1 / 13

EXHIBIT 5.1 FRAMEWORKS FOR DCF-BASED VALUATION

Enterprise discounted cash flow. Free cash flow. Weighted average cost of capital. Works best for projects, business units, and companies that manage their capital structure to a target level. Economic profit. Economic profit. Weighted average cost of capital.

matthew-mendoza
Download Presentation

EXHIBIT 5.1 FRAMEWORKS FOR DCF-BASED VALUATION

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Enterprise discounted cash flow • Free cash flow • Weighted average • cost of capital • Works best for projects, business units, and companies that manage their capital structure to a target level • Economic profit • Economic profit • Weighted average • cost of capital • Explicitly highlights when a company creates value • Adjusted present value • Free cash flow • Unlevered cost of equity • Highlights changing capital structure more easily than WACC-based models. • Capital cash flow • Capital cash flow • Unlevered cost of equity • Compresses free cash flow and the interest tax shield in one number, making it difficult to compare performance among companies and over time • Equity cash flow • Cash flow to equity • Levered cost of equity • Difficult to implement correctly because capital structure is embedded within cash flow. Best used when valuing financial institutions LAN-ZWB887-20050620-13749-ZWB EXHIBIT 5.1 FRAMEWORKS FOR DCF-BASED VALUATION • Model • Measure • Discount factor • Assessment

  2. LAN-ZWB887-20050620-13749-ZWB EXHIBIT 5.2 ENTERPRISE VALUATION OF A SINGLE-BUSINESS COMPANY • $ Million • Free cash flow from operations • Discount free cash flow by the weighted average cost of capital • Economic assets generate operating cash flow = • 427.5 • 427.5 • Enter-prise value • After-tax cash flow to debt holders • Debt value • 200.0 + • Financial claims on the company’s operating cash flow • Cash flow equity holders • Equity value • 227.5 • Year • 1 • 2 • 3 • 4 • 5 * Debt value equals discounted after-tax cash flow to debt holders plus present value of interest tax shield

  3. LAN-ZWB887-20050620-13749-ZWB EXHIBIT 5.3 ENTERPRISE VALUATION OF A MULTIBUSINESS COMPANY • $ Million • Unit A • Unit B • Unit C • Corporate center • Excess cash • Enterprise cash • Value of debt • Equity value • Value of operating units

  4. LAN-ZWB887-20050620-13749-ZWB EXHIBIT 5.4 HOME DEPOT: ENTERPRISE DCF VALUATION • Free cash flow (FCF) • $ Million • Discount factor • @ 9.3% • Present value of FCF • $ Million • Year • 2004 • 2005 • 2006 • 2007 • 2008 • 2009 • 2010 • 2011 • 2012 • 2013 • Continuing value • 1,930 • 2,219 • 2,539 • 2,893 • 3,283 • 3,711 • 4,180 • 4,691 • 5,246 • 5,849 • 133,360 • 0.915 • 0.837 • 0.766 • 0.700 • 0.641 • 0.586 • 0.536 • 0.491 • 0.449 • 0.411 • 0.411 • 1,766 • 1,857 • 1,944 • 2,026 • 2,104 • 2,175 • 2,241 • 2,301 • 2,355 • 2,402 • 54,757 • Present value of cash flow • 75,928 • Mid-year adjustment factor • 1,046 • Value of operations • 79,384 • Value of excess cash • Value of other nonoperating assets • 1,609 • 84 • Enterprise value • 81,077 • (1,365) • (6,554) • Value of debt • Value of capitalized operating leases • Equity value • 73,158 • Number of shares (at fiscal year-end 2003, million) • 2,257 • Estimated share value (Dollars) • 32.41

