Fin 449 week 2

Cash

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F

low Data (

PEP

example)

PEP

F

2/5/20

.

millions

= OCF – ΔNOWC – ΔGFA

FCFF

FCFF 5,010
Michael Dimond: From above

CAT	HBI	DRI	CMG	BLMN	TGT	KR	WMT	COST
10-k filing date	2/13/20	2/19/20		2/5/20	2/11/20	7/24/20	2/26/20	3/11/20	4/1/20	3/20/20	10/7/20
Year Ended…	12/28/19
Shares Outstanding	1,389,544,618 Michael Dimond: From 10-k, front page. Not in	millions
Figures in…
OpInc = Operating Profit	10,291 Michael Dimond: From Income Statement
Effective Tax Rate (t)	21% Michael Dimond: Computed from Income Statement
NOPAT = OpInc x (1-t)	8,126 Michael Dimond: Computed	Net Operating Profit After Taxes
Dep & Amort Exp	2,432 Michael Dimond: From Statement of Cash Flows
OCF = NOPAT + Dep & Amort	10,558 Michael Dimond: Computed	Operating Cash Flow
ΔNOWC	1,575 Michael Dimond: From Balance Sheet	Change (this year minus previous year) in Net Operating Working Capital … CA – CL, but only the operating items
ΔGFA	3,973 Michael Dimond: From Balance Sheet & “Note 4 — Property, Plant and Equipment and Intangible Assets”	Change in Gross Fixed Assets … How Much Did the Company Pay For Long Term Operating Assets … Change in Net Fixed Assets, add Depreciation Expense
		FCFF	5,010 Michael Dimond: Computed	Free Cash Flow to the Firm = OCF minus Reinvestment Need
Interest Expense, net	935 Michael Dimond: From Income Statement
	5,010 Michael Dimond: From above
ΔDebt	(253) Michael Dimond: From Balance Sheet	This year minus previous year, ST and LT items which are debt
Int(1-t)	738 Michael Dimond: Computed	Interest After Taxes
PfdCF	– Michael Dimond: From Statement of Shareholders’ Equity	Pfd = Preferred, PfdCF = Preferred Cash Flow… any Cash going out to Preferred Shareholders
FCFE = FCFF + ΔDebt – Int(1-t) – PfdCF	4,019	Free Cash Flow to Equity, Equity Cash Flow…going to Common Shareholders
Int(t)	197 Michael Dimond: Computed	Tax Benefit… comes from tax savings due to interest paid
UCF = FCFF + Int(t)	5,207 Michael Dimond: Computed	Unlevered Cash Flows, used in the Adjusted Present Value Method (APV Method)

2

>Guidelines

< t

able>

Basic

Valuation Methods: A Rough Guide General Definitions Firm Value = Operating Assets + Non-Operating Assets = Equity + Debt Enterprise Value = Debt + Equity – Non-Operating Assets = Operating Assets Equity Value = Operating Assets + Non-Operating Assets – Debt = Firm Value – Debt =Enterprise Value + Non-Operating Assets – Debt Always use market values in computing the values above Free cash flow = Cash flow available to meet the needs of lenders and the wants of investors Free cash flow for the firm = A variation on free cash flow, eliminating the non-operating items Free cash flow for equity = Cash flow available to meet the wants of investors in common equity: FCFE The cash flows can be tied to the claimants in the same way the balance sheet is organized: CF for Assets = CF for Debt + CF for Equity Relative valuation (using multiples) P/E Ratio Steps: Find the “comparable” ratio of stock price to earnings per share for the subject company Find earnings available to common shareholders for the subject company Multiply P/E ratio times earnings available to common shareholders to find the implied equity value Divide by shares outstanding to find the equity value per share (intrinsic value) P/S Ratio

Steps:

Find the “comparable” ratio of stock price to revenue per share for the subject company Find revenue for the subject company Multiply P/S ratio times revenue to find the implied equity value

Divide by shares outstanding to find the equity value per share (intrinsic value)

EV/

EBITDA

Ratio

Steps:

Find the “comparable” ratio of enterprise value to EBITDA for the subject company Find EBITDA for the subject company Multiply EV/EBITDA ratio times EBITDA to find the value of operations (i.e. Enterprise Value) Add the market value of any non-operating assets Subtract the market value of debt

Divide by shares outstanding to find the equity value per share (intrinsic value)

Discounted cash flow valuation Equity CF Method (FCFE//

Ke

) Determine Free Cash Flows for Equity (FCFE) Model the expected future cash flows for the explicit forecast period (e.g.

