BNR - Uz intern

Revista Economica

REGRESSING ENTERPRISE VALUE ON SEVERAL PREDICTORS

Ph.D. student VIORICA MĂDĂLINA Manu, mvmadalina@yahoo.com, professor

ILIE Vasile, vasile.ilie@fin.ase.ro

Bucharest University of Economic Studies, Council for Doctoral Studies

Abstract
The purpose of this research is to find a function that describes the enterprise
value (the dependent variable) of large companies acting in the steel industry, based
on the price multiples’ role in business valuation, with a special attention to the
market capitalization and other relevant indicators.

Keywords enterprise value, capitalization, comparison, EBITDA, growth rate

JEL classification: G15, G32

1. Introduction

The market multiples used in company valuation as part of the market

approach (relative valuation), when the company is compared to similar ones
(in terms of scope of activity, size, number of employees, etc.) can show
whether a particular stock is overvalued, undervalued, or properly valued
(Kaplan Schweser, 2012). For the traded companies operating in the same
field or similar fields, we use comparisons of the price earnings ratio (PER),
price to book value (PBV), dividend yield (DIVY) (ION & et.al., 2017). In
this paper, we study the case of the world leading steel producer,
ArcelorMittal, which is traded on New York Stock Exchange (symbol MT).
The aim of this paper is to analyse the value maximization theory and use
Enterprise Value (EV) and Equity Value multiples for valuation, in order to
help companies increase their value.

2. Literature review
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Value maximization asks managers to make all the decisions to

increase the total long run market value of the firm, i.e. financial claims –
including equity, debt, preferred stock and warrants (Jensen, 2000). Valuation
is forward looking, whereas accounting tries to help the investor understand
the company today and historically (backward-looking). (Küntzel, 2018)
The objective of maximizing shareholder value was studied with the help of
multiples (such as PER, PBR, PSR, EV/ EBITDA, EV/ EBIT and EV/
SALES).
Enterprise Value (EV) is the negotiated business value in M&A, often viewed
as the cost of a takeover:

EV = Cap.+ pref.s.MV +DMV –C -ISh.T

Cap.= market capitalization
pref.s.MV = the market value of preferred stock
DMV= the market value of debt1
C=cash equivalents
I=short-term investments. (CFA, 2016)

EV is the present value of the amount to be paid, either in cash or a

combination of cash and future payments (Hwa, 2012).
EV/EBITDA is the most common EV multiple, where:

EBITDA= De.+EBIT

Where: De = Depreciation Amortization and Accretion

EBIT = Earnings before Interest and Taxes

EBITDA2 is used for assessing the performance of companies, as a source of

funds to pay off the financial stakeholders in the company (lenders,
shareholders, the government, etc.). Usually EBITDA is positive, even when
net income is negative, allowing for EV/EBITDA to be calculated when a P/E
multiple may not be available.
EV/Operating Income can also be used as an alternative to
EV/EBITDA.

1
or estimated based on comparable bond values. (CFA, 2016)
2
earnings before interest, taxes, depreciation, and amortization
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Revista Economica

Stock price must relate to its financials and that book value (BV), cash flow,
interest and ratios fundamentally value common stock. (ION & et.al., 2017).
Using market multiples estimated through multiple regressions removes the
subjectivity of choosing a ‘comparable’ set. Synthetic multiples estimated on
the basis of fundamental data of companies determine which of the
fundamentals of such companies significantly influence the multiples and
quantify that influence and help assess company and financial management
performance (Popa, 2014).
Damodaran (2018) ran a set of regressions across traded companies in the
United States using the following inputs:
g = The estimate of earnings growth rate for the next 5 years or gEPS, the
expected growth rate in EPS3 for next 5 years;
Payout ratio= Dividends/Earnings;
the return on equity (ROE) = Net Income/ Book value of Equity;
Return on capital (ROIC) = EBIT (1- tax rate)/ Invested Capital;
Operating Margin = Pre-tax Operating Income/ Sales;
Invested Capital = Book value of equity + Book value of debt – Cash;
Tax Rate = Effective tax rate = Taxes paid/ Taxable Income;
DFR = Total Debt/(Total Debt + Market value of equity);
RIR = Reinvestment Rate = (Cap Ex – Depreciation + Chg in WC)/ EBIT (1-
t).
According to the Damodaran’s model, PBV for ArcelorMittal (MT) is:
1.59 + 7.32 gEPS - 0.64 Beta + 9.69 ROE +0.24 Payout
= 1.59 + 7.32 (.147) - 0.64 (1.25) + 9.69 (.136) + 0.24 (.20) = 3.23

3. Methodology

The analysis of valuation indicators gives some insight, while existing cross
correlation between ArcelorMittal and comparable companies offers more
information.

In figure 1, the correlation between the enterprise value and the market
capitalization is strong, both decreasing abruptly.

