Ch 01 Operation Management by rgl85647

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									464ce36d-8848-487d-aa3c-8a2876fba9e1.xls                                                                                            Corporate Valuation



  Ch 10 Mini Case                                                                                                      3/19/2001

                                                   Chapter 10. Mini Case

  Situation
  You have been hired as a consultant to Kulpa Fishing Supplies (KFS), a company that is seeking to increase its
  value. KFS has asked you to estimate the value of two privately held companies that KFS is considering acquiring.
  But first, the senior management of KFS would like for you to explain how to value companies that don't pay any
  dividends. You have structured your presentation around the following questions.

  This spreadsheet has two major components, one for Corporate Valuation and one for Value Based Management. Click on
  the tabs in the lower left of the screen to switch between sections.
  The value of a company is the sum of: (1) the value of its assets-in-place, including their associated growth opportunities,
  which is called the value of operations and (2) the value of its non-operating assets, such as marketable securities and
  investments in non-controlled affiliates. The value of operations is the present value of the free cash flows produced by the
  assets-in-place and their associated growth opportunities.

  Claims on Corporate Value
  Debt holders have the first claim on corporate value. Preferred stockholders have the next claim and the
  remaining is left to common stockholders.




  INPUT DATA SECTION: Data used for valuation (in millions)

  Free Cash Flow                     $20.0
  WACC                                10%                         Vop =            FCF1
  Growth                               5%                                        (WACC-g)
  Marketable Securities              $100.0
  Debt                               $200.0
  Preferred Stock                    $50.0
  Book Value of Equity               $210.0                                       $21.0
                                                                  Vop =
                                                                                   0.05

                                                                  Vop =           $420.0

  Sources of Corporate Value
  Value of Operation                    $420.0
                                                               Total Corporate Value =          $520.0
  Value of Non-operating Assets        $100.0

  Claims on Corporate Value
  Value of Debt                        $200.0
  Value of Preferred Stock              $50.0
  Value of Equity                      $270.0                                Value of Equity =Total Corporate Value - Value of Debt - Value of Preferred


  Market Value Added (MVA)

  Total value of the firm                          $520.00
  Minus: Book value of debt                        $200.00
  Minus: Book value of preferred stock              $50.00
  Minus: Book value of equity                      $210.00

  MVA                                                $60.00

                                                    Vop     Non Op. Assets        Debt       Pref. Stock    Market Value Equity    Book Value Equity
  Market Value Sources                               $420.0         $100.0
  Market Value Claims                                                               $200.0          $50.0                 $270.0
  Book Value Claims                                                                 $200.0          $50.0                                    $210.0


      $600.0




Michael C. Ehrhardt                                                     Page 1                                                               12/9/2010
464ce36d-8848-487d-aa3c-8a2876fba9e1.xls                                                                                            Corporate Valuation




      $500.0
                                                                                                MVA
      $400.0                                                                                     Book Value Equity
                                                                                                Market Value Equity
      $300.0                                                                                    Pref. Stock
                                                                                                Debt
      $200.0                                                                                    Non Op. Assets
                                                                                                Vop
      $100.0

          $0.0
                        Market Value          Market Value            Book Value
                         Sources                Claims                  Claims


  Calculate the value of operations for the
  following company.                                   Actual                             Projected
                                                                             1            2             3                       4
  Long-term growth rate                                   6%
  Weighted Avg. Cost of Cap. (WACC)                   10.00%
  Free Cash Flow                                                        ($5.0)       $10.0         $20.0                   $21.2

  Find the horizon value.
  The horizon value is the value of all the free cash flows in year 4 and beyond, discounted back to the beginning of year 4.
  The formula is:
                            Hvyear 4 = [FCFyear 4 * (1+g)] / [ WACC - g].


  Horizon Value                                                                                                         $530.00

  Find the PV of the horizon value and of the free cash flows.
  PV of Horizon Value @ WACC                        $398.20
  PV of free cash flows @ WACC                       $18.75

  Value of Operations                                 $416.94

  PROBLEM
  Find the value of equity and the price per share.

  Step 1: Find the total value of the firm.
  Value of operations                                 $416.94
  Minus: Value of Debt                                  $0.00

  Total value of firm                                 $416.94

  Step 2: Find the value of equity.
  Total value of firm                                 $416.94
  Minus: Value of debt                                 $40.00
  Minus: Value of preferred stock                       $0.00

  Value of equity                                     $376.94


  Step 3: Find the price per share.


  Value of equity                                     $376.94
  Divided by number of shares                               10

  Price per share                                      $37.69




Michael C. Ehrhardt                                                     Page 2                                                               12/9/2010
464ce36d-8848-487d-aa3c-8a2876fba9e1.xls            Corporate Valuation




Michael C. Ehrhardt                        Page 3            12/9/2010
      464ce36d-8848-487d-aa3c-8a2876fba9e1.xls                                               Corporate Valuation




Value of Equity =Total Corporate Value - Value of Debt - Value of Preferred




                                                                              MVA


                                                                                    $60.00




      Michael C. Ehrhardt                                                     Page 4                  12/9/2010
VALUE-BASED MANAGEMENT:
A company has two divisions. Both have current sales of $1,000, current expected growth of 5%, and a WACC of 10%.
Division A has high profitability (OP=6%) but high capital requirements. (CR =78%) Division B has lower
profitability (OP=4%) but low capital requirements (CR=27%)


Impact on MVA
Expected growth goes to 6%
                                  Division A     Division B
Sales                              $1,000         $1,000
Growth                               6%             6%
WACC                                10%            10%
OP                                   6%             4%
CR                                  78%            27%

  MVAt =
  é Salest (1 + g ) ù é   æ CR öù
  ê WACC - g ú êOP - WACC ç (1 + g ) ÷ú
                          ç          ÷
  ë                 ûë    è          øû
                                                        Division A                    Division B

Operating Profit                                    6%             6%               4%            4%
Capital Requirements                                78%            78%             27%           27%
Growth                                              5%             6%               5%            6%
MVA                                                -300.0         -360.0           300.0         385.0


                                   Market Value Added

         500.0
         400.0
         300.0
         200.0
         100.0
                                                                                           MVA
            0.0                Division A
         -100.0           5%                6%
         -200.0                                             5%                6%
         -300.0                                                  Division B
         -400.0




                                  NOPATt +1
         EROIC t =
                                   Capital t

                         Capital t [EROIC t - WACC]
  MVA t =
                                   WACC - g
                Division A             Division B
Capital    780.00       780.00     270.00      270.00
Growth       5%           6%         5%          6%
Sales     $1,050.0     $1,060.0   $1,050.0    $1,060.0
NOPAT      $63.0        $63.6      $42.0       $42.4
EROIC       8.1%         8.2%      15.6%       15.7%
MVA        -300.0       -360.0      300.0       385.0

								
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