MA&CR Valuation

Valuation: Objectives and Process a true picture of a co over a representative time span an estimate of current normal earning power and dividend pay-out estimate of future profitability and growth and the reliability of such expectations translation of all these estimates into valuation of the co and its securities

Valuation of Securities A security can be regarded as a series of DIVIDENDS or INTEREST PAYMENTS receivable over a period of time. Value of security = present value of future cash streams

P0 = [ Ct / ( 1 + r )t ]
Q1. Calculate value of an asset having annual cash flow of Rs.2,000 for next 7 years at discount rate of 18%.
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P0 = [ Ct / ( 1 + r )t ]
= 2000 X [ 1 / ( 1.18)t ]
= 2000 X 3.812 = Rs.7,624

Concepts of Value Book Value: (Accounting concept) = Book value of assets & liabilities = Shareholders funds (NW) = Paidup Eq+Res Replacement Value Liquidation value Going Concern Value
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Market Value

Present Value is defined as: Future cash flows discounted to the present at an appropriate discount rate. T or F?

If the present value of the cash flow X is $200, and the present value cash flow Y $150, what is the present value of the combined cash flow?

Write down the formula for the present value (PV) of an investment that produces cash flows of C1, C2, and C3 in years 1, 2, 3 ( Discount rate is r )

What is the net present value (NPV) of the following cash flow at a discount rate of 15%? 1. T=0 t=1 t=2 2. -120,000 -100,000 300,000

The net NPV of an investment is often written as NPV = C0 + PV. Is C0 usually positive or negative?

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The value of a share of common stock is theoretically equal to the discounted stream of free cash flow per share. T or F?

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Write down the DCF formula for the value of a stock.

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Po = DIVt / ( 1 + r )t

What is the value of a stock giving DIVIDEND at constant rate of growth g, discount rate r ?

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Po = DIV1 / ( r g )

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The present value of a Rs.2.50 dividend received at the end of this year that grows at 4% forever given a cost of capital of 12% is worth how much today?

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The present value of free cash flow is $5 million and the present value of the horizon value is $10 million. Calculate the present value of the business.

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What is a two-stage DCF model? When would you want to use one?

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Write out the formula for the company cost of capital, ignoring taxes.

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What is the cost of capital for a firm with market value of debt of $20 million and market value of equity of $60 million, given a cost of equity at 12% and a cost of debt at 6%? Assume no taxes.

What is the WACC if tax rate is 35%?

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Valuation of Bond

P0 = [ Ct / ( 1 + r )t ] + [ F / ( 1 + r )n ]
= PV of Cash Flows + PV of Maturity Value Q2. A bond whose par value (face value) is $1,000 bears a coupon rate of 12% and has a maturity period of 3 years. The required rate of return on the bond is 10%. Calculate the value of the bond.
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P0 = [ Ct / ( 1 + r )t ] + [ F / ( 1 + r )n ] = $120 X [ 1/ ( 1.10)t ] + [ $1000 / (1.10)3 ]

= 120 X 2.487 + 1000 X 0.751 = $1,049.44

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Q3. This company had never paid dividends, and when it might do so is unknown. The current free cash flow is $100,000, and this FCF is expected to grow at a constant 7% rate. The weighted av. cost of capital WACC is 11%. The company now holds non operating marketable securities of $325,000, and long term debt of $1,000,000. a. What is the value of operations of the company? b. What total value of the company? c. What is the value of its equity?
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a. What is the value of operations of the company? Vop = [ FCF (1 + g ) / { WACC g } ] = [ $100,000 ( 1 + 0.07 ) / { 0.11 0.07} ] = $2,675,000

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b. What total value of the company? Total value = Value of operations + Value of non-operating assets = $2,675,000 + $325,000 = $3,000,000

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c. What is the value of its equity? Value of equity = Total value Value of debt = $3,000,000 - $1,000,000 = $2,000,000

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Q4. The particulars for a company are as follows. The market is stable and no growth is expected. All earnings are paid out as dividends. Debt comprises of perpetual bonds. EBIT = $4.7 mn Tax rate T = 40% Value of debt D = $2 mn rd = 10% rs = 15% Outst. shares no = 600,000 Stock price Po = $30
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a. What is the total market value of companys stock S? b. What is companys total value V? c. What is WACC?

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a. What is the total market value of companys stock S? S = no x Po

= 600,000 x $30 = $18,000,000

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b. What is companys total value V? V =D+S = $2,000,000 + $18,000,000 = $20,000,000

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c. What is WACC? D/V S/V = $2,000,000 / $20,000,000 = 0.10 = $18,000,000 / $20,000,000 = 0.90

WACC = (D/V) rd (1-T) + (S/V) rs = (0.10) (0.10) (0.60) + (0.90) (0.15) = 14.1 %
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Given the EBIT, how do we calculate the Intrinsic Value per share, to ascertain whether the share is over or undervalued by the market?

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