Corporate Valuation, Value Based Management, Corporate Governance by jsy91563

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									f9f3db94-734c-45cf-b3eb-846da15428b0.xls                                                                               Corporate Valuation



                                                                                                           11/7/2007

                              Chapter 13. Tool Kit for Corporate Valuation,
                          Value-Based Management, and Corporate Governance
    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 nonoperating 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.

    THE CORPORATE VALUATION MODEL (Section 13.2)
    You are given the current and projected financial statements of MagnaVision. Growth is expected to be 5%
    for each year after the projections. If the WACC is 10.84%, what is the value of operations?

    INPUT DATA SECTION: Current and Projected Data Used in the Analysis

    MagnaVision, Inc.: Income Statements for Years Ending December 31
    (in millions of dollars)                       Actual                            Projected
                                                     2008        2009               2010          2011         2012
    Net Sales                                       $700.0     $850.0            $1,000.0      $1,100.0     $1,155.0
    Costs (except depreciation)                     $599.0     $734.0             $911.0        $935.0       $982.0
    Depreciation                                      28.0        31.0               34.0          36.0         38.0
      Total operating costs                         $627.0     $765.0             $945.0        $971.0      $1,020.0
    Earning before int. & tax                        $73.0      $85.0               $55.0       $129.0       $135.0
      Less: Net interest                              13.0        15.0               16.0          17.0         19.0
    Earning before taxes                             $60.0      $70.0               $39.0       $112.0       $116.0
      Taxes (40%)                                     24.0        28.0               15.6          44.8         46.4
    Net income before pref. div.                     $36.0      $42.0               $23.4         $67.2        $69.6
      Preferred div.                                   6.0         7.0                7.4           8.0          8.3
    Net income avail. for com. div.                  $30.0      $35.0               $16.0         $59.2        $61.3
    Common dividends                                  $0.0        $0.0               $0.0         $44.2        $45.3
    Addition to retained earnings                    $30.0      $35.0               $16.0         $15.0        $16.0

    Number of shares                                      100           100           100           100          100
    Dividends per share                                $0.000        $0.000        $0.000        $0.442       $0.453

    MagnaVision Inc.: December 31 Balance Sheets
    (in millions of dollars)                     Actual                              Projected
                                                  2008                2009          2010        2011           2012
    Cash                                          $17.0               $20.0         $22.0       $23.0          $24.0
    Marketable Securities                          63.0                70.0          80.0        84.0           88.0
    Accounts receivable                            85.0               100.0         110.0       116.0          121.0
    Inventories                                   170.0               200.0         220.0       231.0          243.0
      Total current assets                       $335.0              $390.0        $432.0      $454.0         $476.0
    Net plant and equipment                       279.0               310.0         341.0       358.0          376.0
    Total Assets                                 $614.0              $700.0        $773.0      $812.0         $852.0

    Liabilities and Equity
    Accounts Payable                                    $16.0         $20.0         $22.0         $23.0        $24.0
    Notes payable                                       123.0         140.0         160.0         168.0        176.0
    Accruals                                             44.0          50.0          55.0          58.0         61.0
     Total current liabilities                         $183.0        $210.0        $237.0        $249.0       $261.0
    Long-term bonds                                     124.0         140.0         160.0         168.0        176.0
    Preferred stock                                      62.0          70.0          80.0          84.0         88.0
    Common Stock (par plus paid in capital)            $200.0        $200.0        $200.0        $200.0       $200.0
    Retained earnings                                    45.0          80.0          96.0         111.0        127.0
     Common equity                                     $245.0        $280.0        $296.0        $311.0       $327.0
    Total liabilities and equity                       $614.0        $700.0        $773.0        $812.0       $852.0




Michael C. Ehrhardt                                                     Page 1                                                   2/8/2011
f9f3db94-734c-45cf-b3eb-846da15428b0.xls                                                                              Corporate Valuation




                                                         Actual                     Projected
    Step 1: Calculate FCF                                 2008       2009          2010         2011          2012
     1. Net operating working capital                   $212.00    $250.00       $275.00      $289.00       $303.00
     2. Net Plant                                       $279.00    $310.00       $341.00      $358.00       $376.00
     3. Net operating capital                           $491.00    $560.00       $616.00      $647.00       $679.00
     4. Investment in operating capital                             $69.00        $56.00       $31.00        $32.00
     5. NOPAT                                            $43.80     $51.00        $33.00       $77.40        $81.00
     6. Less: Investment in op. capital                             $69.00        $56.00       $31.00        $32.00
     7. Free cash flow                                             -$18.00       -$23.00       $46.40        $49.00

    Step 2: Calculate the value of operations            Actual                     Projected
                                                           2008       2009          2010          2011         2012
    Long-term growth rate                                   5%
    Weighted Avg. Cost of Cap. (WACC)                   10.84%
    Free Cash Flow                                                 ($18.00)     ($23.00)        $46.40      $49.00

    Find the horizon value.
    The horizon value is the value as of 12/31/2012 of all the free cash flows in 2013 and beyond, discounted back
    to 12/31/2012. The formula is:
                              HV2012 = [FCF2012 * (1+g)] / [ WACC - g].


