...CHAPTER 11 CORPORATE VALUATION AND VALUE-BASED MANAGEMENT (Difficulty: E = Easy, M = Medium, and T = Tough) True/False Easy: (11.1) Corporate valuation model Answer: b Diff: E 1 . The corporate valuation model cannot be used unless a company doesn’t pay dividends. a. True b. False (11.2) Free cash flows and valuation Answer: a Diff: E 2 . Free cash flows should be discounted at the firm’s weighted average cost of capital to find the value of its operations. a. True b. False (11.3) Value-based management Answer: b Diff: E 3 . Value-based management focuses on sales growth, profitability, capital requirements, the weighted average cost of capital, and the dividend growth rate. a. True b. False (11.5) Corporate governance Answer: b Diff: E 4 . Two important issues in corporate governance are (1) the rules that cover the board’s ability to fire the CEO and (2)the rules that cover the CEO’s ability to remove members of the board. a. True b. False Medium: (11.3) Return on invested capital and MVA Answer: b Diff: M 5 . If a company’s expected return on invested capital is less than its cost of equity, then the company must also have a negative market value added (MVA). a. True b. False Chapter 11: Valuation and Value-Based Management Page 1 (11.5) Corporate governance Answer: b 6 . A poison pill is also known as a corporate restructuring. a. True b. False Diff: M (11.5) Stock options Answer: b Diff: M 7 . The CEO of D’Amico Motors has been granted some stock...
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...University of Pennsylvania ScholarlyCommons Wharton Research Scholars Journal 5-1-2006 Valuation of Venture Capital Securities: An Options Based Approach A. Lloyd Thomas University of Pennsylvania This paper is posted at ScholarlyCommons. http://repository.upenn.edu/wharton_research_scholars/36 For more information, please contact repository@pobox.upenn.edu. Wharton School Valuation of Venture Capital Securities: An Options Based Approach Disciplines Business | Finance and Financial Management This journal article is available at ScholarlyCommons: http://repository.upenn.edu/wharton_research_scholars/36 Valuation of Venture Capital Securities 1 Valuation of Venture Capital Securities An Options Based Approach Wharton Research Scholars 2005-2006 Investigator: A. Lloyd Thomas Supervising Professor: Dr. Raffi Amit Copyright © A. Lloyd Thomas, 2006 Valuation of Venture Capital Securities 2 Table of Contents Table of Contents................................................................................................................ 2 Introduction......................................................................................................................... 3 Venture Capital Financing Negotiations......................................................................... 3 Venture Capital Securities .............................................................................................. 6 Common Stock...
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...the confines of a Chapter 11 case. Calpine is a leading independent provider of energy that filed for Chapter 11 protection in December 2005. This case picks up in early November 2007, just prior to a November 15, 2007 deadline set by the bankruptcy judge for submission of expert reports on the enterprise valuation of the restructured Calpine. 1 If the parties to the case cannot agree on a valuation, the judge will select his own valuation at the “confirmation” hearing on December 17, 2007. 2 The judge has made it clear to the parties that a cram-down solution will be less than ideal, compared to a negotiated deal. For this exercise, student case groups will be assigned to one of four stakeholder categories in the case. The case groups will serve as valuation experts for the stakeholder groups by estimating Calpine’s enterprise value (or a valuation range) and defending the valuation against other stakeholder groups. Of course, you will also need to take into account that a negotiated solution may be the best outcome. The stakeholder groups that you will represent as experts are: 1) Calpine Corporation (the debtor). 2) Unsecured Creditors Committee. 3) Equity Committee. 4) The 2nd Lien Ad Hoc Committee. For your case write-up, please prepare the following. Please remember that your writeup should be from the perspective of the constituency you were assigned to in the last class ; check with me if you’re not sure which that was. The HMH case was...
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...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 .50% as the risk-free rate, the cost of equity is 8.2%. Here: ------------------------------------------------- Risk-free rate= 10-year...
