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Module 5 : Valuation Using Forecasts of Cash Flows

Module 5 : Valuation Using Forecasts of Cash Flows. Mairin Talerico. Snapshot of Toyota. Limited liability, joint-stock company incorporated under Commercial Code of Japan; started in 1930s Primarily in automotive industry, but also financial services and others

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Module 5 : Valuation Using Forecasts of Cash Flows

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  1. Module 5: Valuation Using Forecasts of Cash Flows Mairin Talerico

  2. Snapshot of Toyota Limited liability, joint-stock company incorporated under Commercial Code of Japan; started in 1930s Primarily in automotive industry, but also financial services and others Sold 9.98 million vehicles in fiscal 2013 Sell in 170 different countries and regions Primary markets: Japan, North America, Europe and Asia

  3. Return on Enterprise Operations Use average NEA for current and prior year since we do not know actual timing of investments *Note: Forecasting discussed later will use ending NEA

  4. Breaking Apart RNEA Could be one-time items skewing comparison differences EPM  indicates profit generated by each dollar of sales (profitability) EATO  indicates the sales generated by each dollar of NEA (efficiency)

  5. Breaking Apart RNEA EPM is changing significantly year to year, and EATO is relatively stable due to one-time items.

  6. Competitors’ RNEA Break-down Toyota 2013 EPM = 5.80%, EATO = 1.36 EPM of Toyota is toward the upper spectrum of the range, and EATO of Toyota is within the range as well. GM seems to be outlier for EATO.

  7. Parsimonious – Revenues Assume 3.68% ***Predicted industry growth = 2.4% Avg(Toyota average + prediction) = 3.68%

  8. Parsimonious – EPM (from Sales) Assume 1.58% Toyota average = 1.58%

  9. Parsimonious – EATO Assume 1.40 Toyota average = 1.35, heading upward so,

  10. Parsimonious Assumptions Sales growth rate 3.68% Enterprise profit margin (EPM) 1.58% Enterprise asset turnover (EATO) 1.40

  11. Industry Analysis • GM, Ford, and Honda were not sufficient to gather appropriate info in each category consistently on Toyota • Revenue is unique makeup for each firm of both car revenue and financing revenue • Hard to predict future of sales due to macro effects on economy • Consumer disposable income, price of gasoline, future of “green” cars and energy

  12. Assumptions for Toyota Sales growth rate 3.68% Enterprise profit margin (EPM) 1.58% Enterprise asset turnover (EATO) 1.40

  13. Valuing Toyota Forecasts of FCF for 2014-2018 Negative FCF due to EPAT increasing at a slower rate than NEA is increasing

  14. Discounted Cash Flow Model

  15. Changing Assumptions for Positive FCF Fairy easy to do… shows the sensitivity of the analysis of FCF Forecasting • Sales growth rate 3.25% • Enterprise profit margin (EPM) 2.50% • Enterprise asset turnover (EATO) 1.40

  16. Changed Sales and EPM

  17. Changing EATO • Sales growth rate 3.68% • Enterprise profit margin (EPM) 1.58% • Enterprise asset turnover (EATO) 2.25

  18. EATO=2.25 DCF

  19. Questions?

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