Financna analiza 2 by HC111130032625

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									Finančna analiza 2
       doc. dr. Aljoša Valentinčič
       Professor dr. Neil Garrod
   (University of Greenwich, London)

             Jesen 2010
                    Operating Value                 ch 7




•   Assets are formed by 2 distinct groups
     – operating assets
     – financial assets
•   Value of whole company can be obtained by summing the value of
    the two constituent parts (using, e.g. RE or AEG)
                                          .




•   Using RE or AEG
     – The added value depends on the residual future profits or future
        change in residual profit

     – Financial assets reflected in the balance sheet are usually
       valued at market value
         • Premia only result from under or over valued book values

     – Premiums therefore come only from operating assets
                           How to disaggregate the balance
                                      sheet…                             p.239




                • … into operating and financial parts:
                           Krakt. poslovne obv.                                                       Expressed in net form
Kratkoročna sredstva       - do dobaviteljev (!!!)                                                       (debt– financial
- denar                    - do države, zaposlenih,…                                                      investments)
- zaloge
- terjatve do kupcev       Kratk. finančne obv.                                        Kratk. finančne obv.
- kratk. fin. naložbe      - kratk. posojila                    Neto obratni kapital   - kratk. posojila

                           Dolgoročne finančne obv.
                                                                                       Dolgoročne finančne obv.
Dolgoročna sredstva                                         Dolgoročna sredstva
- opredmetena                                               - opredmetena
  (zemlj., zgradbe,                                           (zemlj., zgradbe,
   oprema,…)               Lastniški kapital                   oprema,…)               Lastniški kapital
 - neopredmetena           - kar so vplačali lastniki        - neopredmetena           - kar so vplačali lastniki
  (blagovne znamke,        - kar je podjetje zaslužilo in     (blagovne znamke,        - kar je podjetje zaslužilo in
  patenti, dobro ime, …)     zadržalo v podjetju              patenti, dobro ime, …)     zadržalo v podjetju
Modifications of Residual Earnings (RE)
                model(1)
• General formula for RE model:
                  RE 1       RE 2       RE 3
   V0E  B0                                    ...
                (1  rE )1 (1  rE )2 (1  rE )3

                    where REt = earningst – (rE·book valuet-1) =
                    Earnt – (rE·Bt-1)

• Premium = V0E – B0 = PV future RE
• If company covers only the cost of capital → premium = 0 →
  V0E = B0
• If assets “marked to market” then no need to forecast RE as
  value – intrinsic value = market price
                                                                  What is the
                                                           condition for this?
Modifications of Residual Earnings (RE)
                model(2)
• Only need to forecast RE for assets that are not valued at
  market value in the balance sheet:
   – These are mainly operating assets…
   – The premium comes from them
   – therefore:
     V0E = B0 + PV expected RE from assets not recorded at
     market value
                                             Composition of RE                                 p. 243



                 • Total residual earnings can be divided into two parts,
                   financial and operating
                     – Each one originates from a different part of the company
                              • net operating assets – NOA
                                = current assets – current liabilities
                              • net financial obligations – NFO
                                = financial liabilities – financial investments
                       – Each generates its residual earnings according to its own
                         cost of capital                     This is “EVA”, “ekonomski dobiček”,…

                               Components of Earnings                                         Measure of residual earnings
                                                            Components of Book Value (B)
                                      (Earn)                                                              (RE)

                                                                                             OIt – rF · NOAt-1 = ReOI
                             Operating Income – OI         Net Operating Assets – NOA

                             Net Financial Expense – NFE   Net Financial Obligations – NFO
                                                                                             NFEt – rD · NFOt-1 = ReNFE

                                                           Common Stockholders’ Equity
                             Čisti dobiček                                                   Earnt – rE · Bt-1 = RE
                                                           (CSE)


Beware unfortunate choice of nomenclature “rF “ which
         represents cost of capital for the company!!!                                       Which we already recognise…
            Net Financial Obligations
• What is the value of net financial obligations?

