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Why Corporate Valuation? اهمية وأسباب تسعير الشركات

Why Corporate Valuation? اهمية وأسباب تسعير الشركات. You make financial decisions every day Brokers – advice and trading decisions Investors—buy and sell decisions Managers—implement operating decisions Financial staff—evaluate acquisitions

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Why Corporate Valuation? اهمية وأسباب تسعير الشركات

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  1. Why Corporate Valuation?اهمية وأسباب تسعير الشركات • You make financial decisions every day • Brokers – advice and trading decisions • Investors—buy and sell decisions • Managers—implement operating decisions • Financial staff—evaluate acquisitions Success or failure depends on whether you correctly identify value

  2. Goalsالهدف من هذه الدورة المتخصصة • Provide brokers, investors and managers with the basic knowledge to value a company • Use free cash flow valuation • Use dividend discount models • Use multipliers • Use WACC • Use Growth • Use other pricing models

  3. Our plan of attackخطة العمل Finance requires a circular approach: you need to know finance in order to do financial analysis. You need to know how to do financial analysis to understand finance.

  4. Three types of valueثلاثة انواع للقيمة • Book value: the company’s historical value as shown on its financial statements. • Market value: the current price at which an asset can be bought or sold. • Intrinsic value: estimate of the value an individual buyer places on an asset.

  5. Objective:الهدف • Objective is to provide a sound basis for estimating the intrinsic value of a stock. • This intrinsic value is also called its fundamental value. • The process is known as fundamental valuation

  6. The three basic concepts of valuationثلاث مفاهيم اساسية للتقييم • Investors can only spend cash so "Cash is good and more cash is better." • Cash today is worth more than cash tomorrow. • Risky cash flows are worth less than safe cash flows. • These three imply the value of a company depends on the size, timing, and riskiness of its cash flows.

  7. Valuation of a Simple Companyتسعير شركة صغيرة و مبسطة • Investors are: • Debtholders • Stockholders

  8. More investors…المساهمون وقيمة مساهمتهم • Simple Co.’s shares of stock also compete in the market for investors. • Stockholders are the owners of the firm, and the value of ownership is the value of the asset, less any debt that is owed. • For example: Suppose Simple Co. is worth $501 million. It owes $150 million to debtholders. So Simple Co.’s equity is worth $501 – 150 = $351 million.

  9. The Corporate Valuation Modelنموذج تسعير الشركات • PV of cash flows available to all investors—called free cash flows (FCFs). • Discount free cash flows at the average rate of return required by all investors—called the weighted average cost of capital (WACC)

  10. Steps in the corporate value modelخطوات استخدام نموذج تسعير الشركات • Determine weighted average cost of capital • Estimate expected future free cash flows • Find value of company

  11. Estimating the Weighted Average Cost of Capital (WACC)حساب المعدل المرجح لتكلفة رأس المال • Company has two types of investors • Debtholders • Stockholders • Each type of investor expects to receive a return for their investment • The return an investor receives is a “cost of capital” from company’s viewpoint.

  12. Cost of Debtتكلفة القروض • Simple Co.’s cost of debt: rD = 9%. • But Simple Co. can deduct interest, so cost to Simple Co. is after-tax rate on debt. • If tax rate is 40%, then after-tax cost of debt is: • After-tax rD = 9%(1-0.4) = 5.4%.

  13. Cost of Equityتكلفة الملكية • Cost of equity, rs, is higher than cost of debt because stock is riskier. • Simple Co.: rs = 12%

  14. Weighted Average Cost of Capitalالمعدل المرجح لتكلفة الاموال من مصادرها المختلفة • WACC is average of costs to all investors, weighted by the target percent of firm that is financed by each type. • For Simple Co., target percent financed by equity: • wS = 70% • For Simple Co., target percent financed by debt: • wD = 30% (More….)

  15. WACC (Continued)حساب المعدل المرجح لتكلفة رأس المال WACC = wD rD (1-T) + wS rS = 0.3(9%)(1 - 0.4) + 0.7(12%) = 10.02%

  16. Free Cash Flow (FCF)التدفقات النقدية الحرة • FCF is the amount of cash available from operations for distribution to all investors (including stockholders and debtholders) after making the necessary investments to support operations. • A company’s value depends upon the amount of FCF it can generate.

  17. Calculating FCFحسابالتدفقات النقدية الحرة • FCF = net operating profit after taxes minus investment in operating capital

  18. Operating Current Assetsالاصول التشغيلية - قصيرة الامد • Operating current assets are the CA needed to support operations. • Op CA include: cash, inventory, receivables. • Op CA exclude: short-term investments, because these are not a part of operations.

