Evaluation of Corporations
Discount Cash Flow Model
Returns for investments
Future operating profits
dividends
capital gains
cash flows and firm value
earning vs. cash flows
cash flows statement
Free Cash Flow (FCF)
Operational-investment-tax
Corporate Value
formula: (sigma)FCF/(1+WACC)t次方
weighted ave. cost of capital
wsrs+(1-ws)rd
Ws=own capital %
rs = cost of own capital
rd = cost of financing capital
Estimating cost of own capital
CAPM
rs = rF + B*(rM-rF)
Continuing Value
the accuracy of estimating future FCFs
CV= FCF t+1 / WACC - g
g: fixed growing rate of FCF
under going assumption: stable growth rate g; time first start g
formula: (sigma)FCF/(1+WACC)t次方 + PV(CV)
key determining factors of corp. evaluation
FCFs (&g)
relation between FCF and corporate value?
WACC
factors that influence the growth rate of FCFs?
relation between WACC and corporate value?
factors that influence the WACC
SOLUTION:
relation with CV
FCFs
+
g
WACC
-
WACC ⬆; cv ⬇
ROA (Asset utilization)
FCF
WACC
cost control
economy
Effect
FCFs
smaller
WACC
larger
external financing (how east for a firm to earn money)
easy
wacc is low
struggle
wacc is high
should fixed assets be included in cv?
fixed assets are cash generating tools
unless the assets posses "secure" liquid benefits
should S-T securities investment be included in cv? no it is not
low return - shouldn't keep too much
for emergency only
actually part of FCF is generated from S-T secuities
generally, not included in
exception:
assets to be sold (certain)
liquidation value is secured
Diversified Corp. Evaluation
diversified corp. (ex. J&J)
multiple types of products or services
the correlation between products is fairly low
each of the products is in different industries and faces a dif. competitive environment
3 steps to value div. corps.
differentiate among product departs.
assess the value of each product depart. separately
sum up all the independent depart's value
evaluate the values of dif. product departments
view each product depart. as an independent operating co.
follow the FCF method
BUT
determine transfer pricing for a product depart
Transfer pricing
are the payments made between two product departs.
used in valuing departs.
market price
subtract all sales, advertising, and delivery costs
executive management depart.
handle services that could be shared across the whole firms
personnel, accounting, info system,s
integrate resources and essential management functions
costs
ignore costs that could be %allocated to each depart
include only costs that are impossible to allocate
services that it provides to itself should be absorbed by the executive manamgent depart as its own costs
income
tax benefit by inter-departmental offsetting of revenue and losses
tax shielding effect due to enhancement of leverage funding
the cost of capital
all product departments
view every depart. as an independent operating subsidiary
use the cost of capital of a firm in the same industry with similar risk level
executive management depart
costs that are impossible to allocate and for tax benefit by inter-departmental offsetting of revenue losses
cost of own capital
tax shielding effect due to enhancement of leverage funding
cost of fin capital
Internet corp. evaluation-relative value
PE
for $1 of earning, how much do i pay for that
compare to other company
PS
for companies with negative net income
operation cash flow is negative
doesnthave to tax
air-broadcast tv co
the value of advertising
subscribers evaluation method
marketvalue/subsribers ratio
for internet service providers
Hyperlink evaluation method
market value/ hyperlinks
for companies that provide
serach engines
web portals(MSN)
Average daily page view
for web portals
newspaper magazine
MV/numbers of visitors
web portals
content provides