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Module 5 – Cash Flow Valuation Junichi Hara

Module 5 – Cash Flow Valuation Junichi Hara. Agenda. Forecast assumptions DCF Analysis Sensitivity Analysis. 1. Forecast Assumptions. Sales Growth. Sales growth 3.68%. EPM. EPM: 4.05%. EATO. EATO: 3.45. Projection. Sales g%: 3.68 % RNEA: 13.96 % EPM: 4.05% EATO: 3.45.

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Module 5 – Cash Flow Valuation Junichi Hara

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  1. Module 5 – Cash Flow ValuationJunichi Hara

  2. Agenda • Forecast assumptions • DCF Analysis • Sensitivity Analysis

  3. 1. Forecast Assumptions

  4. Sales Growth Sales growth 3.68%

  5. EPM EPM: 4.05%

  6. EATO EATO: 3.45

  7. Projection • Sales g%: 3.68% RNEA: 13.96% • EPM: 4.05% • EATO: 3.45

  8. 2. DCF Analysis

  9. Step 1: Calculate FCF FCF ≡ EPAT - ΔNEA Cash flows from operations - Net capital expenditures Cash flows from operations + Δ Change in Accruals Cash flow from net capital investments + Δ Change in Accruals

  10. Step 1: Calculate FCF FCF ≡ EPAT - ΔNEA Cash flows from operations - Net capital expenditures Cash flows from operations + Δ Change in Accruals Cash flow from net capital investments + Δ Change in Accruals

  11. Step 2: Discount FCF Cost of Capital = 10%

  12. Step 3: Calculate Continuing Value Finite Portion

  13. Step 3: Calculate Continuing Value Cost of Capital = 10% Growth rate = 3.68% Continuing Value

  14. Step 3: Calculate Continuing Value

  15. Final Result

  16. Implications • Current price: $72.73 • Calculated: $58.16 • Not implausible… • But not too confident

  17. Doubts • Cost of capital: 10% • Sales growth (g) • EATO • Is this realistic??? • Too high? Too low? • Too pessimistic?

  18. 3. Sensitivity Analysis

  19. Cost of Capital • Cost of capital used:10.00% • Bloomberg (WAAC): 6.60%

  20. DCF Results

  21. Implications • Current price: $72.73 • Calculated: $148.73 • BIG difference • Why?

  22. Original Results

  23. New Results

  24. Sales Growth Sales growth 3.68%

  25. Sales Growth • Sales growth used: 3.68% • High (2013): 5.02% • Low (2014): 2.34%

  26. Sales Growth: 5.02% (High)

  27. Implications • Current price: $72.73 • Calculated: $76.36 • Much closer • 5.02% growth close to what market expects?

  28. Sales Growth: 2.34% (Low)

  29. Implications • Current price: $72.73 • Calculated: $46.37 • Not close at all • 2014 results non-recurring? • Why?

  30. EATO EATO: 3.45

  31. EATO • EATO used: 3.45 • Mid (2013): 3.50 • High (2011): 3.55

  32. EATO: 3.50 (Mid)

  33. Implications • Current price: $72.73 • Calculated: $71.75 • Very close! • EATO assumption makes a big difference

  34. EATO: 3.55 (High)

  35. Implications • Current price: $72.73 • Calculated: $84.96 • Further away (as expected)

  36. Conclusion • DCF lets us put $ on parsimonious forecasts • Very sensitive to assumptions • Sensitivity analysis helpful

  37. Questions?

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