Assignment - Session 1 Reviewing Equity Valuation

Eon - Adjusted versus Reported Net Income (€m)

2008 2009
Net income attributable to shareholders of E.ON AG 1,283 8,396
Net book gains -1,324 -4,815
Restructuring and cost management expenses 524 443
Other non-operating earnings 6,260 48
taxes and minority interest on non-operating earnings -1,171 1,104
Special tax effects -103 -20
Income/loss from discontinued operations, net 128 172
Adjusted net income attributable to shareholders of E.ON AG 5,597 5,328

Sector multiple 10
Eon premium 10%
Eon multiple 11
Estimated equity value 58,608

Caveat
This answer assumes that we completely agree with the company's definition of Adjusted net income - no
y Valuation

n of Adjusted net income - not necessarily the case!

Assignment - Session 2 Identifying components for enterprise value: Deutsche T

Deutsche Telekom - Balance Sheet (€m)

Assets 2009 Liabilities
Current Assets 23,012 Current Liabilities
Cash and cash equivalents 5,022 Financial liabilities
Trade and other receivables 6,757 Trade and other payables
Current recoverable income taxes 144 Income tax liabilities
Other financial assets 2,001 Other provisions
Inventories 1,174 Other liabilities
Other assets 7,914

Non-current assets 104,762 Non current liabilities

Intangible assets 51,705 Financial liabilities
Property, plant and equipment 45,468 Provision for pensions
Investments accounted with equity method 147 Other provisions
Other financial assets 1,739 Deferred tax liabilities
Deferred tax assets 5,162 Other liabilities
Other assets 541
Total assets 127,774 Total liabilities
Equity
Non controlling interest
Total shareholders' equity
Total liabilities and equity

Financing items to be included in enterprise value

Equity 36,354
Non controlling interest 5,583
Total shareholders' equity 41,937

Liabilities
Current Financial Liabilities 9,391
Non Current Financial Liabilities 41,800
Provision for pensions 6,179
Total Liabilities 57,370
Cash and cash equivalent 5,022

Total Enterprise Value at Book Value 94,285

Caveat
The question was about identifying the financing assets and liabilities to be included in enterprise value.
As discussed in class, the book values are not necessarily the right numbers to be included in enterprise v
se value: Deutsche Telekom

2009
24,794
9,391
6,304
511
3,369
5,219

61,043
41,800
6,179
2,161
7,153
3,750

85,837
36,354
5,583
41,937
127,774

d in enterprise value.
ncluded in enterprise value
Assignment - Session 3 NWC at Household & Personal Care

Beiersdorf (€m) Henkel (€m)

2008 2009 2008 2009
Revenues 5,970 5,748 14,131 13,573
Cost of goods sold 1,979 1,882 8,190 7,411

Cash 1,510 1,722 338 1,110

Receivables 894 906 1,847 1,721
Inventories 634 561 1,482 1,218
Other current assets 254 228 1,146 607
Total current assets 3,292 3,417 4,813 4,656

Trade payables 690 699 1,678 1,885

Other short term liabilities 607 628 1,896 1,568
Total current liabilities 1,297 1,327 3,574 3,453

Net Working Capital - narrow

Absolute amount 838 768 1,651 1,054
As a percentage of sales 14.0% 13.4% 11.7% 7.8%

Net Working Capital - broad

Absolute amount 1,995 2,090 1,239 1,203
As a percentage of sales 33.4% 36.4% 8.8% 8.9%

Caveat
Both using the broad and narrow definitions of working capital should lead to the conclusion that Henkel is
Using cash conversion ratios would have resulted in the same conclusion.

Assignment - Session 3 ROIC at H&M (SKr m)

2008 2009 2009 Average

Sales 88,532 101,393
EBIT 20,138 21,644
EBIT margin 22.7% 21.3%
Tax 26% 26%
NOPAT 14,902 16,017

Operating
Net tangible fixed assets 12,441 14,811 13,626
Goodwill 0 0 0
Other intangible assets 1,656 1,674 1,665
Other fixed assets 1,775 1,797 1,786
Net Working Capital 766 2,966 1,866 *NWC
Other non debt liabilities -1,818 -2,038 -1,928
Invested Capital 14,820 19,210 17,015
Associated investments 0 0 0
Other investments 0 0 0
Total capital employed 14,820 19,210 17,015

Financing
Total common equity 36,950 40,613 38,782
Minority Interests 0 0 0
Net cash/(debt) -22,130 -21,403 -21,767 *Net Cash
Other debt deemed provisions 0 0 0
Net pension asset 0 0 0
Total capital employed 14,820 19,210 17,015
Associated investments 0 0 0
Other investments 0 0 0
Invested Capital 14,820 19,210 17,015

ROIC 94%

Caveats
Return on Invested Capital is calculated on an average invested capital basis rather than year end
Cash is treated as financing rather than operating. Treating cash as operating requires adjustments to NO
onclusion that Henkel is more efficient than Beiersdorf when defined as net working capital as a % of sales
 A/R +Inventory+Other Current Assets - Current Liabilities