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...Valuing Publicly Traded Equity Securities: The Black & Decker Corporation (BDK) [1] I. Introduction This teaching note describes the valuation of publicly traded equity securities using the Discounted Cash Flow (DCF) and Price/Characteristic (market comparison) approaches, with a specific spreadsheet example for The Black and Decker Corporation. Free cash flow valuation and comparables (comps) are key tools in fundamental analysis, the process of picking stocks with high expected return based on an analysis of the company. In theory, buying stocks of companies that are undervalued in the stock market will produce high returns as other investors slowly realize the company’s true value and quoted share prices increase to match that value. Three basic ideas underlie the application of discounted cash flow (DCF) analysis. First, the value of a company is ultimately derived from the cash that can be extracted from that company, and more cash is preferred to less. Second, cash received in the future is not as valuable as cash received today. Third, risky cash flows are valued less than cash flows known with relative certainty. The process of valuing publicly traded equity using DCF involves three steps. First, condensed financial statements, also called pro-forma statements, are forecasted several years into the future. Second, the forecasted statements are used to calculate free cash flows for the entire firm, which are then discounted by the...
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...[pic] Michael G. Foster School of Business Using a Valuation Model to Estimate a Firm’s Stock Price* In the ongoing search for bargains in the stock market, analysts and investors rely on models to estimate the intrinsic value of a firm’s equity. By comparing the valuation suggested by their model to the actual value in the marketplace, they form opinions as to whether a given stock is under or over valued. Valuation models are also used by investment bankers as an aid to pricing initial public offerings, and to inform parties involved in assorted private transactions such as selling a business or division, dividing property among owners, and settling estates. In this note, we introduce a relatively simple but powerful model of equity (stock) valuation.[1] 1. The basic idea behind valuation Valuation models in finance are typically based on discounted future cash flows or discounted future dividends. Keep in mind that, holding underlying assumptions constant, all valuation models should yield the same result. A model for valuing equity based on accounting data may be preferable in some cases, in that: o Benchmarks for performance are almost always given in earnings per share (EPS) – not cash flows or dividends. o Since real world dividend payout policies tend to be stable for long periods, valuation models based on dividends are less useful for modeling changes in value. o Earnings generally receive far more attention from the business...
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...Valuation Fundamentals Table of Contents www.finaticsonline.com Table of Contents > > > > > Introduction – Concept of Fair Value – Who uses Valuation? Valuation & Wealth Maximization Valuation Approaches Valuation Methods Is there a ‘Best’ method? > > Which method is best suited ? – Public vs Private Company – By Scenario – By Sector Valuation FAQs – General – DCF – Comparables Press Alt, W, F for maximizing viewing area Equity Valuation Fundamentals Introduction – Concept of Fair Value www.finaticsonline.com At Finatics, we define Equity Valuation as “A process that involves determining „Fair Value‟ of a company‟s equity in order to assist buy/sell decisions for the purpose of Financial or Strategic Investment ” So what is Fair Value of an investment? How should the worth of an Investment be determined ? …(Contd) Put Simply, Fair Value is the price at which, one will get the desired rate of return when the investment is sold to a willing & able buyer. The worth of an investment is determined by whether it is meant for long term use to generate returns (i.e. Strategic Investment) or for resale when the „right price‟ or „fair value‟ is achieved (Financial Investment). The purpose of Valuation is to determine a fair value range of an investment (or capital asset) using one or more of several available techniques As discussed, investment related demand will be driven by expected return resulting...
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...of the classnotes. For Costco calculate the following using assumptions in Part I of Week 6 homework: i. Take the Value of the firm as of the date of valuation, and decompose it into the “future growth value” of the company and the value of the firm if it earned its current EVA in perpetuity. ii. Determine the future growth value as a percentage of Firm Value. This is called the Sanity Test. iii. The Enterprise value of Costco was approximately $38,308M as of September 2012. At this EV, what percentage of this value comes from “future growth value” in EVA? What is the percentage of value that comes from MVA? (Use IC as of September 2012) iv. What is the relationship between EVA and MVA? v. What is the relationship between MVA and NPV? 3. Use your Costco Model – Part 1 to answer the following questions. i. What information can you glean about Costco from just looking at FCFF worksheet? ii. What information can you glean about Costco from just looking at the EVA worksheet? Question Two: Abnormal Earnings Model (This question must be handed in) Abnormal Earnings Model for equity valuation Value of equity0 = Value of equity0 = + Continuing ValueT AE = Abnormal earnings for period t AEt = BV t -1* (ROE t – re) = NI t – BV t -1*re That is, Note...