  5. LAN-ZWB887-20050620-13749-ZWB EXHIBIT 5.5 HOME DEPOT AND LOWE’S: HISTORICAL ROIC ANALYSIS • $ Million • Home Depot • Lowe’s • 2001 • 2002 • 2003 • 2001 • 2002 • 2003 • Net sales • Cost of merchandise sold • Selling, general and administrative • Depreciation • Operating lease interest • 53,553 • (37,406) • (10,451) • (756) • 288 • 58,247 • (40,139) • (11,375) • (895) • 260 • 64,816 • (44,236) • (12,658) • (1,075) • 276 • 22,111 • (15,743) • (4,053) • (517) • 106 • 26,491 • (18,465) • (4,859) • (626) • 106 • 30,838 • (21,231) • (5,671) • (758) • 114 • Adjusted EBITA • 5,228 • 6,098 • 7,123 • 1,904 • 2,647 • 3,292 • Adjusted taxes • (2,020) • (2,117) • (2,040) • (654) • (825) • (1,069) • NOPLAT • 3,208 • 3,981 • 5,083 • 1,250 • 1,822 • 2,223 • Invested capital • Operating working capital • Net property and equipment • Capitalized operating leases • Net other assets • 2,552 • 15,375 • 5,459 • (216) • 2,746 • 17,168 • 5,890 • (247) • 2,674 • 20,063 • 6,554 • (524) • 1,634 • 8,653 • 2,189 • 134 • 1,451 • 10,352 • 2,373 • 145 • 1,363 • 11,945 • 2,762 • 211 • Invested capital (excluding goodwill) • 23,170 • 25,557 • 28,767 • 12,611 • 14,321 • 16,281 • Acquired intangibles and goodwill • Cumulative amortization and • unreported goodwill • 419 • 46 • 575 • 54 • 833 • 55 • 0 • 730 • 0 • 730 • 0 • 730 • Invested capital (including goodwill) • 23,635 • 26,185 • 29,655 • 13,341 • 15,051 • 17,012 • ROIC excluding goodwill (average) • ROIC including goodwill (average) • 14.5% • 14.3% • 16.3% • 16.0% • 18.7% • 18.2% • 10.9% • 10.3% • 13.5% • 12.8% • 14.5% • 13.9%

  6. LAN-ZWB887-20050620-13749-ZWB EXHIBIT 5.8 HOME DEPOT: FREE CASH FLOW SUMMARY • $ Million • Home depot • Lowe’s • 2003 • 2001 • 2002 • 2003 • 2001 • 2002 • NOPLAT • Depreciation • Gross cash flow • Investment in operating working capital • Net capital expenditures • Investment in capitalized operating leases • Investments in intangibles and goodwill • Decrease (increase) in other operating assets • Increase (decrease) in accumulated other • comprehensive income • Gross investment • Free cash flow • 3,208 • 756 • 3,964 • 834 • (3,063) • (775) • (113) • 105 • (153) • (3,165) • 799 • 3,981 • 895 • 4,876 • (194) • (2,688) • (430) • (164) • 31 • 138 • (3,307) • 1,569 • 5,083 • 1,075 • 6,157 • 72 • (3,970) • (664) • (259) • 277 • 172 • (4,372) • 1,785 • 5,185 • 1,193 • 6,378 • (294) • (3,399) • (721) • (92) • 58 • 0 • (4,448) • 1,930 • 5,741 • 1,321 • 7,062 • (318) • (3,708) • (780) • (99) • 62 • 0 • (4,843) • 2,219 • 6,342 • 1,459 • 7,801 • (344) • (4,036) • (842) • (107) • 67 • 0 • (5,261) • 2,539

  7. 8.3 • 91.7 • 0.2 • 9.1 • 100.0 • 9.3 LAN-ZWB887-20050620-13749-ZWB EXHIBIT 5.10 HOME DEPOT: WEIGHTED AVERAGE COST OF CAPITAL Percent • Proportion of total capital • After-tax opportunity cost • Contribution to weighted average • Source of capital • Cost of capital • Marginal tax rate • Debt • Equity • 4.7 • 9.9 • 38.2 • 2.9 • 9.9 • WACC

