1. FIN449 Valuation Michael Dimond

2. Are you using your references? What helpful parts of the book have you found so far? Where are you looking? (Table of Contents? Index?) – Part of Ch 2 (DCF) – Ch 10 (From Earnings to Cash Flows) – Ch 14 (FCFE Discount Models) –...and other places. This is a reference book, not a textbook. You need to dig into it. 96 Common Errors in Company Valuations by Pablo Fernandez & Jose Maria Carabias http://papers.ssrn.com/sol3/papers.cfm?abstract_id=89 5151 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=89 5151

3. Damodaran has resources online http://pages.stern.nyu.edu/~adamodar/ His spreadsheets are not always as helpful as you might want… An example of a valuation summary he did in 2008

4. What Damodaran’s valuation summary looks like: September 2008

5. What Damodaran’s valuation summary looks like: October 2008

6. Bear in mind, these were a summary. We will ultimately want something more detailed for a working document.

7. Nautilus Dynamic, working spreadsheet for Nautilus' financials This should do the arithmetic for you so you can concentrate on the thought process Build your own. Do not use someone else's work. Capture the previous 5 years – SEC has some data available as Excel document, NLS website seems to have more – http://investors.nautilusinc.com/sec.cfm?DocType=Annual&Ye ar= http://investors.nautilusinc.com/sec.cfm?DocType=Annual&Ye ar – Use amended figures if offered Compute historic FCF & FCFE for the past 5 years – FCF = OCF - ΔFA - ΔNWC – FCFE = FCF - ΔDebt - Interest - PfdDiv

8. Be careful of your methods

9. What else is useful in the 10-k?

11. Financial Analysis Financial analysis will answer questions regarding a firm’s past, present and future situation, including How profitable is the company? Did earnings meet analyst forecasts? How strong is the company’s financial position? What are the firm’s sources of profitability? Does the company have the resources to succeed and grow? What limitations to growth exist? Is the firm making good use of assets? Does the company have resources to invest in new projects? What is the company’s future earning power? How does capital structure affect return?

12. Horizontal & Vertical Analysis Each line item can be represented as % of Sales & % of Assets Growth over time Try to pick the most relevant line items What other ratios are helpful to understanding the company?

13. Calculating Free Cash Flow to Equity FCFE = Net income – Net investment + Net debt issued

14. Net Investment Net investment = (Capital expenditures – Depreciation) + Increase in noncash working capital

15. CapEx Line item on Statement of Cash Flows? Calculate the changes (from year to year) of ALL long-term assets shown on the balance sheet. Find the total amount (for a given year) shown in the “Investing” section of the Statement of Cash Flows. Issues?

16. Depreciation “Basic definition” of net cash flow = net income + depreciation Non-cash expense In the “balance sheet” approach to define capital expenditures, depreciation is usually not incorporated explicitly. Why not? If the “Statement of Cash Flows” approach is used, one must explicitly subtract depreciation from capital expenditures (shown in the “Operating” section of the Statement of Cash Flows)

17. Non-cash Working Capital Noncash working capital = (current assets – cash) – current liabilities… what else? Noncash working capital = (current assets – cash) – (current liabilities – interest bearing debt included in current liabilities) Why? Why not include cash?

18. Net Debt Issued “Net” debt issued implies that one must take both debt issuances AND repayments into account Discussion: Constant Debt Ratio Suppose a firm always finances new investment with a fixed debt ratio (say, 30% debt and 70% equity, for example). The general equation for FCFE then may be expressed as follows: FCFE = Net income – (1 – debt ratio)(Net investment) OR FCFE = Net income – (equity ratio)(Net investment)

19. Free Cash Flow to Equity FCFE = Net income – Net investment + Net debt issued

20. Next Time Exam (Tuesday) Valuation #1 (Thursday)