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Published byDenis Gray Modified over 9 years ago
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Today’s mission To get everyone to understand the basics of DCF valuation
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Table of Contents 1)What’s Valuation? 2)The Frame Works of the DCF method 3)Case Study: Disco
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What’s Valuation?
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What is valuation? The determination of the economic value or asset of a firm
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Why Value Value? A firm’s main target or goal is to maximize shareholder value Shareholder influence is big in many countries
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Types of valuation Discounted cash flow method Economic Profit Method Abnormal Earnings method Comparable Multiples
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The Frameworks for DCF Valuation
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What is the DCF method? Estimates the value of assets based on expected future free cash flows Discounting it to present value by its cost of capital
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The Concept of Present Value(1) If you were given the choice of receiving $100 today or $100 in one year, which would you choose?
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Economics Answer: Receive it today TodayOne year from now If interest is 5 percent 100100*1.05 Future value
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105/1.05 Discount 100(Present value) 100 100/1.05 Discount
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In simple terms…..
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What are the drivers of valuation? Breaking down the Enterprise Value formula operating free cash flow ○ NOPLAT created by the firm’s primary division subtrated by its capital spending WACC ○ Weighted average cost of capital
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Breaking it down further….. FCF=NOPLAT-Capital Investment Capital Investment=NOPLAT*Investment rate We get…. If we substitute the above equation into the Enterprise value formula we get
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The Drivers ROIC(return on invested capital) The return for every dollar invested G(growth) NOPLAT growth
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What we need To get ROIC and growth we need NOPLAT, invested capital Rearrange income statement and balance sheet
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Rearranging Financial Statements
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The balance sheet Separate the operating investments and non operating investments Separate by operating assets and liabilities, non operating assets liabilities
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The income statement Separate operating from non operating costs Subtract operating costs from total revenue to get Net operating Profits less adjusted taxes
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Free Cash Flow Free Cash flow=NOPLAT+ Operating costs that don’t incur cash-invested Capital
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Multiples Take Multiples(ratios) between revenue and other income statement parts like costs, EBITDA
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Finding the Discount rate
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What is the Discount rate? The discount rate is used for determining the present value of the future cash flows we forecast In the case of DCF we use WACC(The Weighted average of the cost of capital)
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WACC WACC is the opportunity cost of investors choosing between returns on two different assets to invest in D/V=percentage of fianncing that is debt E/V=Pecentage of financing that is equity T=Tax Kd=cost of debt Ke=cot of equity
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Dissecting WACC Cost of equity Beta risk: a number describing a relation of its returns with those financial market as a whole Market risk premium Risk free rate Beta
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Forecasting the Future
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Why do we do it? To find future cash flows and discount them to the present
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How do we do it? Forecasting Future Revenues Using multiples
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Future Revenues(1) looking at sales in by region Looking at sales by division Looking at sales by rivals
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Future revenues(2) Finding drivers of revenue Population, product demand, GDP, political aspects Looking at internal changes Change in corporate governance, IPO,SPO
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Putting Everything To Together
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Terminal Value Enterprise Value=FCF + Terminal Value Terminal value is the present value at a future point in time of all future cash flows with growth constant
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Determining Enterprise Value EV=Operating Segment Value +terminal value + extra cash +securities +other non operating asset value
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Case Study: Disco
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Disco background Japanese company Traded on Tokyo Stock exchange Number one firm in precision cutting
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Sales by division
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Sales by region
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ROIC
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Disco’s drivers Main clients semi conductor manufacturers Semi conductor demand might be a driving force population
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Semi conductors
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Population Population for Japan, Asia, Europe and North America had respective correlations with revenue of Disco by 0.92,0.94,0.96,0.99
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Population estimates(UN)
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Using population Taking population growth as growth estimates in Disco’s revenue we get….
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Operating free cash flow
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Terminal Value and WACC WACC=2% Terminal Value=79560(milliios of yen)
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Putting everything together Enterprise Value=168032(millions of yen) Ideal stock of price=4962
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Stock price today=4260 yen Which means……. BUY
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