Financial Modeling - The value of intangibles Flashcards
What are examples of intangibles assets that generate cash flows?
- Developed patents, copyrights, trademarks, and licenses
2. DCF adequately value
What are examples intangible assets that are not on the books but generate value?
- Brand name (eg. Coca Cola)
- Reputation (eg Nordstrom)
- Value of human capital (eg Apple)
What are examples of intangibles assets that have the potential to generate cash flows but do not now?
- Patents (eg. Pfizer and GSK)
2. Oil reserves (eg Noble energy)
What are features of some intangibles?
Traditional accounting rules ignore or undervalue them
- Don’t appear on balance sheet
- Significant effect on firm value
- Traditional measures used for valuation may distort value
What are 2 traditional measures used for valuation which may distort value?
- Profitability measures (ROE, ROIC)
2. Market multiples (P/E, EV/EBITDA)
What’s included in DCF for trademarks, copyrights, and licenses?
Include costs of violations and enforcement
What do you find in relative valuation for trademarks, copyrights, and licenses?
Find pure plays
What is a franchise?
A franchise gives its owner the right to market or sell a product or service of a brand-name company. (McDonald’s fast food restaurant)
For a franchise, what are sources of excess return?
- Brand name value (McDonald’s)
- Product/service expertise (eg special sauce)
- Legal monopolies (CBOE seat)
What is brand name value?
A franchise might have a brand name value that enables the franchise to charge higher prices and attract more customers
What is product/service expertise?
A franchise has value because the franchisor provides expertise on the product or service that is being sold.
What are legal monopolies?
Sometimes a franchise may have value becauase the franchise is given the exclusive right to provide a service.
What are 3 special issues with franchises?
- Problems of franchiser will affect franchisee (and are not within her control)
- Franchisor has much more bargaining power than independent
- Franchisor controls exclusivity of rights (eg another store opening)
When valuing a franchise, what do you compare?
Compare cash flows from operating WITH brand name value, product/service/ expertise, and legal monopolies to operating WITHOUT those things.
What are 3 “firm wide cash flow generating intangible assets” characteristics?
- Difficult to isolate
- Company can charge higher prices for its products
- Examples are brand name and value of human capital