Valuation Models Flashcards
What is the basic idea of Valuation?
Present value of stream of future benefits.
Assume for course that expected returns are what?
Constant in Perpetuity.
What is the WACC?
Weighted average cost of capital is the weighted average of the cost of equity and the cost of debt.
What changes in WACC if interest is tax deductible?
The cost of debt term should be multiplied by (1-tax rate)
Enterprise Cash flow and Economic profit values businesses how?
Measure value of assets and discount at WACC.
What are the 6 steps of Enterprise DCF?
1) Analyse historical performance
2) Forecast Financials and Cash Flows
3) Estimate a Continuing Value
4) Compute the Cost of Capital
5) Enterprise Value to Equity value
6) Calculate and interpret results
Getting NOPLAT from a statement formula:
revenues minus operating costs less any taxes paid is the firm held only core assets and was financed only with equity
Getting Invested Capital from a statement formula
Operating assets required for core business activities (inventory and PP&E) less accounts payable and plus goodwill
Getting ROIC from a statement formula:
ROIC = NOPLAT/Invested cap
NOPLAT from EBITA
adj for Operating Leases and Taxes on EBITA and change in deferred taxes
Explicit Forecast plus conintuing value entails what?
Making decisions about near future changes and then using the McKinsey formula for a continuing value into the future. Do them separately.
The 5 steps for the Enterprise value to Equity Value step of Enterprise DCF are:
1) Estimate average cash flows
2) Get present value of cash flows and continuing value (using WACC)
3) Add non operating assets excess securities and investments gives Enterprise Value
4) Subtract non-equity financial claims debt and minority interest to get Equity Value
5) Divide by number of shares
What does the economic profit model highlight?
How and when value is created.
What is the basic maths principle of Economic Profit? What does it mean?
Economic Profit = Invested Capital x (ROIC-WACC)
OR
Economic Profit = NOPLAT - (Invested Capital x WACC)
No competitive adv means no profit
What is Capital Charge?
Invested Cap x WACC
