Corporate valuation
Par Junecooper • 16 Novembre 2017 • 1 189 Mots (5 Pages) • 575 Vues
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= EBIAT (Earning Before Interest After Taxes)
+ Non cash charges (NCC)
- Capital expenditures (CapExp)
- Change in working capital (InvWC) .
= FCFF
FCFF = EBIT x (1 – Tax rate) + NCC – CapExp – InvWC
FCFE Formula
Net income
+ Non-cash charges (NCC)
- Capital expenditures (CapExp)
- Change in Work Capital (InvWC)
+ (New debt issues – Debt repayments) .
= FCFE
Step 2)
- For FCFF: Cost of capital
- For FCFE: Cost of equity
The cost of capital
- Weighted Average Cost of Capital (WACC)
WACC = [pic 20]
RE – Cost of equity: the required rate of return of shareholders
RD - before-tax cost of debt: the required rate of return of debtholders (the interest rate at which a company can issue new debt)
RD(1-t) - after-tax cost of debt
and - the proportion of equity and debt in capital structure, based on: [pic 21][pic 22]
- Current capital structure [pic 23]
- Target capital structure
Step 3)
- Terminal value = [pic 24]
For FCFF: Terminal value = [pic 25]
For FCFE: Terminal value = [pic 26]
Step 4)
- For FCFF Valuation:
- Firm value = [pic 27]
- Equity value = Firm value – Market value of debt
- For FCFE Valuation
- Equity value = [pic 28]
Discounted cash flow valuation models
- Strengths:
- Widely accepted
- Based on fundamental concept of present value
- Free cash flow: more complex
- Weaknesses
- The model inputs must be estimated
- Sensitivity to changes in input values
Method of comparable
- Based on law of one price → identical assets should sell for the same price
- Price multiples:
- P/E (price earning ratio):
P/E ratio = ; Earning per share (EPS) = [pic 29][pic 30]
- P/S (price sales ratio):
P/S ratio = ; Sales per share =[pic 31][pic 32]
- P/B (Price book ratio)
P/B ratio= ;BV of equity/share=[pic 33][pic 34]
- Enterprise value multiple
Enterprise value= Market value of equity + market value of debt – cash
EBITDA= earnings before interest, taxes, depreciation and amortization
= EBIT + depreciation and amortisation
- Strengths
- Price multiples are widely used by analysts
- EV/EBITDA multiple could be used for companies with different capital structure
- Weaknesses
- P/E multiple is meaningless when earnings are negative
- Identifying comparable companies (based on size, industry, growth opportunities) could be difficult
- Provide information regarding the value of the firm relative to similar companies
Asset based valuation
- Based on the assumption that equity is equal to the difference between assets and liabilities
- … But book values are different from market values. Why?
- … Therefore the book values of assets and liabilities are adjusted to realistic market values
Adjusted equity value= Adjusted asset value – Adjusted liabilities value
- Strengths
- Provides floor values
- Appropriate for firms based primarily on tangible short-term assets, or when a firm is being liquidated
- Useful for companies reporting fair values
- Weaknesses
- Market values are difficult to obtain
- Less appropriate for companies with high proportion of intangible assets
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