...Discounted Cash Flow Valuation: Basics Aswath Damodaran Aswath Damodaran 1 Discounted Cashflow Valuation: Basis for Approach t = n CF t Value = ∑ t t = 1( 1 +r) where CFt is the cash flow in period t, r is the discount rate appropriate given the riskiness of the cash flow and t is the life of the asset. Proposition 1: For an asset to have value, the expected cash flows have to be positive some time over the life of the asset. Proposition 2: Assets that generate cash flows early in their life will be worth more than assets that generate cash flows later; the latter may however have greater growth and higher cash flows to compensate. Aswath Damodaran 2 Equity Valuation versus Firm Valuation n n Value just the equity stake in the business Value the entire business, which includes, besides equity, the other claimholders in the firm Aswath Damodaran 3 I.Equity Valuation n The value of equity is obtained by discounting expected cashflows to equity, i.e., the residual cashflows after meeting all expenses, tax obligations and interest and principal payments, at the cost of equity, i.e., the rate of return required by equity investors in the firm. t=n Value of Equity = CF to Equity t ∑ (1+ k )t t=1 e where, CF to Equityt = Expected Cashflow to Equity in period t ke = Cost of Equity n The dividend discount model is a specialized case of equity valuation, and the value of a stock is the present value of expected future dividends...
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...Course Objectives FINM7044 Applied Valuation Semester 1, 2015 Instructor: Dr Xianming Zhou E‐mail: xianming.zhou@anu.edu.au Consultation hours: Thursday 2‐4pm Tutors Jan Drienkou (jan.drienko@anu.edu.au) Xiang Gao (xiang.gao@anu.edu.au) The purpose of this course is to offer students an applicationoriented approach to understanding how concepts and theories of finance are applied to investment decisions. Students will learn to value corporate entities using various techniques, including discounted cash flow and multiple based valuations. The methods and analytical techniques discussed in this course are heavily used in practice, which are helpful not only to financial managers in modern corporations but also to investors in financial markets. Introduction 2 Textbook and Course Materials Prescribed textbook: Damodaran, A. (2012), Investment Valuation, Wiley & Sons (3rd University edition) Lecture notes: available on the course Wattle site Valuation cases: Darden Business School cases to be distributed in class Recommended reading: Ross, S., Westerfield, R., and Jaffe, J., (2013) Corporate Finance. McGraw-Hill (10th edition) (RWJ) Study Groups All assignments and case reports are group-based. Form your study team by the end of week 2, each consisting 4 to 6 students. Students attendance is required for case discussions. A 2% penalty applies to each absence. At the conclusion of this course, each student will submit a confidential assessment of...
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...Acquisition Valuation Aswath Damodaran Aswath Damodaran 1 Issues in Acquisition Valuation I Acquisition valuations are complex, because the valuation often involved issues like synergy and control, which go beyond just valuing a target firm. It is important on the right sequence, including • When should you consider synergy? • Where does the method of payment enter the process. I I Can synergy be valued, and if so, how? What is the value of control? How can you estimate the value? Aswath Damodaran 2 Steps involved in an Acquisition Valuation I I I I I Step 1: Establish a motive for the acquisition Step 2: Choose a target Step 3: Value the target with the acquisition motive built in. Step 4: Decide on the mode of payment - cash or stock, and if cash, arrange for financing - debt or equity. Step 5: Choose the accounting method for the merger/acquisition purchase or pooling. Aswath Damodaran 3 Step 1: Motives behind acquisitions (1) Simplest rationale is undervaluation, i.e., that firms that are undervalued by financial markets, relative to true value, will be targeted for acquisition by those who recognize this anomaly. (2) A more controversial reason is diversification, with the intent of stabilizing earnings and reducing risk. (3) Synergy refers to the potential additional value from combining two firms, either from operational or financial sources. • • Operating Synergy can come from higher growth or lower costs Financial Synergy...
