it together…(V = FCF/WACC) • FCF 6863 6080 6922(FY2004) 7028(FY2005) • Implied growth FCF after FY 2005: about 2% • What about WACC%: • Ke= Rf+ β(Rm-Rf)= 4 %+ 0.65*(3,5%)= 6.3% • Kd= LT interest/LT Debt=5.87% • Tax rate= tax/earnings before tax= 30.2% (FY 2003) • LT Debt= $ 2,955 M • Shareholders Equity= $ 26,869 M • WACC = D/(D+E)*Kd*(1-t)+ E/(D+E)*Ke= • 2,955/(2,955+26,869)*5.87%*(1-0.302)+26,869/(2,955+26,869)*6.3%= 6.1% Intro. to Financial Managment - 10th Week of Class
So…the company value of J&J is: • PV= FCF (2004)/(1+Wacc%)+ FCF(2005)/(1+Wacc%)^2+….+FCF(n)/(1+Wacc%)^n • (where n=number of years and FCF’s) • Fill in for J&J: • V= 6922/(1.061)+ 7028/(1.061)^2+ 7169/(1.061)^3+…+ 7028*(1.02)^(n-2)/(1.061)^n= • V= 6922/(1.061)+ 7028/(1.061)^2+ 7028/(.061-.02)-7028/1.061-7028/(1.061)^2= • V=6524+6243+171414-6624-6243= $ 171,314 M • LT Debt is: $ 2955 M So the Equity Value is: $ 171,314M-$2955M= $ 168,359M • The number of shares outstanding is: 2.968.107.066 • So the Equity Value per share is: $ 168359M/ 2968107066=$ 56.72 • The Stock Market Price is: $ 57.10 (closing 28 sep 2004) Intro. to Financial Managment - 10th Week of Class
Market Price J&J Intro. to Financial Managment - 10th Week of Class
Homework Assignment: Valuation • Review the J&J example of valuation • Estimate the future cash flows of your company (use Valueline docs.) • Estimate the future growth % of FCF based on past and present performance • Estimate WACC • Estimate Company Value • Calculate the intrinsic value per share • Compare the market price… • Download the share performance of your company’s share (see example J&J) Intro. to Financial Managment - 10th Week of Class
End of the Section – Chapter 7b GO TO THE TOP! Mt. Machu Pichu! Intro. to Financial Managment - 10th Week of Class