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Laura Martin: Valuations

Doris Li (3220413) Carmen Chan (3219451) Nick Tatarchuk ()

Topic Areas:
Introduction
Background Information

Multiple Analysis
Regression model Assumptions

Discounted Cash Flow


Assumption

Real Options
Assumptions Stealth Tier

Conclusion
Flowchart

Introduction
- Changes in the Cable Industry - Laura Martin demonstrates the drivers of value in the Cable Industry - Evaluation of the Multiple Analysis, DCF Analysis and the Real Options

Topic Areas:
Introduction
Background Information

Multiple Analysis
Regression model Assumptions

Discounted Cash Flow


Assumption

Real Options
Assumptions Stealth Tier

Conclusion
Flowchart

Multiple Analysis
Multiple Valuation involve the following steps:

1. 2. 3. 4.

Define the multiple Describe the multiple Analyze the multiple Apply the Multiple

Multiple Analysis
Advantages: Simple and Cheap Does not rely on forecasting Relevant Disadvantages: EBITDA inflates earnings Historical Data Subjective

Multiple Assumptions

Exhibit 2 shows the summary of financial data for selected comparable companies

Multiple Assumptions
Firms are similar in size, growth and return

R2 is the coefficient of determination which shows the strength in relationship between the two variables

Multiple Assumptions

EBITDA is calculated at the same period EBITDA only focuses on earnings and excludes interest, tax, depreciation and amortization which could have significant impacts on a company

Regression Vs. Traditional Multiple Analysis


Traditional Multiple Analysis
Uses the average of companies multiples

Regression

Plots results on a graph and a line of best fit is drawn

Topic Areas:
Introduction
Background Information

Multiple Analysis
Regression model Assumptions

Discounted Cash Flow


Assumption

Real Options
Assumptions Stealth Tier

Conclusion
Flowchart

DCF Analysis
DCF Analysis involve the following steps: 1. 2. 3. Forecasting the expected cash flows Estimating the discount rate (WACC) Calculating the value of the corporation

DCF Analysis
Advantages: Clear, consistent decision criteria for all projects Quantitative, decent level of precision Not as vulnerable to accounting conventions Time value of money Disadvantages: Future rates = Unknown Lacks in Accuracy Decision made now Use of FCF Unknown, intangible factors are valued as zero

DCF Assumptions

Assumptions: WACC of 9.3%: unrealistic changes in market conditions and beta Terminal multiple value of 13: realistic conservative in comparison to Exhibit 6 EBITDA: unrealistic Income statement shows fluctuating figures but forecasted EBITDA shows growing at constant rate Asset Intensity ignores stealth tier

Topic Areas:
Introduction
Background Information

Multiple Analysis
Regression model Assumptions

Discounted Cash Flow


Assumption

Real Options
Assumptions Stealth Tier

Conclusion
Flowchart

Real Options

102 MHz, 17 Empty Channels 100% Capital Spending but < 100% Return Black Scholes Model (Refer to later slides) Flexibility in Real Options

Black and Scholes Model

Black and Scholes Model


Applicability - The Current Stock Price of $23.15 - The Strike Price Yes Difficult to estimate

- The Volatility of 50%


- The Option Period of 10 years

Yes
Yes

- The Interest Rate of 5.25%

No

The Stealth Tier


Call Option

The holder of a call option has the right to buy within a specific date at a specified price.
Coxs Call Option
Profit

Opportunity cost of 1.22 Exercise/Strike Price of $22.45


$1.22

$22.45 $23.67

Market Price of Asset

Loss

The Stealth Tier


DCF - Calculate an approximate value for the stealth tier

Multiples - Compare multiples of companies who have incorporated the stealth tier

Topic Areas:
Introduction
Background Information

Multiple Analysis
Regression model Assumptions

Discounted Cash Flow


Assumption

Real Options
Assumptions Stealth Tier

Conclusion
Flowchart

Conclusion
Multiples

Valuations

Real Options

DCF

Conclusion

Multiples

- Comparable to industries - Subjective - Historical Data - Size, Growth Return

Conclusion
DCF

Valuations

Real Options

Conclusion

DCF - Clear decision rule - Quantitative precision - Time value of money - Future rates - Lack of Accuracy - Intangible factors

Conclusion

Valuations

Real Options

Conclusion

Real Options
- Overcomes problem of Stealth Tier - Focus on changes in Technology