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Module 7: Valuation using the residual enterprise income valuation model

Module 7: Valuation using the residual enterprise income valuation model. International Business Machines Corporation F rank H uang. Brief introduction of IBM. incorporated in the State of New York on June 16, 1911 In the computer manufacturing and IT consulting industries

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Module 7: Valuation using the residual enterprise income valuation model

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  1. Module 7:Valuationusingtheresidualenterpriseincomevaluationmodel International Business Machines Corporation Frank Huang

  2. BriefintroductionofIBM • incorporated in the State of New York on June 16, 1911 • InthecomputermanufacturingandITconsultingindustries • Creates value through integrated solutions that leverage information technology and deep knowledge of business processes • IBM solutions reduces a client‘s operational costs or enablesnew capabilities that generate revenue

  3. Major operation components • The company's major operations consists of five business segments: • Global Technology Services and Global Business Services, which the company collectively calls Global Services, • Software, • Systems and Technology, • Global Financing

  4. Global Services • a critical component of the company's strategy of providing IT infrastructure and business insight and solutionsto clients. • While solutions often include industry-leading IBM software and systems… • Approximately 60 percent of external Global Services segment revenue is annuity based, coming primarily from outsourcing and maintenance arrangements.

  5. Assumptions for parsimonious forecasting • Sales growth rate 1.13% • Enterprise profit margin (EPM) 15.1% • Enterprise asset turnover (EATO) 14.11

  6. Discounted Cash Flow Model • Assumption: growthrate:1.13% Discountrate:7.60%

  7. Enterprise value using DCF model

  8. Enterprise value using REI model formula: Avaluationmodelbasedonaccountingnumbers.

  9. Valuation using abnormal enterprise income growth • Anchoring on

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