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...Mergers and Acquisitions – A beginner’s guide Valuation M&A involves using more than one valuation technique to arrive at a valuation that we think is fair. The most common techniques used are: Comparable Publicly traded companies (“Public Comps”) – this analysis indicates how the stock markets are valuing companies that are similar to the target Precedent Comparable Transaction analysis (“Transaction Comps”) – this analysis indicates the valuations at which prior M&A transactions have been done in the same industry as that of the target. DCF analysis – is one of the most important valuation techniques Sum-of-the-parts analysis – If a target has more than one lines of business, the financial advisor will value each business separately. Therefore, each “part” might have its own Public Comps, Transaction comps and DCF (with different WACCs for each part). The total value is the sum of the parts Other –depending on the unique characteristics of the transaction, financial advisors will perform a number of other analyses to arrive at fair value like Leveraged Buyout (“LBO”) Analysis, Historical Exchange Ration analyses etc. PUBLIC COMPS Compare the current trading level of a Company to its peer group of companies The peer group is a set of 5 to 10 companies that are most similar to the target in terms of business mix and strategy, geographic risks(same country), margins and size. (i.e. processed meats and raw meats are different). To find a good peer...
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...as on SAIF BB system Course objectives Corporate Finance is the art and science of making important corporate decisions under the guidance of relevant financial theory, advanced quantitative methods, and careful study of previous business decisions and outcomes. Mergers and acquisitions (M&As) offer a lens into a variety of financial management practices, and are a critical time in the life of a corporation. In this course we will use M&As as a focal point in our study of corporate finance. We will draw on, and extend your knowledge of finance topics including valuation, capital structure, financial distress, financial statement analysis, working capital management, securities markets, securities issuance, agency theory, corporate governance, executive compensation, and real and financial derivatives, and apply to M&As. Our study of change of control will include the economic motivations for M&A activity, advanced valuation, transaction structuring, creative financing, risk management, tactics for friendly M&A negotiations and hostile transactions, leveraged buyouts (LBOs), due diligence, and execution. By the end of the course you should: Be able to identify motives for transactions Understand reasons for differences in payment and financing Be able to recommend and justify payment and financing packages for a deal Understand incentives of different parties and how these will influence their actions Know the factors associated with long-run success or failure of transactions...
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...EVALUATING THE VALUATION ALLOWANCE Christine Czekai Bauman, Assistant Professor, The University of Wisconsin, Milwaukee, Wisconsin John W. Gribble, Partner, PricewaterhouseCoopers, Jersey City, New Jersey Terry D. Warfield, Associate Professor, The University of Wisconsin, Madison, Wisconsin Brett Jones is a senior accountant with the accounting firm of BGW. On a recent audit engagement, Brett was assigned the task of evaluating the deferred tax accounting for Packer Inc. The company, founded in 1962, is a large heavy machinery manufacturer. Packer’s balance sheet at December 31, 1997 includes a deferred tax asset of approximately $22 million related to net future deductible temporary differences. However, realization of the deferred tax asset is dependent upon profitable operations in the U.S. and abroad, and future reversals of existing temporary differences. Although realization is not assured, Packer management in the past has been pretty sure that such benefits will be realized through the reduction of future taxable income. Management has carefully considered various factors in assessing the probability of realizing these deferred tax benefits. Brett recalls the complexity surrounding the judgmental nature of accounting for deferred taxes under generally accepted accounting principles. Under Statement of Financial Accounting Standard No. 109 (FAS 109), Packer could be required to record a deferred tax asset for future deductible amounts and carry-forwards...
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...Online Chapter 15 LEASE FINANCING AND BUSINESS VALUATION Learning Objectives After studying this chapter, readers will be able to describe the two primary types of leases, explain how lease financing affects financial statements and taxes, conduct a basic lease analysis from the perspective of the lessee, discuss the factors that create value in lease transactions, explain in general terms how businesses are valued, and conduct a business valuation using discounted cash flow and market multiple approaches. Introduction This chapter covers two unrelated topics: lease financing and business valuation. Leasing is a substitute for debt financing and hence expands the range of financing alternatives available to businesses (and to individuals). However, leasing should be used only when it offers some advantage over conventional financing. We begin this chapter by discussing factors that contribute to the large amount of leasing activity among healthcare businesses and how businesses analyze lease transactions. The valuation of entire businesses, as opposed to capital projects, is a critical step in the merger and acquisition process. In addition, business valuation plays an important role when one owner is bought out by other owners and when businesses are inherited. The second part of this chapter discusses two techniques used to value businesses. Leasing Basics Businesses generally own fixed assets, but it is the use of buildings and equipment that is important, not their...