5

years) Compute the terminal value of the cash flows Discount the cash flows and terminal value using the cost of equity (Ke) to find the equity value of operations Add the market value of any non-operating assets which were excluded from CF computations

Divide by shares outstanding to find the equity value per share (intrinsic value)

Corporate Valuation Method (

FCFF

//

WACC

) Determine Free Cash Flows for the firm (FCFF)

Model the expected future cash flows for the explicit forecast period (e.g. 5 years)
Compute the terminal value of the cash flows

Discount the cash flows and terminal value using the weighted average cost of capital (WACC) to find the Value of Operations (i.e. Enterprise Value)

Add the market value of any non-operating assets which were excluded from CF computations
Subtract the market value of debt
Divide by shares outstanding to find the equity value per share (intrinsic value)

Adjusted Present Value (A

PV

) Method (FCFF//

Ku

+ TS//Ku)

Steps:
Determine Free Cash Flows for the firm (FCFF)
Model the expected future cash flows for the explicit forecast period (e.g. 5 years)
Compute the terminal value of the cash flows

Discount the cash flows and terminal value using the unlevered cost of capital (Ku) to determine the Unlevered Value of Operations Determine the interest tax savings for the firm (

Interest expense

* tax rate) Model the expected future interest tax savings for the explicit forecast period (e.g. 5 years) Compute the terminal value of the interest tax savings Discount the interest tax savings and terminal value using the unlevered cost of capital (Ku) to determine the value of the tax shield Add the Unlevered Value of Operations to the Value of the Tax Shield to find Value of Operations (i.e. Enterprise Value)

Add the market value of any non-operating assets which were excluded from CF computations
Subtract the market value of debt
Divide by shares outstanding to find the equity value per share (intrinsic value)

Examples (Template)

5.78

.50

t

Ke

WACC

%

Ku

EBITDA

Interest expense

Benchmark P/E
Earnings available to common shareholders
Shares
Benchmark P/S

Equity intrinsic value
Shares
Implied price per share

Benchmark EV/EBITDA
EBITDA
Market value of non-operating assets
Market value of debt

Equity intrinsic value
Shares
Implied price per share

1 2 3 4 5

Equity cash flow (FCFE)
PV

Market value of non-operating assets
Equity intrinsic value
Shares
Implied price per share

Forecast Year: 1 2 3 4 5

Free cash flow (FCFF)

Terminal value
PV

Market value of debt
Market value of non-operating assets
Equity intrinsic value
Shares
Implied price per share

Forecast Year: 1 2 3 4 5

FCFF

Terminal value
PV

Terminal value
PV

Market value of debt
Market value of non-operating assets
Equity intrinsic value
Shares
Implied price per share

Use the following data in the models indicated below to estimate the equity value of your subject firm, “Company X.”
	Benchmark P/E				1	Price-to-Earnings ratio from “Peer” firms
	Benchmark P/S	1.55	Price-to-Sales ratio from “Peer” firms
	Benchmark EV/EBITDA	1			3	Enterprise-Value-to-EBITDA ratio from “Peer” firms
30.00%	Tax rate
15.83%	Cost of equity
Kd	5.00%	Cost of debt
12.0			4	Weighted average cost of capital
12.50%	Unlevered cost of equity
						Shares	1,000,000	Shares outstanding
Terminal growth rate (after year 5)	—————————————————————————————————————————>	4.50%
Forecast Years
Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Sales revenue	9,193,548.4
1,203,703.7
	Earnings available to common shareholders	903,041.8
	Equity cash flow (FCFE)	1,220,095.694	1,275,000.000	1,332,375.000	1,392,331.875	1,454,986.809	1,520,461.216
	Free cash flow (FCFF)	1,172,248.804	1,225,000.000	1,280,125.000	1,337,730.625	1,397,928.503	1,460,835.286
239,234.450	250,000.000	261,250.000	273,006.250	285,291.531	298,129.650
			Market value of debt	5,000,000.000
				Market value of non-operating assets	3,000,000.000
P/E Multiples Valuation
					Equity intrinsic value
					Implied price per share
P/S Multiples Valuation
Sales Revenue
EV/EBITDA Multiples Valuation
Enterprise value
Equity Cash Flow Model: Discounting Equity Cash Flows at Cost of Equity
Ke (Cost of Equity)
		Forecast Year:
			Terminal value
Equity value of operations
Corporate Valuation Model: Discounting Free Cash Flows at WACC
WACC (Weighted Average Cost of Capital)
Value of operations
Adjusted Present Value Model: Discounting Unlevered Cash Flows at Unlevered Cost of Capital
Ku (Unlevered Cost of Capital)
Unlevered value of operations
Interest tax savings
Value of tax shield