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Financna analiza 2

. Operating Value ch 7. Assets are formed by 2 distinct groupsoperating assetsfinancial assetsValue of whole company can be obtained by summing the value of the two constituent parts (using, e.g..RE or AEG)Using RE or AEGThe added value depends on the residual future profits or future change i

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Financna analiza 2

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    1. Financna analiza 2 doc. dr. Aljoša Valentincic Professor dr. Neil Garrod (University of Greenwich, London) Jesen 2010

    2. Operating Value ch 7 Assets are formed by 2 distinct groups operating assets financial assets Value of whole company can be obtained by summing the value of the two constituent parts (using, e.g..RE or AEG) Using RE or AEG The added value depends on the residual future profits or future change in residual profit Financial assets reflected in the balance sheet are usually valued at market value Premia only result from under or over valued book values Premiums therefore come only from operating assets

    3. How to disaggregate the balance sheet… p.239 … into operating and financial parts:

    4. Modifications of Residual Earnings (RE) model(1) General formula for RE model: where REt = earningst – (rE·book valuet-1) = Earnt – (rE·Bt-1) Premium = V0E – B0 = PV future RE If company covers only the cost of capital ? premium = 0 ? V0E = B0 If assets “marked to market” then no need to forecast RE as value – intrinsic value = market price

    5. Modifications of Residual Earnings (RE) model(2) Only need to forecast RE for assets that are not valued at market value in the balance sheet: These are mainly operating assets… The premium comes from them therefore: V0E = B0 + PV expected RE from assets not recorded at market value

    6. Composition of RE p. 243 Total residual earnings can be divided into two parts, financial and operating Each one originates from a different part of the company net operating assets – NOA = current assets – current liabilities net financial obligations – NFO = financial liabilities – financial investments Each generates its residual earnings according to its own cost of capital

    7. Net Financial Obligations What is the value of net financial obligations? Where ReNFEt=NFEt – rD·NFOt-1 (residual net financial expense) What is the expected difference between the cost of debt and the interest rate? The value V0NFO equals book keeping value of net financial obligationsNFO0 From a business finance perspective we would say that NFO project is a zero NPV project!!! Discount rate corresponds exactly with the cost of capital The market for debt is highly competitive and, therefore, efficient

    8. Operating Value For operating value we replace RE with ReOI: Operating value drives enterprise value (as RE = ReOI) How will the continuing value (CV) perform? As before, 3 possible scenarios:

    9. Residual Operating Income Model Residual operating income model Value of ownership capital = anchor + premium:

    10. “Drivers” of ReOI Residual Operating Income Model= (RNOA – required rate of return from operating)·NOA ReOIt = (RNOA – rF)·NOAt-1 Two drivers of value return on net operating assets above required rate of return Quantity of asset to achieve return As Before!!

    11. Primer – Nike, Inc. Accuracy very good also with this modification of the model forecast error only +5,80%! Residual earnings from operations growing

    12. Modification of Cum-Dividend Earnings (AEG) Model General formula (in forward form): AEG = (Earningst + rE·Dividendt-1) – (1+rE)·Earningst-1 = (gcum-dividend– rE)·Earningst Growth of profit with dividends originates from operating assets not from financial assets! Remember the previous examples of bank accounts on slide 3!

    13. Modification of AEG Model (2) Focus of AEG is on growth of cum-dividend earnings How to divide the growth of cum-dividend profit into that from operating and that from financial assets? “Dividends from financing” are simple: All payments to debt holders (interest + principal) – “F” Dividends, “d”, to the owners are also simple All net dividends d (dividends, issue of new shares, purchase of shares) What about “dividends fro operations”? These must be a sustainable source for d and F This is a simple cash flow (FCF)!!! FCF = after tax cash flow from operations – required investment into operating assets p. 240 FCF = C – I = F + d = OI - ?NOA

    14. Residual Change of cum-dividend earnings from operations (AOIG) Residual change of cum-dividend earnings = abnormal operating incomes growth (AOIG) = = cum-dividend operating earnings – normal earnings from operations = (Operating earningst + rF·FCFt-1) – (1+rF)·Operating earningst-1 = (gcum-dividend operating earnings – rF)·Operating earningst-1 Analogous with…

    15. Example – Nike, Inc. Capitalise forward earnings by calculating PV of residual change of cum-dividend operating earnings and the PV of continuing value Estimate of value is the same as before AOIG is the change in ReIO…

    16. What is rF? It reflects the operations of the whole company They are financed by both debt and equity Weighted average cost of capital (WACC) from operating finance! WACC = wD·rD + wE·rE rD being after tax (beware – different nomenclature to Brigham) Weights are measured at market values not book values WACC is marginal not an average

    17. Examples – costs and structures of capital, USA 2005

    18. Alternative perspective on required return on equity rE Reconfiguring the WACC formula provides an interesting insight into rE: If the company has net financial assets rather than net financial debt:

    20. “Enterprise” P/B indicatorp.489 Value of Equity = value of operations – value NFO: value of P/B therefore depends on the effects of financing… “Enterprise” P/B – removes the effects of financing Must focus on operations alone!

    21. “Hamada formula” for P/B indicator An indicator without financial effects must be modified for capital structure:

    22. How does “levered” P/B change with levels of debt? Effect of borrowing on levered P/B increases with level of enterprise P/B So higher error if using unadjusted multipliers

    23. Relationship Between the 2 forms of P/B Greater the debt the greater the difference between enterprise P/B and levered P/B Larger are the errors when using uncorrected multipliers…

    24. Historical Median Values of P/B (Penman, 2007)

    25. “Enterprise” P/E indicator Earnings used in the calculation of P/E is after interest (and taxes) It includes the effect of financing Problem: growth in earnings changes with financial leverage (look at the bank account example!), but does not create residual change in cum-dividend earnings (AEG) Forward form: Trailing form:

    26. “Hamada formula” for forward P/E Forward P/E has to be adjusted for financial leverage impact on earnings Definition of financial leverage… ? depends on (net) interest expense

    27. “Hamada formula” for trailing P/E In the same way, if we move back one period:

    28. Historic median Values of trailing P/E (Penman, 2007)

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