                 ReNFE 1 ReNFE 2              ReNFE T
  V0  NFO 0 
   NFO
                                      ...              NFO 0
                  1  rD   (1  rD )2         (1  rD )T

• Where ReNFEt=NFEt – rD·NFOt-1 (residual net financial
  expense)
   – What is the expected difference between the cost of debt
      and the interest rate?
• The value V0NFO equals book keeping value of net financial
  obligationsNFO0
• From a business finance perspective we would say that NFO
  project is a zero NPV project!!!
   – Discount rate corresponds exactly with the cost of capital
   – The market for debt is highly competitive and, therefore,
      efficient
                          Operating Value
• For operating value we replace RE with ReOI:

                     Re OI 1 Re OI 2               Re OIT      CVT
   V0NOA  NOA 0                         ...            
                     (1  rF ) (1  rF )2         (1  rF )T (1  rF )T
• Operating value drives enterprise value (as RE = ReOI)
• How will the continuing value (CV) perform?
   – As before, 3 possible scenarios:

      CVT  0
               Re OIT 1
      CVT 
                  rF
               ReOIT 1
      CV T 
                rF  g
    Residual Operating Income Model
• Residual operating income model
• Value of ownership capital = anchor + premium:


                              NO
                             V0 A
                                       NFO
                                                       V0
               ReOI1           ReOIT        CVT        
                                                       
  V0  NOA 0 
   E
                         ...                       NFO0
               (1 rF )       (1 rF )T
                                          (1 rF )T


               ReOI1           ReOIT      CVT
       B0              ...          
               (1 rF )       (1 rF )T (1 rF )T
                   “Drivers” of ReOI
• Residual Operating Income Model=
  (RNOA – required rate of return from operating)·NOA

  ReOIt = (RNOA – rF)·NOAt-1            RNOA=OIt/NOAt-1
                                        A clearer version of what we have
                                        called ROA…
• Two drivers of value
   – return on net operating assets above required rate of
     return
   – Quantity of asset to achieve return

   – As Before!!
    Primer – Nike, Inc.
                                                2004A     2005E      2006E      2007E     2008E
    Dobiček iz poslovanja (OI)                               1,170      1,204     1,246      1,327
    Neto poslovna sredstva (NOA)                  4,551      4,815      5,248     5,820      5,951
    RNOA (%)                                               25.70%     25.00%      23.7&    22.80%
    Preostali dobiček iz poslovanja (ReOI)                   778.6      789.9     794.7      826.5
    Diskontna stopnja                                        8.6%       8.6%       8.6%      8.6%
    SV( ReOI)                                                716.9        670     620.5      594.2
    Skupna SV ReOI                                2,602
    Continuing value (CV)                                                                   18,686
    SV končne vrednosti                          13,434                                    (g=4%)

    = Vrednost poslovanja (enterprise value )    20,587

    - Knj. vr. neto finančnih sredstev              289
    = Vrednost lastniškega kapitala              20,876

    Ocenjena vrednost delnice                     79.35

    AFE                                           5.80%

•       Accuracy very good also with this modification of the model
         – forecast error only +5,80%!
•       Residual earnings from operations growing

                            Re OI1             Re OI 4 Re OI 5 /(rF  gReOI )
          V0E  B0                    ...              
                           (1  rE )1
                                              (1  rE ) 4
                                                            (1  rE )4
Modification of Cum-Dividend Earnings (AEG)
                   Model

• General formula (in forward form):


            1            AEG2       AEG3           
   V0E         Earn1                        ...
           rE           (1  rE )1 (1  rE )2      