Cash and Cash Equivalents + Long-term debt

r than year end

ires adjustments to NOPAT to include interest income
s a % of sales
Assignment - Session 4 Equity betas for European Paper

Equity beta Debt Weighting

SCA 1.16 33%
Stora Enso 1.24 29%
UPM 1.17 34%

Equity beta Debt Weighting

SCA 0.85 50%

Assignment - Session 4 Akzo Nobel

Capital structure Cost of WACC
Market capitalization 10,746 Unlevered beta
Minority interest 1,250 Corporate Tax Rate
Gross debt 3,679 Risk free rate
Cash 1,595 Equity risk premium
Pension deficit 1,450 Credit spread

Cost of Capital
Total Equity 11,996
Total Net Debt 3,534
Equity weighting 77%
Debt weighting 23%
Debt/Equity factor 29%
Unlevered beta 0.90
Corporate Tax Rate 26%
Equity beta 1.10

Cost of equity 9.4%

Cost of debt 4.4%
Weighted average cost of capital 8.3%

Announced share buy back

Before After
Amount of share buy back 2,000
% of market cap repurchased 19%
Equity 11,996 9,996
Debt 3,534 5,534
Equity weighting 77% 64%
Debt weighting 23% 36%
Debt/Equity 29% 55%
Cost of equity - post buy back
Before After
Unlevered beta 0.9 0.9
Corporate Tax Rate 26% 26%
Equity weighting 77% 64%
Debt weighting 23% 36%
Debt/Equity weighting 29% 55%
Equity beta 1.1 1.3
Risk free rate 4.5% 4.5%
Equity risk premium 4.5% 4.5%
Cost of equity 9.4% 10.2%
Cost of debt 4.4% 4.4%
WACC 8.3% 8.2%
Equity Weighting Tax rate Unlevered beta
67% 26% 0.85
71% 23% 0.94
66% 16% 0.82

Equity Weighting Tax rate Unlevered beta

50% 26% 1.48

0.90
26%
4.5%
4.5%
1.5%
Assignment - Session 5 EPS impact and M&A

Based on 2011 Estimates

1) All cash offer (2.75 cash+debt)
SAP Sybase Transaction
Sales 12,583 1,056
EBIT 3,991 325
Margin 31.7% 30.8%

Cost synergies 0 0 90
EBIT adjusted 3,991 325

Financing income (expense) 10 -30 -66

Profit before tax 4,001 295
Tax rate 29% 29%
Profit after tax 2,841 209
Number of shares outstanding (m) 1,186

EPS adjusted 2.40

Purchase price 2,750

Interest rate 2.4%
Additional interest charge for acquisition -66

Assignment - Session 5 Cost of capital in M&A

Pre - acquisition Pre - acquisition
At acquisition value
Diageo Moet Hennesy Moet Hennesy
Asset beta 1.1 0.9 0.9
Marginal Corporate Tax Rate 25% 35% 35%
Equity weighting 44% 57% 67%
Debt weighting 56% 43% 33%
Debt/Equity factor 125% 75% 50%
Equity beta 2.1 1.3 1.2
Risk free rate 4.0% 4.0% 4.0%
Equity risk premium 4.5% 4.5% 4.5%
Cost of equity 13.6% 10.0% 9.4%

Risk Free Rate 4.0% 4.0% 4.0%

Credit spread 2.0% 1.5% 1.5%
Cost of debt (pre-tax) 6.0% 5.5% 5.5%
Cost of debt (post tax) 4.5% 3.6% 3.6%
Weighted Average Cost of Capital 8.5% 7.3% 7.4%

COMPONENTS OF WACC
Total Equity 20,000 4,000 6,000
Total Debt 25,000 3,000 3,000
Total Enterprise Value 45,000 7,000 9,000

Equity weighting 44% 57% 67%

Debt weighting 56% 43% 33%
Total capital 100% 100% 100%

Bid premium 50.0%

Caveat
The cost of capital to value the target company should reflect the cost of capital of the target based on th
 Combined
13,639
4,316
31.6%

90
4,406

-86
4,320
29%
3,067
1,186

2.59 8.0%

sition value
of the target based on the acquisition value for equity and other components of enterprise value
Assignment - Session 6 DDM - HSBC

Dividends
2010 Dividends per share 0.49
Expected Growth rate 4.0%

Cost of equity
Beta of the stock 1.00
Riskfree rate 4.00%
Risk Premium 4.50%
Cost of Equity 8.5%

Gordon Growth Model Value 10.9

implied growth rate in share price of US$7 1.5%

Assignment - Session 6 Nordic Banks

SEB SHB Swedbank
Adjusted ROE 2012E 12.3% 18.8% 10.0%
CoE 10.5% 10.5% 10.5%
Growth 3% 3% 3%
2012E adjusted BVPS 44.6 123.8 72.8

Target Price to Book Value 2011 1.2 2.1 0.9

Implied Fair Value 55.3 260.9 67.9
Swedbank
12.0%
10.5%
3%
72.8

1.2
87.3