  8. LAN-ZWB887-20050620-13749-ZWB EXHIBIT 5.11 HOME DEPOT: ECONOMIC PROFIT SUMMARY $ Million, percent • Historical • Forecast • Method 1 • 2001 • 2002 • 2003 • 2004 • 2005 • 2006 • Return on invested capital • 15.0% • 16.8% • 19.4% • 17.5% • 17.4% • 17.4% • Weighted average cost of capital • 10.1% • 9.0% • 9.3% • 9.3% • 9.3% • 9.3% • Economic spread • 4.9% • 7.9% • 10.1% • 8.2% • 8.1% • 8.1% • 21,379 • Invested capital • 23,635 • 26,185 • 29,655 • 32,910 • 36,432 • Economic profit • 1,048 • 1,857 • 2,645 • 2,424 • 2,677 • 2,950 • Method 2 • Invested capital • 21,379 • 23,635 • 26,185 • 29,655 • 32,910 • 36,432 • Weighted average cost of capital • 10.1% • 9.0% • 9.3% • 9.3% • 9.3% • 9.3% • Capital charge • 2,159 • 2,124 • 2,438 • 2,761 • 3,064 • 3,392 • NOPLAT • 3,208 • 3,981 • 5,083 • 5,185 • 5,741 • 6,342 • Capital charge • 2,159 • 2,124 • 2,438 • 2,761 • 3,064 • 3,392 • Economic profit • 1,048 • 1,857 • 2,645 • 2,424 • 2,677 • 2,950

  9. LAN-ZWB887-20050620-13749-ZWB EXHIBIT 5.12 HOME DEPOT: ECONOMIC PROFIT VALUATION • Invested • Capital* • $ Million • Economic profit • $ Million • Discount • factor • @ 9.3% • Present value of economic profit • $ Million • ROIC • Percent • WACC • Percent • Year • 0.915 • 2004 • 29,655 • 17.5 • 9.3 • 2,424 • 2,217 • 0.837 • 2005 • 32,910 • 17.4 • 9.3 • 2,677 • 2,241 • 0.766 • 2006 • 36,432 • 17.4 • 9.3 • 2,950 • 2,259 • 0.700 • 2007 • 40,235 • 17.4 • 9.3 • 3,242 • 2,271 • 0.641 • 44,329 • 17.3 • 9.3 • 3,556 • 2008 • 2,278 • 2009 • 48,729 • 17.3 • 9.3 • 3,890 • 2,281 • 0.586 • 2010 • 53,445 • 17.3 • 9.3 • 4,247 • 0.536 • 2,278 • 0.491 • 58,488 • 17.2 • 9.3 • 4,627 • 2011 • 2,270 • 0.449 • 63,870 • 17.2 • 9.3 • 5,031 • 2012 • 2,258 • 0.411 • 5,458 • 2013 • 69,600 • 17.2 • 9.3 • 2,241 • 0.411 • Continuing value • 57,671 • 23,679 • Present value of economic profit • 46,273 • Invested capital*2004 • 29,655 • Invested capital plus present value of economic profit • 75,928 • Mid-year adjustment factor • 1.046 • Value of operations • 79,384 • Value of excess cash • 1,609 • Value of other nonoperating assets • 84 • Enterprise value • 81,077 • Value of debt • (1,365) • Value of capitalized operating leases • (6,554) • Equity value • 73,158 * Invested capital is measured at the beginning of the year

  10. LAN-ZWB887-20050620-13749-ZWB EXHIBIT 5.13 HOME DEPOT: VALUATION USING ADJUSTED PRESENT VALUE • Free cash flow$ Million • Interest • tax shield • (ITS) • Discount • factor • @ 9.5% • Present • value of FCF • $ Million • Present • value of ITS • $ Million • Year • 1,930 • 113 • 0.914 • 1,763 • 103 • 2004 • 1,852 • 100 • 2,219 • 120 • 0.835 • 2005 • 1,936 • 98 • 2006 • 2,539 • 128 • 0.763 • 2,016 • 95 • 2007 • 2,893 • 136 • 0.697 • 92 • 2008 • 2,090 • 3,283 • 145 • 0.636 • 89 • 2009 • 3,711 • 153 • 0.581 • 2,158 • 2010 • 86 • 4,180 • 162 • 0.531 • 2,220 • 83 • 2011 • 4,691 • 171 • 0.485 • 2,276 • 2,326 • 80 • 5,246 • 180 • 0.443 • 2012 • 2,369 • 77 • 5,849 • 189 • 0.405 • 2013 • 52,550 • 129,734 • 3,626 • 0.405 • 1,469 • Continuing value • 2,372 • 73,557 • Present value • Present value of FCF using unlevered cost of equity • 73,557 • Present value of interest tax shields (ITS) • 2,372 • Present value of FCF and ITS • 75,928 • Mid-year adjustment factor • 1.046 • Value of operations • 79,384 • Value of excess cash • 1,609 • Value of other nonoperating assets • 84 • Enterprise value • 81,077 • Value of debt • (1,365) • Value of capitalized operating leases • (6,554) • Equity value • 73,158

