Professional Documents
Culture Documents
Logistics
I.
My CV/Research
II.
Syllabus:
a) Office Hours
- Thu 2:30-4:30pm CBA 6.228
b) TA Review Sessions :
- TBD
c) Textbook
d) Assignments/Cases
e) Grading
f) Classroom Policies
g) Discussion Board
h) News of the day
III. Slides
IV. Make-up class this FRIDAY same time same room.
Overview
-
2
Company Valuation
Introduction: Accounting Principles
Discounted Cash Flow (DCF) Models
FFCF
Discount Rate
No Friction Model
WACC (Weighted Average Cost of Capital)
APV (Adjusted Present Value)
Multiples
Other topics: Other valuation models, LBOs, M&A, etc.
II.
Introduction to Options
Financial options
Binomial model
Black-Scholes-Merton model
Real options
Overview - 3
Todays Content
I.
http://www.cnbc.com/2015/10/16/so-how-much-is-uber-reallyworth.html
II.
Homework Assignment #1
VI. Problems
Overview - 4
I. Company Valuation
Assets
Cash & Marketable
Securities (Cash)
Inventories (Inv)
Accounts receivable (AR)
Property, Plants and
Equipment (PPE)
Harley Davidsons
Balance Sheet
FY 2012
Debt = STD+LTD
Equity= PE+CE
Equity
Simplified
Income Statement
HOG
Income
Statement
FY 2012
Accounting Terminology
Annual Report = Annual Accounts = Financial Statement = 10-K
Balance Sheet = Statement of Financial Position= Statement of
Condition
Invested Capital = D + E NOA
Leverage = D/(D+E)
Income Statement = Income and Expense Statement = Statement
of Earnings = Profit and Loss Account (P&L)
Revenues = Sales = Top Line
EBITDA = Operational Cash Flow = Operating Cash Flow
EBIT = Operating Income = Operating Profit
Earnings = Net Earnings = Net Income = Profit (or Loss) = Bottom
Line
Shareholders = Equity holders = Stock holders
Stakeholders = Shareholders, bondholders, employees, suppliers,
customers, government,. Anybody who has a stake in the
company
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/
datafile/variable.htm
Company
Valua6on
Introduc6on
-
13
I. Company Valuation
Introduction Accounting Principles
Discounted Cash Flow (DCF) Models
FFCF
Discount Rate
No Friction Model
WACC (Weighted Average Cost of Capital)
APV (Adjusted Present Value)
Multiples
Other topics: LBOs, M&A, etc.
10
20
30
40
50
60
70
80
E[CFt ]
V =
t
(
)
1
+
r
t =0
o CF = Cash Flow
o r = Discount Rate
The DCF model can be used for a multitude of purposes (firm
valuation, real estate rent setting, bond pricing, retirement plans,
investment decisions, )
Company
Valua6on
DCF
Models
-
16
E[FFCFt ]
VA =
= Enterprise Value
t
(1 + r )
t =0
The market value of equity (MVE) and the stock price (P) are
obtained by:
MVE
P=
N
E[FFCFt ] E[RV ]
VA =
+
t
T
(
)
(
)
1
+
r
1
+
r
t =1
T
PROS
The
process
of
doing
a
DCF
helps
you
learn
how
the
business
operates
(e.g.
Do
they
have
fat/thin
or
stable/vola6le
opera6ng
margins/sales
?
Do
they
spend
a
lot
on
marke6ng?
on
R&D?
Is
the
business
capital
intensive,
or
capital
light?)
The
model
is
very
amenable
to
sensi6vity
analysis,
which
allows
you
to
get
an
understanding
of
the
important
value
drivers
DCF
value
should
be
less
aected
by
the
current
mood
of
the
market
i.e.,
panic
or
euphoria
DCF
can
help
you
detect
a
bubble
DCF
is
fundamental
value;
PV
of
the
cash
ows
received
as
an
owner
is
a
powerful
idea.
