Short Business Lease by vou46833

VIEWS: 10 PAGES: 10

• pg 1
```									1   Prepare an economic balance sheet using 3-5 years of data
CORE      Assets and liabilities central to the basic business
NONOP Assets and liabilities that could be separated from the basic business

DEBT       Long and short term, capital lease obligations
OCAP       Preferred stock, employee stock options, minority interest
COMEQ      Common stock, retained earnings

2   Prepare an adjusted cash flow statement
3   Analyze the cash flow worksheet to determine model assumptions
4   Forecast future cash flows using assumptions
5   Calculate the cost of capital
6   Discount the future cash flows to find CORE value
7   Add CORE to NONOP from economic balance sheet. Subtract DEBT and OCAP. Result = COMMEQ.
8   Divide COMEQ by shares outstanding. Result = Implied price per share.
9   Perform sensitivity analysis.
t = COMMEQ.
Format of Economic Balance Sheet
COMEQ = CORE + NONOP - DEBT - OCAP

GAAP Balance Sheet Reclassified
CORE                     300 Operating assets minus operating liabilities
NONOP                    100 Nonoperating assets minus nonoperating liabilities
TOTAL                   400

DEBT                        200 Long and short-term debt
OCAP                         50 Preferred stock, minority interest, stock options
COMEQ                       150 Total common equity
TOTAL                      400

Suppose we calculate the market value of the common equity to be \$330.
Assuming NONOP, OCAP, and DEBT are stated at market value already,
what is the market's assessment of the value of the CORE?

GAAP Balance Sheet Restated at Market Value
CORE                     480 Inferred from the market value of COMEQ
NONOP                    100
TOTAL                   580

DEBT                        200
OCAP                         50
COMEQ                       330 Known
TOTAL                      580

An analyst directly restates the balance sheet by estimating CORE
Then the market value of COMEQ can be inferred to see if the shares are over
or under-valued

GAAP Balance Sheet Restated at Estimated Fair Value
CORE                     500 From the valuation model: PV of future cash flows
NONOP                    100
TOTAL                   600

DEBT                        200
OCAP                         50
COMEQ                       350 Inferred
TOTAL                      600
BALANCE SHEET (In 000s)                                     Oct. 1, 2000 Oct. 3, 1999 Econ. Bal. Sheet

ASSETS
Current assets:
Cash and cash equivalents                                     70,817       66,419 CORE
Short-term investments                                        61,336       51,367 NONOP
Accounts receivable, net of allowances of \$2,941 and          76,385       47,646
\$1,227, respectively                                                                  CORE
Inventories                                                  201,656      180,886 CORE
Prepaid expenses and other current assets                     20,321       19,049 CORE
Deferred income taxes, net                                    29,304       21,133 CORE
Total current assets                                      459,819      386,500
Joint ventures                                                    52,051       42,718 NONOP
Other investments                                                  3,788       25,342 NONOP
Property, plant and equipment, net                              930,759       760,289 CORE
Other assets                                                      25,403       23,474 CORE
Goodwill, net                                                     21,311       14,191 CORE
TOTAL ASSETS                                               1,493,131    1,252,514

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable                                             73,653       56,108   CORE
Checks drawn in excess of bank balances                      56,332       63,811   CORE
Accrued compensation and related costs                       75,250       43,872   CORE
Accrued occupancy costs                                      29,117       23,017   CORE
Accrued taxes                                                35,841       30,752   CORE
Other accrued expenses                                       35,053       32,480   CORE
Deferred revenue                                              7,320          484   CORE
Current portion of long-term debt                               685          673   DEBT
Total current liabilities                                313,251      251,197
Deferred income taxes, net                                       21,410       32,886   CORE
Long-term debt                                                    6,483        7,018   DEBT
Minority interest                                                 3,588          400   OCAP
Total Liabilities                                               344,732      291,501
Shareholders' equity:
Common stock -- Authorized, 300,000,000 shares;             750,872      651,020
issued and outstanding, 188,157,651 and 183,282,095
shares, respectively (includes 848,550 common stock units
in both years)                                                                         COMEQ
Retained earnings                                            408,503      313,939 COMEQ
Accumulated other comprehensive loss                         (10,976)      (3,946) COMEQ
Total shareholders' equity                              1,148,399      961,013
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                 1,493,131    1,252,514

Unrecorded contingencies (est.)                                       0                NONOP
Unrecorded employee stock options (est.)                        347,304                OCAP
on. Bal. Sheet
We can now take the GAAP balance sheet with our new classifications and restate
Starbuck's B/S. But this isn't an economic balance sheet yet, because it uses the