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...discounted cash flow valuation methods. Different alternatives for determining the discounted value of tax shields and their implications for the valuation∗ Pablo Fernández PricewaterhouseCoopers Professor of Corporate Finance IESE Business School, University of Navarra Camino del Cerro del Aguila 3. 28023 Madrid, Spain. E-mail: fernandezpa@iese.edu Abstract This paper addresses the valuation of firms by cash flow discounting. The first part shows that the four most commonly used discounted cash flow valuation methods (free cash flow discounted at the WACC; cash flow for equityholders discounted at the required return on the equity flows; capital cash flow discounted at the WACC before taxes; and Adjusted Present Value) always give the same value. The disagreements in the various theories on the valuation of the firm arise from the calculation of the discounted value of tax shields (VTS). The paper shows and analyses 7 different theories on the calculation of the VTS: Modigliani and Miller (1963), Myers (1974), Miller (1977), Miles and Ezzell (1980), Harris and Pringle (1985), Ruback (1995), Damodaran (1994), and Practitioners method. The paper also shows the changes that take place in the valuation formulas when the debt's market value does not match its book value. JEL Classification: G12, G31, M21 October 16, 2008 (First version: July 2, 1999) Another version of this paper may be found in chapters 17, 18, 19 and 21 of the author's book Valuation Methods and Shareholder...
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...the company is undervalued by the market at the 2011 and has potential for a rise towards its fair price. In addition, the company has a relatively better credit rating by the credit rating agencies being an indication of its relative low risk. In conclusion, the company’s stock has been identified as a buy, and its fair price for the year 2011 has been estimated to be $18.64. American Greetings Analysis Company value depends on a number of factors. Those factors include the capital structure that determines its cost of resources as well as the market situation that defines its risk and future cash-flow prospects. On the other hand, investments’ valuation is crucial to decision making. In that respect, investors have a growing need to know the proposed of their target investments and the suitability of their current market valuation. Thus, it is important to identify the company’s...
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...Indian Institute of Management Kozhikode Valuation of Brand “Coca-Cola” Project Report, Valuations and Real Options Submitted to: Professor Abhilash Nair GROUP 1, Term V 1. Harshit Boob (PGP/15/143) 2. Saurav Agarwal (PGP/15/319) 3. Siddhartha Roy (PGP/15/321) Valuation of Brand “Coca-Cola” 2012 Contents Executive Summary....................................................................................................................................... 3 COCA-COLA Company ................................................................................................................................... 4 Coca-Cola Brand ............................................................................................................................................ 6 Relevance of the Study ................................................................................................................................. 6 Why Coca-cola .............................................................................................................................................. 7 Objective of the Study .................................................................................................................................. 8 Literature Review .......................................................................................................................................... 8 Data Source .............................................................................
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...ideas . . . . . 12 4 Conclusion 19 ∗ Freie Universität Berlin, Germany, Chair of Finance and Banking, E-Mail LK@wacc.de. † Universität Paderborn, Germany, Chair of Finance and Investment, E-Mail AL@wacc.de. ‡ Universität Graz, Austria, Chair of Accounting and Auditing, E-Mail Gerwald.Mandl@uni-graz.at. 1 Electronic copy available at: http://ssrn.com/abstract=1651466 1 Introduction For several years, when setting discount rates Damodaran has advocated more consideration of country risk premiums (CRP ) when it comes to assessing companies with activities in emerging markets. We have to acknowledge that his approach is enjoying growing support among investment banks and auditing firms. At the same time, it is to be noted that Damodaran’s concept has failed to resonate sufficiently with the academic community. This is reason enough to perform a systematic analysis and critical discussion of his country risk premium concept. Damodaran’s initial considerations concerning a country risk premium can be found in Damodaran (1999a) and Damodaran (2003), with further essentially unchanged mentions in his more recent publications. In our contribution we will concentrate on the two aforementioned sources. 2 CRP concept In the following, we intend to give a neutral, that is, non-judgmental description of Damodaran’s country risk premium concept (CRPC). We will also attempt to provide a detailed reconstruction of Damodaran’s thought process which led to this approach. Risk-return...
