12. Valuation

Question 1

firm value

Answer 1

• what other would pay for it (market value)
• the value of all assets in the balance sheet minus the debt of the company
• A = C + P = E + D
  → E = A - D
  → firm value would equal to E

Question 2

asset value

Answer 2

• the value of an investment (asset) is determined by the future cash flow this asset generates
• perpetuity: if the interest rate is i then the perpetuity of C has a value of C/i
  → only possible if C is constant/forever

Question 3

risky cash flow

Answer 3

if the annual payment C varies then the cash flow is risky

• an average value (EXPECTED VALUE) E may exist
• the expected squared deviations are called the VARIANCE of the cash flow
• the square root of the variance is the STANDARD DEVIATION (SD)

Question 4

risk future dividends

Answer 4

• if investors are risk-averse, they demand a risk-premium
• the current value of risky cash flow is lower than the value of a secure cash flow C

→ willingness to pay for acquiring the right to obtain this cash flow is lower the higher the risk involved

• they demand a higher rate of return → a higher profit or lower initial investment

Question 5

rate of return

Answer 5

ROR = (payback - investment) / investment

Question 6

income statement equation

Answer 6

• net revenues = (unit price - VAT) x units sold
• variable cost = marginal cost x units sold = (price - marginal cost) x quantity
• operated profit = revenue - variable cost
• EBIT = operated profit - fixed cost
• EBT = operated profit - fixed cost - interest
• taxes = corporation income tax + trade tax = t . EBT
• net income = (1-t) x EBT
• dividends = net income - retained earning

Question 7

evaluation of financial statement

Answer 7

• NET INVESTMENT = INVESTMENT - DEPRECIATION
• net income can be manipulated
• receiving dividends out of the net income is not the only goal owners pursue

→ they may also interested in maintaining or even extending the substance of the company

• the substance of the firm may also increase if the inventory grows
• investors who own bonds benefit from the interest payment

Question 8

free cash flow

Answer 8

FCF is a performance measure:

• which can not be easily manipulated
• that sums up how much money the firm is able to put into net investment, inventory, interest and dividends
• beyond the free cash flow, the firm may also use additional short-term debt as a funding source for these goals

Question 9

free cash flow

Answer 9

FCF = net income + depreciation - new investments + interest payment + inventory growth + debt repayment - additional debt