The
projec6ons
can
accommodate
superior
informa6on
CONS
DCF Model
V A, 0
FCF1
=
= Perpetuity
r
V A, 0
FCF1
=
= Growing Perpetuity
rg
V A, 0
FCF1 1
=
1
= Annuity
r 1 + r
V A, 0
T
FCF1 1 + g
=
1
= Growing Annuity
r g 1 + r
Company
Valua6on
DCF
Models
-
20
I. Company Valuation
Introduction Accounting Principles
Discounted Cash Flow (DCF) Models
FFCF
Discount Rate
No Friction Model
WACC (Weighted Average Cost of Capital)
APV (Adjusted Present Value)
Multiples
Other topics: LBOs, M&A, etc.
Taxes
A FFCF
IS
D
E
Gov.
FFCF = FFCF from Operating Activities + FFCF from Investing Activities
Company
Valua6on
FFCF
-
22
DA Tax Shield
Add back DA
4.
Year
Revenue
Direct
Costs
Indirect
Costs
Depreciation
Tax
Rate
Debt
Interest
Rate
on
Debt
Working
Capital
Gross
Fixed
Assets
2,000
3,000
10,000
1
1,000
500
200
50
30%
2,100
5%
3,300
10,050
Solutions
FFCF=EBIT*(1-T) + DA - NWC Capex + AS CGT
FFCF from Operating Activities
1. Macro-economic conditions
Key question: how will the economy fare in the future?
Population and demographics
Gross National Product (GNP)
Labor market, unemployment
Business cycle
Inflation
Fiscal policy and taxation
International trade, exchange rate and globalization
2. Industry dynamics
Key question: What are main trends and characteristics
of the industry the firm is in?
Industry analysis using Porters Five Forces
Intensity of the rivalry among industry competitors
Threat of new entrants into the industry
Threat of substitution (substitute for the industrys
products and services
Bargaining power of the buyers of the industrys
product
Bargaining power of the suppliers of inputs for the
industry
Company
Valua6on
FFCF
-
30
2. Industry dynamics
12/31/2001 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013 3/31/2014 6/30/2014 9/30/2014
Q1
Q2
Q3
14.0%
18.6%
24.9%
15.0%
19.4%
26.0%
15.5%
19.3%
25.7%
16.2%
19.7%
27.6%
18.3%
22.4%
31.1%
18.9%
23.4%
37.8%
16.5%
20.9%
39.3%
7.9%
10.3%
29.3%
-0.6%
-0.7%
-2.6%
1.6%
1.8%
6.6%
6.2%
7.4%
24.8%
6.8%
8.1%
24.4%
7.8%
8.9%
24.4%
10.9%
12.9%
33.7%
14.1%
16.2%
42.1%
6.0%
6.9%
18.3%
42.9%
16.3%
23.9%
19.6%
12.3%
42.0%
14.8%
25.0%
20.9%
13.5%
43.9%
13.9%
28.1%
24.1%
15.5%
45.6%
13.6%
30.3%
26.3%
16.7%
45.6%
13.4%
30.4%
26.8%
16.9%
46.0%
13.5%
30.6%
27.1%
16.8%
44.7%
14.6%
28.1%
24.8%
15.1%
42.8%
16.5%
23.6%
19.5%
10.4%
44.5%
20.5%
15.3%
10.1%
-1.2%
50.1%
21.3%
23.3%
15.8%
3.1%
46.7%
19.9%
25.1%
20.1%
11.3%
46.9%
19.9%
26.1%
21.5%
11.2%
46.9%
19.1%
26.9%
22.4%
12.4%
47.2%
16.0%
30.0%
26.1%
15.4%
51.4%
14.3%
36.3%
29.5%
17.7%
59.4%
21.5%
36.3%
20.4%
11.5%
114%
28
19
112%
38
19
100%
41
22
97%
41
22
108%
44
24
112%
41
20
109%
32
16
76%
19
14
52%
16
13
51%
16
13
55%
21
11
61%
21
13
63%
20
12
71%
19
14
79%
25
20
52%
16
10
2.3
34.0%
25.4%
16.1%
43.7%
28.3
34.5
2.1
34.2%
25.5%
12.7%
42.2%
59.5
71.1