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...Financial Analysis: Kohl’s May 6, 2016 WACC Calculation: a) Estimation of Cost of Debt: For the purpose of calculation of cost of debt for the company, we have used the most recent debt issued by the company. Referring to note 2 of the financial statements, we found that during July, 2015, the company issued $650 million of 4.25% notes due in July 2025 and $450 million of 5.55% notes due in July 2045. (Kohl's, 2015) Accordingly, we used the average coupon rate of these two recently issued bonds to represent the cost of debt in the WACC formula. OK – I’ll go with that. Average Coupon Rate: = (4.25+5.55)/2 = 4.90% Effective Tax Rate= Income Tax Expense/ Earnings before Tax = 384/1057 = 36.32% After Tax Cost of Debt= 0.0490*(1-0.3632) = 3.12% OK, good. Important to note, this after tax figure represent the cost of issuing bonds to the company. b) Estimation of Cost of Equity (CAPM Model) For the purpose of calculation of cost of equity, we relied on CAPM model as part of which, we used the risk-free rate for 10-year Treasury bill, while beta for the stock was sourced from Yahoo Finance. Additionally, and Market Premium was sourced from the database released by New York University. = Risk free rate+ beta (Market Premium) = 1.81+ 1.10(6) – I’d suggest 7%, but 6% is acceptable. = 8.41% We can go with this; however, and as I mentioned in the video, a 1-year T-bill rate is superior to a 10-year rate. The 1-year rate is about .50%. Using 7% as the premium and...
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...and future financial condition and make a valuation about firm’s value of two companies that dominate the mining sector of industry in Indonesia which are PT Aneka Tambang (Persero) Tbk (ANTAM) and PT Vale Indonesia Tbk, formerly PT International Nickel Indonesia Tbk (VALE). To assess the financial performance of PT Aneka Tambang (Persero) Tbk, researcher will use several methods which are time-series analysis (Compound Annual Growth Rate), cross-section analysis, common-size analysis, and DuPont Analysis (ROA and ROE). Then make a valuation of the firm’s value using three valuation approach which are asset based method, market approach, and income approach better known as discounted cash flow approach. Based on the results, ANTAM has better performance in their net working capital through total current assets, current liabilities, retained earnings, and share capital. Nevertheless, VALE has good capability in attract the investors and controlling their non-current assets, non-current liabilities, and additional paid in capital. In overall, ANTAM has better financial performance than VALE in terms of CAGR comparison, cross-section analysis, and DuPont system of analysis. Whereas, both of ANTAM and VALE had been experienced a not significant difference in terms of financial ratios and common-size financial statements. The valuation both of PT Aneka Tambang (Persero) Tbk and PT Vale Indonesia Tbk used three approaches. The asset based method approach indicates that PT Aneka Tambang...
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...AMITY INTERNATIONAL BUSINESS SCHOOL ANALYSIS AND VALUATION OF EQUITY SECURITIES OF TATA CONSULTANCY SERVICES , INFOSYS AND WIPRO LTD. SUBMITTED TO: SUBMITTED BY : Ms.Vibha Singh Atreya Vyas A1802011445 Section C MBA IB TABLE OF CONTENTS S.No | Topic | Page Number | 1 | Introduction | 3 | 2 | Research Methodolgy | 4 | 2.1 | Research Objectives | 5 | 2.2 | Proposed Literature Review and Tentative Hypothesis | 5 | 3 | Data Collection | 7 | 4 | About Companies and Research | 8 | 5 | Limitation of Study | 11 | 6 | References | 12 | 1) INTRODUCTION In today’s era every company needs cash or cash equivalents to run its day to day activities smoothly. The major sources through which companies can borrow money are: * Bank Loans * Debenture * Preference Share * Equity Share. Bank Loan is the amount which companies receive after fulfilling all the required information which is mandate according to the rules of banks. Companies need to mortgage its assets as guarantee for the future repayment of its loan amt. on the loan bank charge interest which company has to pay irrespective of the fact that company is in profit or loss. Debentures are the instruments which are used to acknowledge the receipt of the debt form the debenture holders. Debenture Holders are sought lenders for the company. They...
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...impact on valuations based on multiples. It broadly describes the need for relative valuation which is increasingly used in assessing individual business or corporations. On a theoretical level, it captures the advantages and shortcomings of multiples. It also describes why the multiples differ from one institution in one sector to another whilst addressing the factors that cause the anomalies. In addition it highlights what the value drivers are behind the multiples and the significant role they play in arriving at multiples. Alongside the paper also details how these value drivers are systematically aligned in producing results. It emphasizes largely on enterprise valuation, and the different methods used in Enterprise valuation, formulas and application. The basic conclusion is that multiples nearly always have broad dispersion, which is why valuations performed using multiples may be highly debatable. 1. Introduction Valuation is the process of determining the current worth of an asset or a company in the financial aspect. There are many techniques that can be used to determine value, some of which might be subjective and the others objective. Judging the contributions of a company's management would be more of a subjective valuation technique, while calculating intrinsic value based on future earnings would be an objective technique. However, this paper will exclusively focus on valuation with multiples which is based on the method of relative valuation. 2. Literature...
