s13 valuation 0014

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					            Financial Statements and Valuation
                              (Welch, Chapter 13)



                                     Ivo Welch




                    UCLA Anderson School, Finance 430, Winter 2012


                                 January 1, 2012


Rough Time: 1:45h



                                                                      /
                                                                     11
Create an IRS Income Statement and IRS Cash Flow
Statement


  I   3-Year Project
  I   $250 capital expense in year 1
  I   $50 capital expense in year 2
  I   Net Revenues (EBITDA): $200, $400, $200
  I   Cost of Capital: 15% / year. (Not really used, just sketched.)
  I   Corporate Tax Rate: 40% / year
  I   Debt: $200 (r=10%)


  I   IRS allows Depreciation: 2 years, linear.
         I The usual US IRS schedules are 5 years, 7 years, or 10 years, sometimes accelerated (depending on Congress) and depending on
             the asset. W e are too lazy to deal with so many columns, so we sketch it with a 2 -year depreciation schedule.




                                                                                                                                          2/1
Create the IS and CFS!




                         3/1
What are the project and equity cash flows and NPV?




                                                      4/1
Thought E xpe ri m ent : Proj ect C ash Fl ows



    Project cash flows here are not “as- if-u n levered” cash flows. (An
     unlevered firm would get less interest tax shield, and therefore it would
     have to pay more in taxes.)
    Instead, project cash flows here is money that accrues to debt and equity
     holders combined. If you wish, imagine that you provide both types of
     capital. As far as your (project) cash flows are concerned, you are not
     getting money from creditors (yourself!) and you are not paying money to
     creditors (yourself!).
    Put differently, would you ever subtract out interest cash flow from your
    project cash flows without getting any cash inflow?




                                                                                 5/1
What Formula Did You Use?




                            6/1
Could you have just discounted net income? Close enough?




                                                           7/1
Would it make sense to discount EBITDA? Or net income
plus depreciation?




                                                        8/1
Sho uld you t ake the de preci ation fig ur e fr om the inc ome
s t a t e m e n t o r t h e d e p r e c i a t i o n f i g u r e f r o m t h e c a s h f l ow
statement?




                                                                                               9/1
What is the difference between deferred tax and
taxes-payable?




                                                  10/1
The reported GAAP financials force a three -year
depreciation schedule. How would the publicly -reported
financials look look? Where on the financials would you
find IRS Tax Payments?




                                                           1
                                                          1/1
What reverse -engineering formula could you use?




                                                   12/1
Customers pay half of what they owe immediately, half of
what they owe one year later — what are your actual cash
flows now?




                                                           13/1
How do your public fina ncials look like?




                                            14/1
What reverse -engineering formula could you use?




                                                   15/1
What else is in Working Capital? Why do you work with
changes in working capital?




                                                        16/1
How w o u ld y o u ov e r r e p o rt e a r ni n gs ? C as h f l ows ? H ow
would you try to detect this as an external analyst?




                                                                             17/1
What is Investment in Goodwill?




                                  18/1
What would you put into a complete valuation formula?




                                                        19/1
Goldman Sachs Income Statements, 2011




                                        20/1
Goldman Sachs Balance Sheet, 2011




 PS: Why does GS’s liabilities not add up?? What does “BS” abbreviate?   21/1
Goldman Sachs Cash Flow Statement, 2011




                                          22/1
GS: What were its project cash flow in Sep 30, 2011?
Equity cash flow?




                                                       23/1
Faster, Faster—Any Quicker And More Accurate
Formulas?




                                               24/1
What do you believe on the Balance Sheet?




                                            25/1

				
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