Financial Valuation

Question 1

What are the two methods to value a company?

Answer 1

Method 1: Adjust discount rate (WACC)
Method 2: Adjust cash flows (APV-adjusted present value)

Question 2

Explain Method 1

Answer 2

You put the adjustment into the discount rate and you dont do anything with the cashflows

Question 3

Explain Method 2

Answer 3

You put the adjustment into the cashflows and you dont do anything to the discount rate

Question 4

What do you adjust for?

Answer 4

It is the adjustment for tax effect

Question 5

What is FCF?

Answer 5

FCF = Cash inflow - cash outflow

Question 6

Cash inflow

Answer 6

Sales*Operating profit margin

Question 7

Cash outflow

Answer 7

Capital expenditure (CAPEX)
+ New investments in working capital
+ Taxes

Question 8

Capital expenditure

Answer 8

Change in PPE (= new PPE)
+ Depreciation (=replacement)

Question 9

How to forecast cash flows?

Answer 9

Percentage of sale approach

Question 10

What are the steps in the percentage of sales approach?

Answer 10

Forecast the sales:
Immediate growth rate (year 1-3)
Perpetual growth rate (year 4+)
Express other cash flow items as percentage of sales
COGS/sales
Depreciation/sales
Net PPE/sales
Working capital/sales

Question 11

Horizon value

Answer 11

The present value at a future point in time of all future cash flows when we expect stable growth rate forever.

Question 12

Why is the WACC restrictive?

Answer 12

You need to assume constant capital structure.
Leverage and risk cannot change over time.
APV does not assume this