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Today’s mission  To get everyone to understand the basics of DCF valuation.

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Presentation on theme: "Today’s mission  To get everyone to understand the basics of DCF valuation."— Presentation transcript:

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2 Today’s mission  To get everyone to understand the basics of DCF valuation

3 Table of Contents 1)What’s Valuation? 2)The Frame Works of the DCF method 3)Case Study: Disco

4 What’s Valuation?

5 What is valuation?  The determination of the economic value or asset of a firm

6 Why Value Value?  A firm’s main target or goal is to maximize shareholder value  Shareholder influence is big in many countries

7 Types of valuation  Discounted cash flow method  Economic Profit Method  Abnormal Earnings method  Comparable Multiples

8 The Frameworks for DCF Valuation

9 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

10 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?

11 Economics Answer: Receive it today TodayOne year from now If interest is 5 percent 100100*1.05 Future value

12 105/1.05 Discount 100(Present value) 100 100/1.05 Discount

13 In simple terms…..

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15 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

16 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

17 The Drivers  ROIC(return on invested capital) The return for every dollar invested  G(growth) NOPLAT growth

18 What we need  To get ROIC and growth we need NOPLAT, invested capital Rearrange income statement and balance sheet

19 Rearranging Financial Statements

20 The balance sheet  Separate the operating investments and non operating investments  Separate by operating assets and liabilities, non operating assets liabilities

21 The income statement  Separate operating from non operating costs  Subtract operating costs from total revenue to get Net operating Profits less adjusted taxes

22 Free Cash Flow Free Cash flow=NOPLAT+ Operating costs that don’t incur cash-invested Capital

23 Multiples  Take Multiples(ratios) between revenue and other income statement parts like costs, EBITDA

24 Finding the Discount rate

25 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)

26 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

27 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

28 Forecasting the Future

29 Why do we do it?  To find future cash flows and discount them to the present

30 How do we do it?  Forecasting Future Revenues  Using multiples

31 Future Revenues(1)  looking at sales in by region  Looking at sales by division  Looking at sales by rivals

32 Future revenues(2)  Finding drivers of revenue Population, product demand, GDP, political aspects  Looking at internal changes Change in corporate governance, IPO,SPO

33 Putting Everything To Together

34 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

35 Determining Enterprise Value EV=Operating Segment Value +terminal value + extra cash +securities +other non operating asset value

36 Case Study: Disco

37 Disco background  Japanese company  Traded on Tokyo Stock exchange  Number one firm in precision cutting

38 Sales by division

39 Sales by region

40 ROIC

41 Disco’s drivers  Main clients semi conductor manufacturers Semi conductor demand might be a driving force  population

42 Semi conductors

43 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

44 Population estimates(UN)

45 Using population  Taking population growth as growth estimates in Disco’s revenue we get….

46 Operating free cash flow

47 Terminal Value and WACC  WACC=2%  Terminal Value=79560(milliios of yen)

48 Putting everything together  Enterprise Value=168032(millions of yen)  Ideal stock of price=4962

49 Stock price today=4260 yen Which means……. BUY


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