• AEG = (Earningst + rE·Dividendt-1) – (1+rE)·Earningst-1
       = (gcum-dividend– rE)·Earningst
• Growth of profit with dividends originates from operating
  assets not from financial assets!
   – Remember the previous examples of bank accounts on
     slide 3!
        Modification of AEG Model (2)
• Focus of AEG is on growth of cum-dividend earnings
• How to divide the growth of cum-dividend profit into that from
  operating and that from financial assets?
   – “Dividends from financing” are simple:
        • All payments to debt holders (interest + principal) – “F”
    – Dividends, “d”, to the owners are also simple
        • All net dividends d (dividends, issue of new shares,
          purchase of shares)
    – What about “dividends fro operations”?
        • These must be a sustainable source for d and F
        • This is a simple cash flow (FCF)!!!
            – FCF = after tax cash flow from operations – required
              investment into operating assets p. 240
              FCF = C – I = F + d = OI - ΔNOA         By the way this also means that we not
                                                              have to deal with forecasts of FCF after
                                                             we have established OI and the required
                                                                                         reinvestment
 Residual Change of cum-dividend earnings
          from operations (AOIG)

• Residual change of cum-dividend earnings = abnormal
  operating incomes growth (AOIG) =

  = cum-dividend operating earnings – normal earnings from
                                              operations

  = (Operating earningst + rF·FCFt-1) – (1+rF)·Operating
                                                         earningst-1
  = (gcum-dividend operating earnings – rF)·Operating earningst-1

• Analogous with…
Example – Nike, Inc.
                                                    2004A     2005E      2006E      2007E      2008E
Dobiček iz poslovanja (OI)                                     1,170      1,204      1,246      1,327
Neto poslovna sredstva (NOA)                         4,551     4,815      5,248      5,820      5,951
Free cash flow (C-I = OI - NOA)                                 906        771        674      1,196

Dobiček iz reinvestiranih "dividend" - FCF-ja (po 8,6%)                     77.9       66.3         58
Dobiček iz poslovanja z "dividendami"                                   1,281.90     1312.3      1385
Rast dobička iz poslovanja z "dividendami"                                9.57%      9.00%     11.16%
Normalni dobiček iz poslovanja                                          1,270.60   1,307.50   1,353.20
Presežna sprememba dobička iz poslovanja z "div." (AOIG)                    11.3        4.8       31.8

Diskontna stopnja                                                         8.60%      8.60%      8.60%
SV(AOIG)                                                                    10.4        4.1       24.8
Skupaj SV(AOIG)                                                 39.3
"Nadaljevalna" vrednost                                                                           719
SV "nadaljevalne" vrednosti                                     561.3                          (g=4%)
Forward OI za 2005                                           1,170.00
                                                             1,770.60

Kapitalizacijska stopnja                                       0.086

= Vrednost poslovanja (enterprise value )           20,587

+ Knj. vr. neto finančnih sredstev                     289
= Vrednost lastniškega kapitala                     20,876

Cena delnice (263.1 mio delnic)                     $79.35

 •     Capitalise forward earnings by calculating PV of residual change of cum-dividend
       operating earnings and the PV of continuing value
 •     Estimate of value is the same as before
        – AOIG is the change in ReIO…
                      What is rF?
•   It reflects the operations of the whole company
     – They are financed by both debt and equity
     – Weighted average cost of capital (WACC) from
         operating finance!
    WACC = wD·rD + wE·rE