  19. Operating Current Liabilitiesالخصوم التشغيلية – قصيرة الامد • Operating current liabilities are the CL resulting as a normal part of operations. • Op CL include: accounts payable and accruals. • Op CA exclude: notes payable, because this is a source of financing, not a part of operations.

  20. Balance Sheet: Assetsقائمة المركز المالي - الاصول 200120022003 Op. CA 162,000.0168,000.0176,400.0 Total CA 162,000.0 168,000.0 176,400.0 Net PPE 199,000.0210,042.0220,500.0 Tot. Assets 361,000.0 378,042.0 396,900.0

  21. Balance Sheet: Claimsقائمة المركز المالي – الخصوم وحقوق المالكين 200120022003 Op. CL 57,911.562,999.766,150.0 Total CL 57,911.5 62,999.7 66,150.0 L-T Debt 136,253.0143,061.0150,223.0 Total Liab. 194,164.5 206,060.7 216,373.0 Equity 166,835.5171,981.3180,527.0 TL & Eq. 361,000.0 378,042.0 396,900.0

  22. Income Statementقائمة الدخل 200120022003 Sales 400,000.0 420,000.0 441,000.0 Costs 344,000.0361,994.2374,881.6 Op. prof. 56,000.0 58,005.8 66,118.4 Interest 11,678.712,262.812,875.5 EBT 44,321.3 45,743.0 53,242.9 Taxes (40%) 17,728.418,297.221,297.2 NI 26,592.7 27,445.8 31,945.7 Dividends 21,200.022,300.023,400.0 Add. RE 5,392.7 5,145.8 8,545.7

  23. NOPAT (Net Operating Profit After Taxes)الارباح التشغيلية بعد الضريبة • NOPAT is the amount of after-tax profit generated by operations. • NOPAT is the amount of net income, or earnings, that a company with no debt or interest-income would have. NOPAT = (Operating profit) (1-T) = EBIT (1-T)

  24. Calculating NOPATحساب الارباح التشغيلية بعد الضريبة NOPAT = (Operating profit) (1-T) = EBIT (1-T) NOPAT03 = 66.1184 (1-0.4) = 39.67104 million.

  25. Calculating Operating Capitalحساب رأس المال التشغيلي • Operating capital (also called total operating capital, or just capital) is the amount of assets required to support the company’s operations, less the liabilities that arise from those operations. • The short-term component is net operating working capital (NOWC). • The long-term component is factories, land, equipment.

  26. Net Operating Working Capitalحساب صافي رأس المال العامل NOWC = Operating current assets – Operating current liabilities This is the net amount tied up in the “things” needed to run the company on a day-to-day basis.

  27. Net Operating Working Capitalحساب صافي رأس المال العامل NOWC = Operating CA – Operating CL NOWC03 = $176.4 – $66.15 = $110.25 million

  28. Operating Capitalحساب رأس المال التشغيلي • Operating capital = • Net operating working capital (NOWC) plus • Long-term capital, such as factories, land, equipment.

  29. Operating Capitalحساب رأس المال التشغيلي Operating Capital = NOWC + LT Op. Capital Capital03 = $110.25 + $220.50 = $330.75 million This means in 2003 Simple Co. had $330.75 million tied up in capital needed to support its operations. Investors supplied this money. It isn’t available for distribution.

  30. Investment in Operating Capitalالاستثمار في رأس المال التشغيلي • Operating capital in 2002 was $315.0423 million • Operating capital in 2003 was $330.75 million • Simple Co. had to make a net investment of $330.75 – $315.0423 = $15.7077 million in operating capital in 2003.

  31. Calculating FCFحساب التدفقات النقدية الحرة FCF = NOPAT – Investment in operating capital FCF03 = $39.67104 – (330.75 – 315.0423) = $39.67104 – $15.7077 = $23.96334 million

  32. Uses of FCFاستخدامات التدفقات النقدية الحرة There are five ways for a company to use FCF 1. Pay interest on debt. 2. Pay back principal on debt. 3. Pay dividends. 4. Buy back stock. 5. Buy nonoperating assets (e.g., marketable securities, investments in other companies, etc.)