2.9
33.6%
25.2%
17.0%
39.9%
67.1
78.3
2.8
40.3%
28.7%
17.7%
41.3%
61.7
71.1
3.6
39.1%
28.1%
23.3%
41.3%
42.2
47.8
2.2
61.8%
38.2%
19.5%
50.2%
28.2
31.8
1.8
88.4%
46.9%
21.9%
58.0%
18.8
21.3
2.1
185.0%
64.9%
36.1%
73.0%
8.5
10.3
1.9
270.7%
73.0%
52.7%
77.0%
1.6
2.4
2.0
260.7%
72.3%
56.8%
76.6%
2.1
3.1
1.7
236.4%
70.3%
47.2%
75.0%
3.9
4.9
2.7
199.5%
66.6%
57.1%
72.1%
5.0
6.0
1.6
174.8%
63.6%
41.3%
68.0%
6.3
7.5
1.5
161.2%
61.7%
39.6%
67.5%
10.6
12.2
1.8
159.2%
61.4%
43.5%
66.6%
14.3
17.7
1.6
165.8%
62.4%
40.9%
67.2%
6.6
11.8
21.6%
26.5%
29.0%
32.5%
32.6%
23.8%
11.5%
13.0%
28.2%
31.4%
31.1%
31.6%
27.5%
-29.8%
8.5%
17.1%
18.5%
16.9%
19.8%
11.4%
-6.0%
6.5%
7.0%
8.7%
7.8%
15.8%
-4.2%
-7.1%
8.6%
9.7%
10.5%
8.7%
15.4%
5.3%
10.7%
-1.3%
-8.7%
-9.2%
-10.5%
-3.1%
2.2%
10.3%
-2.3%
-18.7%
-23.7%
-33.5%
-31.9%
38.4%
-4.1%
-23.4%
-48.2%
-58.5%
-108.9%
-108.8%
16.9%
-49.7%
-2.6%
52.7%
55.7%
-365.9%
-364.5%
3.0%
46.3%
11.6%
19.9%
41.7%
308.8%
317.7%
2.6%
10.6%
6.0%
9.3%
12.8%
4.1%
6.2%
-5.2%
0.0%
6.4%
8.7%
10.1%
17.6%
21.4%
2.6%
10.2%
19.6%
30.8%
36.3%
44.9%
44.9%
3.5%
-50.3%
39.5%
83.2%
78.2%
93.0%
94.1%
7.1%
43.1%
-14.0%
19.2%
-19.8%
-18.2%
-16.9%
6.6%
131.0%
Margin Analysis
Gross Margin %
SG&A Margin %
EBITDA Margin %
EBIT Margin %
Net Income Margin %
Asset Turnover
Total Asset Turnover
Accounts Receivable Turnover
Inventory Turnover
Short Term Liquidity
Current Ratio
Total Debt/Equity
Total Debt/Capital
LT Debt/Capital
Total Liabilities/Total Assets
EBIT / Interest Exp.
EBITDA / Interest Exp.
Growth Over Prior Year
Total Revenue
EBITDA
EBIT
Net Income
Diluted EPS before Extra
Total Assets
Capital Expenditures
Homework Assignment #1
Individual Assignment posted on course website
Objective: Choose a company that you will value
during the rest of the course, and compute historical
FFCF
I suggest that you select a company that is NOT:
Diversified (conglomerate)
Newly IPO
Multinational corporation
In financial distress/near bankruptcy
In the financial services industry
You can use the HOG spreadsheet as template
Due Mon Jan 25th at the beginning of class
Paper format only. Do not email me with the
assignment. If you can not attend the class, please
give it to one of your classmates.
Company
Valua6on
FFCF
-
40
Reminder:
Fill up the classroom policy survey by tomorrow
(Thursday) at 5pm
Make-up class this Friday same room same time.
a.
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b.
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12.1
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14.6
16.1
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16.1
17.7
19.5
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h.
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j.
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Results