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...University of South Carolina Moore School of Business FINA 761 (800): Advanced Corporate Finance Fall 2013 Instructor: Eric Powers |Class time: |T/TH 2:50 – 5:35 | |Location: |364 | |Office Hours: |TBD | |Office Hour Location: |BA 462 | |E-mail: |epowers@moore.sc.edu | |Course website: |blackboard.sc.edu | The objective of this course is deepen your understanding of the many issues faced by firms as they identify valuable investment opportunities, raise funds for those investment opportunities, distribute profits to share-holders and debt-holders and deal with the consequences of both good and bad investment financing decisions. We will expand on the concepts that you have learned in FINA 760 or in DMSB 715. Class time will be divided between lectures and case studies. My lectures will briefly review concepts from prior courses. The bulk of my lectures will present advanced material that will be new to you. It is assumed that you understand the concepts from your earlier finance and accounting courses. If not, it is your responsibility to review. In order to reduce your note-taking, my lecture notes will be available...
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...NORGES HANDELSHØYSKOLE Bergen, June 2008 Business Analysis and Valuation of Vodafone Group Iryna Saplitsa Supervisor: Tore Leite NORGES HANDELSHØYSKOLE This thesis was written as a part of the Master of Science in Economics and Business Administration program ‐ Major in International Business. Neither the institution, nor the advisor is responsible for the theories and methods used, or the results and conclusions drawn, through the approval of this thesis. 2 Acknowledgments This thesis is written in conjunction with my final semester as a Master student at the Norwegian School of Economics and Business Administration. The process of completing this paper has been both rewarding as well as challenging. I would like to express my sincere gratitude towards a person that has been very helpful in finalizing this thesis. My academic advisor, Associate Professor Tore Leite, deserves special thanks for his support and guidance through the challenges of applying financial theory into practice. I am very grateful for his invaluable help, all constructive comments and timely recommendations. Iryna Saplitsa Bergen, June 2008 3 Executive Summary Every asset, both financial and real, has a value. The main factor of successful investments and management of these assets is in the understanding not only what the value is, but the source ...
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...Valuation of Metals and Mining Companies Author: Svetlana Baurens E-Mail: baurens@basinvest.ch Date: 7.11.2010 In collaboration with the University of Zürich, Swiss Banking Institute and Prof. Dr. T. Hens Contents 1. Introduction ...............................................................................................................7 1.1. Motivation .......................................................................................................7 1.2. Structure ..........................................................................................................7 1.3. Definition of terms .........................................................................................8 2. Valuation models in mining and metals industry ................................................12 2.1. Special features of metals and mining companies ........................................12 2.2. Classification of valuation models ................................................................15 2.3. Resource & Reserve .....................................................................................17 3. Valuation of Explorations properties ...................................................................20 3.1. Appraised Value Method (Cost Approach) ...................................................23 3.2. Comparable Transactions (Market Approach) ..............................................24 4. Cycle importance in valuation of metals and mining companies...
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...highlight the confusing message in the literature regarding the equity premium and its evolution. The confusion arises from not distinguishing among the four concepts and from not recognizing that although the HEP is equal for all investors, the REP, the EEP and the IEP differ for different investors. A unique IEP requires assuming homogeneous expectations for the expected growth (g), but we show that there are several pairs (IEP, g) that satisfy current prices. We claim that different investors have different REPs and that it is impossible to determine the REP for the market as a whole, because it does not exist. We also investigate the relationship between (IEP – g) and the risk free rate. There is a kind of schizophrenic approach to valuation: while all authors admit different expectations of equity cash flows, most authors look for a unique discount rate. It seems as if the expectations of equity cash flows are formed in a democratic regime, while the discount rate is determined in a dictatorship. 1. Introduction 2. Historical Equity Premium (HEP) 3. Expected Equity Premium (EEP) 2.1. First studies of the historical equity return. 2.2. Estimates of the historical equity premium of the US. 2.3. A closer look at the historical data. 2.4. Estimates of the Historical Equity Premium (HEP) in other countries...
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