Beruflich Dokumente
Kultur Dokumente
McGraw-Hill/Irwin
DCF Valuation and cash accounting for value does not work
Move to accrual accounting for value in Chapters 5 and 6
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CF 1
CF2
CF3
CF4
CF5
Equity
0 Dividend Flow 1 2 3 4 5 T
d1
d2
d3
d4
d5
dT TVT
The terminal value, TVT is the price payoff, PT when the share is sold Valuation issues :
The forecast target: dividends, cash flow, earnings? The time horizon: T = 5, 10, ? The terminal value? The discount rate?
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4-6
Will it work?
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Some Financial Math: The Value of a Perpetuity and a Perpetuity with Growth
The Value of a Perpetuity
A perpetuity is a constant stream that continues without end. The periodic payoff in the stream is sometimes referred to as an annuity, so a perpetuity is an annuity that continues forever. To value that stream, one capitalizes the constant amount expected. If the dividend expected next year is expected to be a perpetuity, the value of the dividend stream is
E Value of a perpetual dividend stream = V0
d1 E 1
V0E
d1 E g
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Disadvantages
Relevance: dividends payout is not related to value, at least in the short run; dividend forecasts ignore the capital gain component of payoffs. Forecast horizons: typically requires forecasts for long periods; terminal values for shorter periods are hard to calculate with any reliability
C1
C2
C3
C4
C5
I1 C1-I1
I2 C2-I2
I3 C3-I3
I4 C4-I4
I5 C5-I5
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C1 I1 C1 I1
C2 I2 C2 I2
C3 I3 C3 I3
C4 I4 C4 I4
C5 I5 ---> --->
________________________________________________ Time, t 1 2 3 4 5
4-11
The Continuing Value for the DCF Model A. Capitalize terminal free cash flow
C T 1 I T 1 CVT F 1
Will it work?
4-12
139,414
2,472 $40.67
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4-15
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536
627 (91) 0.03
828
541 287 0.04
968
894 74 0.06
1,422
1,526 (104) 0.07
1,553
2,150 (597) 0.09
1,540
3,506 (1,966) 0.11
2,573
4,486 (1,913) 0.13
3,410
3,792 (382) 0.17
2,993
3,332 (339) 0.20
10
16
27
32
26
25
24
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The most uncertain (speculative) part of a valuation is the continuing value. So valuation techniques are preferred if they result in a smaller amount of the value attributable to the continuing value DCF techniques can result in more than 100% of the valuation in the continuing value: See General Electric and Starbucks
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A firm reduces free cash flow by investing and increases free cash flow by reducing investments: Free cash flow is partially a liquidation concept!! Note: analysts forecast earnings, not cash flows
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Disadvantages
Suspect concept:
free cash flow does not measure value added in the short run; value gained is not matched with value given up. free cash flow fails to recognize value generated that does not involve cash flows investment is treated as a loss of value free cash flow is partly a liquidation concept; firms increase free cash flow by cutting back on investments.
Forecast horizons: typically requires forecasts for long periods; terminal values for shorter periods are hard to calculate with any reliability Not aligned with what people forecast: analysts forecast earnings, not free cash flow; adjusting earnings forecasts to free cash forecasts requires further forecasting of accruals
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Calculating Free Cash Flow from the Cash Flow Statement: Nike, Inc., 2010
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A Common Approximation
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RevenueAccruals
Value added that is not cash flow Adjustments to cash inflows that are not value added
ExpenseAccruals
Value decreases that are not cash flow Adjustments to cash outflows that are not value added
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Revenue =
Cash receipts from sales + New sales on credit Cash received for previous periods' sales Estimated sales returns and rebates Deferred revenue for cash received in advance of sale + Revenue previously deferred
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+ Amounts paid in the past for generating revenues in the current period
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Earnings and Cash Flows Earnings from the business (operating earnings) = Earnings + Net interest (after tax) = Free cash flow + investment + accruals = [C - I]+ I + accruals = C + accruals The earnings calculation adds back investments and puts them back in the balance sheet. It also adds accruals.
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