3
Earnings Per Share is net income to common shareholders divided by shares
outstanding (
https://corporatefinanceinstitute.com/resources/knowledge/finance/earnings-per-share-
eps-formula/ )
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Figure 1. The relationship between ArcelorMittal Market Capitalization and its

Enterprise Value

Source: (Macroaxis LLC, 2018)

The dependent variable y (also known as explained, endogenous or

resultative) is the Enterprise Value, which is a more accurate representation of
ArcelorMittal value than its market capitalization, because it takes into
account the existing debt of the company.
The independent variable (explanatory, factorial, exogenous) is the share price
and Market capitalization (or market cap), which is the total value of the
shares outstanding of ArcelorMittal (current share price times the number of
ArcelorMittal outstanding shares). Such regression models are noted as in
equation [1]:

Y= α + β1x1 + e [1]
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Revista Economica

In table 3, the regression results are presented.

Table 3. Regression statistics

REGRESSION STATISTICS For the company (MT)
Arithmetic Mean 49,724,433,497
Geometric Mean 46,092,382,364
Coefficient Of Variation 40.32
Mean Deviation 14,609,895,886
Median 49,614,716,642
Standard Deviation 20,046,820,134
Range 69,963,850,199
R Value (0.70)
R Squared 0.49
Significance 0.008089
Slope (3,588,449,067)
Source: (Macroaxis LLC, 2018)

4. Results

The PEG regression uses the natural log of the expected growth rate. Thus, if
your expected growth rate is 15%, you will use ln(.15) = -1.8971
In table 4, there are the main indicators for valuation used.

Table 4. Valuation Measures for the company (MT)

Valuation measures 2018
Market Cap 33.662B
Beta 3.22
PE Ratio (TTM) 7.41
EPS (TTM) 4.46
Forward Dividend & Yield 0.10 (0.29%)
1y Target Est 43.05
Source: (Yahoo Finance & Morningstar, Inc., 2018)
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Revista Economica

5. Conclusions

This paper emphasizes the essential role of the enterprise mission and
recommends the enterprises to focus their activity towards the objective of
enterprise value maximization.
The development of an economy's financial markets is closely related to its
overall development as well-functioning financial systems provide good and
easily accessible information, with low transaction costs and subsequently
improve resource allocation and boosts economic growth. (The WFE)
Both banking systems and stock markets enhance growth, for poverty
reduction: at low levels of economic development, commercial banks tend to
dominate the financial system (in Romania); as we can notice in the developed
European countries and other developed economies, domestic stock markets
tend to become more active and efficient relative to domestic banks. Open
economies with sound macroeconomic policies, good legal systems, and
shareholder protection attract capital and therefore, have larger financial
markets. Recent research on stock market development shows that modern
communications technology and increased financial integration have resulted
in more cross-border capital flows, a stronger presence of financial firms
around the world, and the migration of stock exchange activities to
international exchanges. Many firms in emerging markets now cross-list on
international exchanges, which provides them with lower cost capital and
more liquidity-traded shares. However, this also means that exchanges in
emerging markets may not have enough financial activity to sustain them.
(The WFE)

6. References

 CFA. (2016). Retrieved 2018, from https://analystprep.com/cfa-level-1-

exam/equity/enterprise-value-multiples/
 Damodaran, A. (2018, 01). Regressions of Multiples on Fundamentals:
Market Wide. Retrieved 05 2018, from
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/MReg18.
html#USRegressions
 Damodaran, A. (n.d.). Variables used in Data Set. Retrieved 06 2018, from
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/variable.
htm
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 DESJARDINS, J. (2016). All of the World’s Stock Exchanges by Size.

Retrieved from http://money.visualcapitalist.com/all-of-the-worlds-stock-
exchanges-by-size/
 Hwa, O. K. (2012). Valuation for Mergers and Acquisitions. Retrieved
2018, from http://invest-
fair.com/misc/ifmy2012/slides/Valuation_for_Mergers_and_Acquisitions.
pdf
 ION, M. V., & et.al. (2017). How much is the listed enterprise worth? The
price multipliers’ approach. FIBA (p. 77). București: Theoretical and
Applied Economics. Special Issue.
 Jensen, M. C. (2000). Value Maximization and the Corporate Objective.
Harvard Business School.
 Macroaxis LLC. (2018). Market Cap VS Enterprise Value. Retrieved
2018, from
https://www.macroaxis.com/invest/symbolRatiosCompareOverTime/MT?
r1=Market-Capitalization&r2=Enterprise-Value
 Macroaxis LLC. (2018). MT - USA Stock. Retrieved 2018, from
https://www.macroaxis.com/invest/symbolRatiosCorrelations/MT?t=vd
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value. Journal of Banking & Finance.
 Popa, M. (2014). THE STUDY OF FINANCIAL INDICATORS THAT
REFLECT THE PERFORMANCE AND VALUE OF COMPANIES
LISTED ON THE ROMANIAN CAPITAL MARKET - Estimating
market multiples. Applied Financial Research-DAFI.
 The WFE. (n.d.). Retrieved 05 2018
 World Federation of Exchanges database. (2018). Market capitalization of
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contextual=region&locations=RO&view=chart
 Yahoo Finance & Morningstar, Inc. (2018, 06 29). Retrieved 2018, from
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XJpb2RpY2l0eSI6MSwiY2FuZGxlV2lkdGgiOjEsInZvbHVtZVVuZGVy
bGF5Ijp0cnVlLCJhZGoiOnRydWUsImNyb3NzaGFpciI6dHJ1ZSwiY2hh
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Vzc2lvbnMiOnt9LCJhZ2dyZWdh