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Business Valuation

Business Valuation. What’s an apple tree worth?. “Old Man and Apple Tree”. Consider the following valuations: Salvage Current production Future production Market price Book value Balance Sheet. Time value of money. What is the value of $1?. Time value of money.

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Business Valuation

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  1. Business Valuation What’s an apple tree worth?

  2. “Old Man and Apple Tree” Consider the following valuations: • Salvage • Current production • Future production • Market price • Book value Balance Sheet

  3. Time value of money What is the value of $1?

  4. Time value of money Let’s say I offer you either $500 today or $800 in three years. Which is better?

  5. Time value of money $800 in 3 years is better than $500 today (assuming a 10% rate for money)

  6. Time value of money $500 today is better than $800 in 3 years (assuming a 20% rate for money)

  7. Time value of money Mathematically $500 * (1+ .20)3 = $864

  8. Time value of money What if somebody offers you $864 in three years. Or $1000. What is it worth to you?

  9. Time value of money $864 (discounted at 20% rate) = $500

  10. Time value of money $1000 (discounted at 20% rate) = $579

  11. Time value of money Mathematically $1000 / (1+ .20)3 = $578.70

  12. “Old Man and Apple Tree” Value of cash flows? (from Class Notes)

  13. Net income  $390,000 Depreciation $250,000 Bonuses $120,000 Net cash flow $760,000 Adjusted CF $500,000 Discount rate 33% Growth rate 8% Capitalization rate 25% (discount minus growth) Cap multiplier 4 DCF $2,000,000 Precision Tools

  14. Comparables Method Company X Price = $4,000,000 Adj Earnings = $520,000 Precision Tools Price = ?? Adj Earnings = $760,000 4000 PT Price 520 = 760 PT Price = $5,850,000 Use P/E ratio Company X Price = $4,000,000 Adj Earnings = $520,000 P/E = 7.7 Precision Tools Price = P/E * Earnings Adj Earnings = $760,000 7.7*$760,000 = $5,850,000 Precision Tools

  15. Precision Tools Price = $2,000,000 Earnings = $390,000 P/E = 5.13 U.S. stock market (average stock) Price = $36 Earnings = $1.80 P/E = 20 Irrationally exuberant? Price-earnings ratio

  16. Precision Tools

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