    – rD being after tax (beware – different nomenclature to
      Brigham)
    – Weights are measured at market values not book values
    – WACC is marginal not an average
                         Examples – costs and structures of
                                capital, USA 2005
                                                                                                   After-tax
                         Number of             Cost of             Std Dev in   Cost of                                  Cost of
     Industry Name                   Beta                E/(D+E)                          Tax Rate Cost of     D/(D+E)
                           Firms               Equity                Stock       Debt                                    Capital
                                                                                                     Debt
Air Transport                   45      1.40    11.12%    69.27%      55.55%      5.89%     19.71%     4.73%    30.73%     9.16%
Beverage (Alcoholic)            22      0.56     7.06%    79.95%      49.54%      5.64%     13.24%     4.89%    20.05%     6.63%
Beverage (Soft Drink)           19      0.61     7.30%    86.45%      30.97%      5.39%     17.31%     4.46%    13.55%     6.91%
Biotechnology                   87      1.63    12.23%    96.48%      91.85%      6.39%      3.29%     6.18%     3.52%    12.01%
Chemical (Basic)                18      1.03     9.31%    76.81%      82.98%      6.39%     16.27%     5.35%    23.19%     8.39%
Coal                            12      0.92     8.81%    89.03%      40.43%      5.64%      4.20%     5.40%    10.97%     8.43%
Computer Software/Svcs         395      2.06    14.29%    96.74%      86.60%      6.39%     10.48%     5.72%     3.26%    14.01%
Grocery                         23      0.86     8.50%    61.59%      36.13%      5.39%     24.86%     4.05%    38.41%     6.79%
Internet                       306      2.78    17.73%    98.23%     129.81%      6.39%      4.23%     6.12%     1.77%    17.52%
Newspaper                       19      0.86     8.50%    82.26%      47.17%      5.64%     28.87%     4.01%    17.74%     7.70%
Semiconductor                  121      2.97    18.63%    95.30%      85.00%      6.39%      9.91%     5.76%     4.70%    18.02%
Semiconductor Equip             14      2.91    18.37%    92.34%      60.75%      6.39%     20.39%     5.09%     7.66%    17.35%
Tire & Rubber                   13      1.19    10.11%    52.90%      64.70%      6.39%     16.27%     5.35%    47.10%     7.87%
Tobacco                         11      0.66     7.58%    83.43%      25.96%      5.14%     23.64%     3.92%    16.57%     6.97%
Toiletries/Cosmetics            20      0.82     8.31%    83.93%      44.25%      5.64%     20.09%     4.51%    16.07%     7.70%
Water Utility                   16      0.64     7.48%    67.20%      57.55%      5.89%     31.17%     4.05%    32.80%     6.36%
Wireless Networking             66      2.60    16.85%    83.84%      89.20%      6.39%      7.09%     5.94%    16.16%    15.08%
Market                        7113      1.15     9.93%    73.82%      61.87%      6.39%     16.27%     5.35%    26.18%     8.73%
    Alternative perspective on required
             return on equity rE
• Reconfiguring the WACC formula provides an interesting
  insight into rE: D
                    V0
   rE  WACC         E
                         (WACC  rD )
                    V0

                               (financial risk)
  (business risk)




• If the company has net financial assets rather than net
  financial debt:

       V0NOA  V0NFA
   rE  E rF  E rNFA
        V0     V0
              “Enterprise” multipliers
• Financial debts
   – Increase P/B indicator
   – Decrease P/E indicator
   – Financing does not affect the price of the share
   – If multipliers of similar companies are used for evaluation
     then we transfer with P also the effects of debt
        • Different companies, different optimal structure of capital
• Can we eliminate financial leverage from P/B and P/E?
          “Enterprise” P/B indicator              p.489




• Value of Equity = value of operations – value NFO:
   V0E V0NOA  V0NFO
      
   B0 NOA  NFO

   value of P/B therefore depends on the effects of financing…

• “Enterprise” P/B – removes the effects of financing
   – Must focus on operations alone!
                           V0NOA
      " Enterprise P / B 
                  "
                           NOA0
“Hamada formula” for P/B indicator
• An indicator without financial effects must be modified for
  capital structure:
                 V0  V0
                  NOA   NFO
   Levered P/B             
                 NOA  NFO


                         NFO   V0      
                   NOA             NOA
                  V0
                                   1
                  NOA 0  B   NOA 0 


           P/B without the
           effects of financing   Book value of “debt-
                                  to-equity”
                                           How does “levered” P/B change with
                                                      Levered P/B vs. Financial Leverage

                          7.0
                                                    levels of debt?
                                                                                          VNOA/NOA = 3

                          6.0
                                                                                                         VNOA/NOA = 2.5


                          5.0
                                                                                                                            “Enterprise” P/B
                                                                                                           VNOA/NOA = 2
Levered P/B (V E / CSE)