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...ECFS895 Private Equity Investment AFC Term 1 CBD 2015 Dept of Applied Finance and Actuarial Studies Contents General Information Learning Outcomes General Assessment Information Assessment Tasks Delivery and Resources Unit Schedule Learning and Teaching Activities Policies and Procedures Graduate Capabilities Changes from Previous Offering Important Notice Standards Required to Complete the Unit Satisfactorily 2 2 3 3 7 8 10 10 12 15 15 15 Disclaimer Macquarie University has taken all reasonable measures to ensure the information in this publication is accurate and up-to-date. However, the information may change or become out-dated as a result of change in University policies, procedures or rules. The University reserves the right to make changes to any information in this publication without notice. Users of this publication are advised to check the website version of this publication [or the relevant faculty or department] before acting on any information in this publication. http://unitguides.mq.edu.au/unit_offerings/52041/unit_guide/print 1 Unit guide ECFS895 Private Equity Investment General Information Unit convenor and teaching staff Lecturer (Sydney/Melbourne) Stephane Chatonsky stephane.chatonsky@mq.edu.au Contact via Email Unit Convenor / Lecturer Roger Casey roger.casey@mq.edu.au Contact via Email Credit points 2 Prerequisites (Admission to MAppFin or PGCertAppFin or GradDipAppFin) and ECFS866 Corequisites Co-badged status Unit description This...
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...CLASS LECTURE Review of Topics, Assignment Sheets, and Course Outline The Case Method - Rules for Classroom Discussion Instruction for the Formation of Study & Project Groups B. Professor/Student Introductions C. Readings from Course Packet: 1. Fin 394.4 Syllabus - Course Outline and Grading Policy 2. “Course Introduction” 3. Note to the Student: How to Study and Discuss Cases 4. “The Case Method” - Jeff Sandefer 5. “Classroom Discussion” - Jeff Sandefer 6. “Note on Study Groups” - Jeff Sandefer ASSIGNMENT: 1. PURCHASE THE COURSE PACKET 2. BRING YOUR RESUME TO THE NEXT CLASS 3. BROWSE THE CLASS BLACKBOARD SITE: (HTTP://COURSES.UTEXAS.EDU/) AND LOOK AT THE EXTERNAL LINKS AND COURSE DOCUMENTS POSTED. a. Case Exhibits b. Case Solutions c. Valuation Templates d. Valuation External Links e. Project Information ASSIGNMENT SHEET THURSDAY, JANUARY 19, 2012 CLASS 2 – WORK FOR MONEY OR MONEY WORK FOR YOU? A. Turn in Resume B. Form study groups (self-select 4-6 people with different education, concentration, work experience and cultural background). Send e-mail to the professor with team member’s names. Study teams members must be in same section of the class. C. If you plan to do a consulting project...
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...2003 CFA® Level II Examination Morning Session – Essay Candidate Number: FOR AIMR USE ONLY FOR AIMR USE ONLY _____ _____ _____ _____ _____ _____ THIS BOOK IS THE PROPERTY OF: Association for Investment Management and Research® 560 Ray C. Hunt Drive Charlottesville VA 22903-0668 USA Tel: 434-951-5499 © 2003 Association for Investment Management and Research. All rights reserved. The following list contains the command words used on the Morning Session of the 2003 Level II examination. Candidates may want to refer to this list as they formulate their answers. Calculate: Cite: Compute: Define: Determine: To ascertain or determine by mathematical processes. To quote by way of evidence, authority, or proof. To determine, especially by mathematical means. To set forth the meaning of; specifically, to formulate a definition of. To come to a decision as the result of investigation or reasoning; to settle or decide by choice among alternatives or possibilities. To transmit a mental image, an impression, or an understanding of the nature and characteristics of. To discourse about through reasoning or argument; to present in detail. To judge the value, worth, or significance of. To give the meaning or significance of; to provide an understanding of; to give the reason for or cause of. To establish the identity of; to show or prove the sameness of. To point out or point to with more or less exactness; to show or make known with a fair degree of certainty. To prove or...
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