GAAP values instead of economic values. The next step is to restate this balance
sheet using what we know about unrecorded assets and liabilities and the market value
of the stock.

CORE                                                    1,041,980
NONOP                                                     117,175
TOTAL                                                  1,159,155

DEBT                                                        7,168
OCAP                                                        3,588
COMEQ                                                   1,148,399
TOTAL                                                  1,159,155              -

Following is the Economic Balance Sheet shown in Exh. 6.2. You can safely
disregard what the text says about its construction and read my explanation instead.
The purpose of preparing it is to think about the firm in terms of its market (or
economic) value instead of the book value.
You start out with the GAAP statements (book values) in the second column. Then
start down the Economic column. Ignore CORE for now. We will assume for now that
NONOP items and DEBT are stated at market value. We then record the estimated
value of other items that are not on the GAAP statements (shown in blue). Even if we
haven't done a formal valuation model, we already know something about market
value, that is the stock price times # of shares=market value of common equity. Now
work backwards to see at what value the "market" assesses the value of CORE.
It is crucial that you understand that
CORE + NONOP = DEBT + OCAP + COMEQ or alternately
CORE = DEBT + OCAP + COMEQ - NONOP, or
COMEQ = CORE+ NONOP - DEBT - OCAP

1. Estimate the value of CORE indirectly using the market value of equity
as COMEQ
Economic         GAAP
CORE AND NONOP
CORE (a plug)                                        7,799,528       1,041,980
NONOP:
Short-term investments                                  61,336           61,336
Joint ventures                                          52,051           52,051
Other investments                                         3,788           3,788
Contingencies (est.)                                        -
Nonoperating net assets                            117,175          117,175

Total CORE and NONOP                                    7,916,703        1,159,155

DEBT, OCAP, AND COMEQ
DEBT:
Current portion long-term debt                                685              685
Long-term debt                                              6,483            6,483
Debt claims                                                7,168            7,168
OCAP:
Minority Interest (see note 1 below)                        24,635             3,588
Employee stock options (estimated)                         347,304
Other capital claims                                    371,939             3,588

COMEQ @ market value (see note 2 below)                   7,537,595        1,148,399

Total Capital Claims                                      7,916,703        1,159,155

Note 1: Minority Interest at Economic Value
Total Capital Claims                                      7,916,703        1,159,155
Less: Debt claims                                             7,168            7,168
COMEQ and OCAP (Net Value)                                7,909,535        1,151,987

Minority Interest @book value                                                  3,588
Minority Interest @ book / Non-debt capital @ book                        0.0031146
Ratio applied to non-debt capital @ fair value               24,635

Note 2: Market value of equity
Stock price (actual at valuation date)                      40.06
x Shares outstanding at year end                            188,158
= Market value of equity                                  7,537,595

Once you know how to do a valuation using your own assumptions, rather than the
market's, you can take this further. In the free cash flow model, we will estimate the
value of CORE directly by finding the present value of the future cash flows from core
operations. Once you find that value in your model, you can then use the rest of the
information in the economic balance sheet to find COMEQ and the implied price per
share.

Remember that
COMEQ = CORE+ NONOP - DEBT - OCAP

2. Estimate the value of CORE using a valuation model & solve for COMEQ
Economic         GAAP

CORE                                                      7,800,000        1,041,980
NONOP                                                       117,175          117,175

Total                                                     7,917,175        1,159,155

DEBT, OCAP, AND COMEQ

DEBT                                                          7,168            7,168
OCAP:
Minority Interest (see note 1 below)                      24,637             3,588     Note: showing this @ market reduce
Employee stock options (est.)                            347,304                       Note: showing this @ market reduce
Total OCAP                                               371,941             3,588
COMEQ (see comment in cell and note 2)        7,538,066   1,148,399

Total                                         7,917,175   1,159,155

Note 1: Minority Interest at Economic Value
Total Core and Nonoperating Net Assets        7,917,175   1,159,155
Less: Debt claims                                 7,168       7,168
COMEQ and OCAP (Net Value)                    7,910,007   1,151,987

Minority Interest @book value                                  3,588
Minority Interest@book / Net Book Value                   0.0031146
Ratio applied to Net Economic Value             24,637

Note 2: Model value of equity per share
Market value of equity                        7,538,066
divided by Shares outstanding                   188,158
= Stock price implied by model                    40.06
wing this @ market reduces share price by\$0.11
wing this @ market reduces share price by\$ 1.85

```
To top