  11. LAN-ZWB887-20050620-13749-ZWB EXHIBIT 5.14 HOME DEPOT: FORECAST OF INTEREST TAX SHIELDS • Prior year • net debt$ Million • Expected • interest rate • Percent • Interest • payment • $ Million • Marginal • tax rate • Percent • Interest • tax shield • $ Million • Year • 2004 • 6,310 • 4.7 • 295 • 38.2 • 113 • 2005 • 6,737 • 4.7 • 315 • 38.2 • 120 • 2006 • 7,179 • 4.7 • 336 • 38.2 • 128 • 2007 • 7,637 • 4.7 • 357 • 38.2 • 136 • 2008 • 8,107 • 4.7 • 379 • 38.2 • 145 • 2009 • 8,589 • 4.7 • 402 • 38.2 • 153 • 2010 • 9,081 • 4.7 • 425 • 38.2 • 162 • 2011 • 9,579 • 4.7 • 448 • 38.2 • 171 • 2012 • 10,081 • 4.7 • 472 • 38.2 • 180 • 2013 • 10,583 • 4.7 • 495 • 38.2 • 189 • Continuing value • 11,082 • 4.7 • 518 • 38.2 • 198

  12. LAN-ZWB887-20050620-13749-ZWB EXHIBIT 5.15 HOME DEPOT: EQUITY CASH FLOW SUMMARY $ Million • Historical • Forecast • 2001 • 2002 • 2003 • 2004 • 2005 • 2006 • Net income • 3,044 • 3,664 • 4,304 • 4,796 • 5,318 • 5,882 • Depreciation • 756 • 895 • 1,075 • 1,193 • 1,321 • 1,459 • Amortization • 8 • 8 • 1 • 0 • 0 • 0 • Increase (decrease) in deferred taxes • (6) • 173 • 605 • 214 • 237 • 262 • Gross cash flow • 3,802 • 4,740 • 5,985 • 6,203 • 6,876 • 7,603 • 834 • (194) • 72 • (294) • (318) • (344) • Investment in operating working capital • Investment in net long-term assets • (3,224) • (2,683) • (3,780) • (3,433) • (3,745) • (4,076) • (1,509) • 383 • (473) • (177) • (191) • (207) • Decrease (increase) in excess cash • 9 • (24) • 23 • (9) • (10) • (11) • Investment in other nonoperating assets • Increase (decrease) in short-term debt • 207 • (211) • 509 • (44) • (54) • (66) • (295) • 71 • (465) • (73) • (91) • (112) • Increase (decrease) in long-term debt • Cash flow to equity • (176) • 2,082 • 1,871 • 2,173 • 2,466 • 2,788 • Dividends • 595 • 663 • 735 • 813 • 396 • 492 • Share repurchases (issued) • (572) • 1,276 • 1,510 • 1,731 • 1,975 • 1,590 • Cash flow to equity • (176) • 2,082 • 1,871 • 2,173 • 2,466 • 2,788

  13. LAN-ZWB887-20050620-13749-ZWB EXHIBIT 5.16 HOME DEPOT: CASH-FLOW-TO-EQUITY VALUATION • Cash flow • to equity • $ Million • Discount • factor • @ 9.9% • Present value of CFE • $ Million • Year • 2004 • 2,173 • 0.910 • 1,978 • 2005 • 2,466 • 0.828 • 2,042 • 2006 • 2,788 • 0.754 • 2,101 • 2007 • 3,143 • 0.686 • 2,155 • 2008 • 3,530 • 0.624 • 2,203 • 2009 • 3,954 • 0.568 • 2,245 • 2010 • 4,416 • 0.517 • 2,282 • 2011 • 4,917 • 0.470 • 2,312 • 2012 • 5,459 • 0.428 • 2,336 • 2013 • 6,044 • 0.389 • 2,353 • Continuing value • 122,492 • 0.389 • 47,695 • Present value of cash flow • 69,702 • to equity • 3,456 • Midyear adjustment amount • Equity value • 73,158

More Related