  33. Non-operating income دخل غير تشغيلي NOPAT الربح الصافي بعد الضريبة Dividends توزيعات الارباح Working Capital الاستثمار في رأس المال العامل Buy back stock اعادة شراء الاسهم Pay interest دفع فوائد الديون Fixed Assets الاستثمار في الاصول الثابتة Buy non-op assets شراء اصول غير تشغيلية Pay principal دفع القروض Free Cash Flow التدفقات النقدية الحرة Reinvestmen اعادة الاستثمار

  34. How Did Simple Co. use its FCF?كيف استخدمت الشركة البسيطة تدفقاتها النقدية الحرة • Paid dividends: $23.4 million • Paid after-tax interest of: $12,875.5 (1-0.4) = $7.7253 million • For a total of $31.1253 million! This is $7.162 million more than the $23.9 million FCF available! Where did it come from? • Simple Co. increased its borrowing by $150.223 – $143.061) = $7.162 million to make up the difference.

  35. Corporate Valuationتسعير الشركة • Forecast financial statements and use them to project FCF. • Discount the FCFs at the WACC This gives the value of operations

  36. Value of Operations:حساب قيمة اعمال الشركة Of course, this requires projecting free cash flows out forever.

  37. Constant growthنمو ثابت • If free cash flows are expected to grow at a constant rate of 5%, then this is easy: 200320042005200620072008 FCF 23.963 25.161 26.419 27.740 29.127 30.584 There is an easy formula for the present value of free cash flows that grow forever at a constant rate…

  38. Constant Growth Formulaنموذج التسعير بفرض النم الثابت • The summation can be replaced by a single formula:

  39. The value of operationsحساب قيمة اعمال الشركة

  40. Value of Equityقيمة حقوق المالكين • Sources of Corporate Value • Value of operations = $501.225 million • Value of non-operating assets = $0 (in this case) • Claims on Corporate Value • Value of Debt = $150.223 million • Value of Equity = ? • Value of Equity = $501.225 - $150.223 = $351.002 million, or just $351 million.

  41. Value of Equityقيمة حقوق المالكين Price per share = Equity / # of shares = $351 million / 10 million shares = $35.10 per share

  42. A picture of the breakdown of Simple Co.’s valueرسم توضيحي لقيمة الشركة من دين وملكية

  43. Return on Invested Capital (ROIC)العائد على رأس المال المستثمر ROIC can be used to evaluate Simple Co.’s performance: ROIC = NOPAT / Total operating capital in place at the beginning of the year

  44. Return on Invested Capital (ROIC)العائد على رأس المال المستثمر ROIC03 = NOPAT03 / Capital02 ROIC03 = 39.67104 / 315.0423 = 12.6%. This is a good ROIC because it is greater than the return that investors require, the WACC, which is 10.02%. So Simple Co. added value during 2003.

  45. Economic Value Added (EVATM) (also called Economic Profit)القيمة الاقتصادية المضافة او الربح الاقتصادي • EVA is another key measure of operating performance. • EVA is trademarked by Stern Stewart, Inc. • It measures the amount of profit the company earned, over and above the amount of profit that investors required. • EVA = NOPATt – WACC(Capitalt-1)

  46. Calculating EVAحساب القيمة الاقتصادية المضافة EVA = NOPAT- (WACC)(Begng. Capital) EVA03 = NOPAT03 – (0.1002)(Capital02) EVA03 = $39.67104 – (0.1002)(315.0423) = $39.67104 – $31.56742 = $8.1038 million (More…)

  47. Economic profit…الربح الاقتصادي This shows that in 2003 Simple Co. earned about $8 million more than its investors required. Another way to calculate EP is EVAt = (ROIC – WACC)Capitalt-1 = (0.125923 – 0.1002)$315.0423 = $8.1038 million

  48. Intuition behind EVAمعنى الربح الاقتصادي If the ROIC – WACC spread is positive, then the firm is generating more than enough “profit,” and is increasing value. But, if the ROIC – WACC spread is negative, then the firm is destroying value, in the sense that investors would be better off taking their money and investing it elsewhere.

  49. Valuing a basic companyتسعير شركة اكثر تفصيلا • Here we will price a company with more detailed operations and financial statements line items. • The purpose is to advance our ability to value real life companies one step at the time.

  50. 2001 2002 2003 Cash 37.30 41.40 45.12 Inventory 522.14 579.58 631.74 Accounts receivable 932.40 1,034.96 1,128.11 Total current assets 1,491.84 1,655.94 1,804.98 Gross PPE 2,619.28 3,031.40 3,443.32 Accumulated depreciation 754.48 961.47 1,187.09 Net PPE 1,864.80 2,069.93 2,256.23 Total assets 3,356.64 3,725.87 4,061.20 Basic Co.'s Balance Sheet: Assets قائمة المركز المالي - الاصول

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