                          4.0



                          3.0

                                                                                                           VNOA/NOA = 1.5


                          2.0



                          1.0                                                                              VNOA/NOA = 1




                          0.0
                                     0.0     0.3    0.5    0.8     1.0     1.3      1.5        1.8       2.0      2.3
                                                                                                           VNOA/NOA = 0.5
                          -1.0
                                                                   Leverage (NFO/CSE)
                                 •         Effect of borrowing on levered P/B increases with level of enterprise P/B
                                            – So higher error if using unadjusted multipliers
                         Relationship Between the 2 forms of
                                         P/B   Levered vs. Unlevered P/B

                         3.0
                                                FLEV = 1.5

                                                   FLEV = 1.0
                         2.5
                                                       FLEV = 0.75

                         2.0
                                                                                              FLEV = 0.5

                                                                                         FLEV = 0.25
                         1.5
                                                                                   FLEV = 0
Levered P/B (V E /CSE)




                         1.0



                         0.5



                         0.0
                                0.0      0.5                 1.0            1.5    2.0

                         -0.5



                         -1.0



                         -1.5
                                                       Unlevered P/B (VNOA /NOA)

 •                          Greater the debt the greater the difference between enterprise P/B and levered P/B
                             – Larger are the errors when using uncorrected multipliers…
                     Historical Median Values of P/B
                             (Penman, 2007)
2.50


                                                   P/B levered                             P/B unlevered

2.00




1.50




1.00




 .50




 .00
       1963

              1965

                     1967

                            1969

                                   1971

                                          1973

                                                 1975

                                                        1977

                                                               1979

                                                                      1981

                                                                             1983

                                                                                    1985

                                                                                            1987

                                                                                                   1989

                                                                                                          1991

                                                                                                                 1993

                                                                                                                        1995

                                                                                                                               1997

                                                                                                                                      1999

                                                                                                                                             2001
            “Enterprise” P/E indicator
• Earnings used in the calculation of P/E is after interest (and
  taxes)
    – It includes the effect of financing
• Problem: growth in earnings changes with financial leverage
  (look at the bank account example!), but does not create
  residual change in cum-dividend earnings (AEG)
• Forward form:
                              Operating value V0NOA
      Forwardenterprise P/E                 
                               ForwardOI       OII

• Trailing form:

                           V0  FCF0
                            NOA
   TrailingenterpriseP/E 
                               OI0
    “Hamada formula” for forward P/E
• Forward P/E has to be adjusted for financial leverage impact
  on earnings
   – Definition of financial leverage… → depends on (net)
     interest expense

                             V0 
                                E

                             Earn  
      Levered forward P/E        
                                 1
                              NOA
                             V0     Neto obresti1  V0
                                                     NOA
                                                             1        
                                                                 
                              OI1      Earn1       OI1 Neto obresti1 

                                    Forward measure
                    P/E without     of financing
                    effects of      leverage (interest
                    leverage        relative to
                                    earnings)
               “Hamada formula” for trailing P/E

    • In the same way, if we move back one period:
                                   V0E  d 0 
                                   Earn  
           Levered trailing P/E             
                                         0 

                                  V0NOA  FCF0
                                               
                                        OI0
                                   Net int erest 0  V0NOA  FCF0         1           
Trailing “enterprise” P/E
without the effect of leverage
                                                                                 1
                                      Earn 0            OI0        Net int erest 0 

                                                  Forward measure
                                                  of financial
                                                  leverage (interest
                                                  relative to
                                                  earnings)
    Historic median Values of trailing P/E
              (Penman, 2007)
25.00

                                                         P/E levered                         P/E unlevered

20.00




15.00




10.00




 5.00




  .00
        1963

               1965

                      1967

                             1969

                                    1971

                                           1973

                                                  1975

                                                          1977

                                                                 1979

                                                                        1981

                                                                               1983

                                                                                      1985

                                                                                               1987

                                                                                                      1989

                                                                                                             1991

                                                                                                                    1993

                                                                                                                           1995

                                                                                                                                  1997

                                                                                                                                         1999

                                                                                                                                                2001

								
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