    Horizon Value (Value at 12/31/2012)                                                                    $880.99

    Find the PV of the horizon value and of the free cash flows.
    PV of Horizon Value @ WACC                       $583.70
    PV of free cash flows @ WACC                      $31.58

    Value of Operations                                 $615.27

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

    Step 1: Find the total value of the firm.
    Value of operations                                 $615.27
    Plus: Value of nonoperating assets                   $63.00

    Total value of firm                                 $678.27

    Step 2: Find the value of equity.
    Total value of firm                                 $678.27
    Minus: Value of debt                                $247.00
    Minus: Value of preferred stock                      $62.00

    Value of equity                                     $369.27

    Step 3: Find the price per share.

    Value of equity                                     $369.27
    Divided by number of shares                             100

    Price per share                                       $3.69

    Step 4: Find Market Value Added (MVA)

    Total value of the firm                             $678.27
    Minus: Book value of debt                           $247.00
    Minus: Book value of preferred stock                 $62.00
    Minus: Book value of equity                         $245.00

    Market value added (MVA)                            $124.27




Michael C. Ehrhardt                                                    Page 2                                                   2/8/2011
f9f3db94-734c-45cf-b3eb-846da15428b0.xls                                                                                               Corporate Valuation




      $700
                                                                                                                         See right for inputs to chart.
                Nonoperating assets = $63                                              Market Value Added
      $600
                                                          Market value
      $500
                                                           of equity =
                                                              $369                         Book value
      $400                                                                                 of equity =
                            Value of                                                          $245
      $300                operations =
                                                          Preferred stock = $62          Preferred stock = $62
                             $615
      $200
                                                                                         Debt = $247
      $100
                                                           Debt = $247
         $0
                        Market Value:                     Market Value:                     Book Value:
                          Sources                            Claims                           Claims


    PROBLEM
    The cost of equity, rs, for Magnavision is 14%. Using the dividend growth model, what is the stock price per
    share?


    Dividend Growth Model                                 Actual                      Projected
    Year                                                    2008          2009       2010           2011         2012
    Diviend per share                                                     0.000      0.000          0.442        0.453
    Cost of equity, rs                                    14.0%
    Long-term growth rate                                  5.0%
    Price of stock at 2012 = [D2012 * (1+g)] / [rs - g]                                                          5.285
    PV of Year 2012 stock price @ rs                    $3.1291
    PV of dividends @ rs                                $0.5665

    Current stock price                                $3.6957 (Difference from price in text is due to rounding.)

    Click the tab labeled "Value Based Management"




Michael C. Ehrhardt                                                         Page 3                                                                 2/8/2011
f9f3db94-734c-45cf-b3eb-846da15428b0.xls            Corporate Valuation




Michael C. Ehrhardt                        Page 4             2/8/2011
f9f3db94-734c-45cf-b3eb-846da15428b0.xls            Corporate Valuation




Michael C. Ehrhardt                        Page 5             2/8/2011
f9f3db94-734c-45cf-b3eb-846da15428b0.xls                                                                                         Corporate Valuation




                              operations
                      Value ofNonoperating assets    Debt            Preferred stock           Market Value of Equity       Book Value of Equity
   Market Value:
   Sources             $615                     63
   Market Value:
   Claims                                                   247.00                     62.00                       369.27
   Book Value:
   Claims                                                   247.00                     62.00                                               245.00




Michael C. Ehrhardt                                                  Page 6                                                                 2/8/2011
f9f3db94-734c-45cf-b3eb-846da15428b0.xls            Corporate Valuation




Michael C. Ehrhardt                        Page 7             2/8/2011
f9f3db94-734c-45cf-b3eb-846da15428b0.xls            Corporate Valuation




Michael C. Ehrhardt                        Page 8             2/8/2011
f9f3db94-734c-45cf-b3eb-846da15428b0.xls                              Corporate Valuation




                                           Market Value Added (MVA)




                                              124.27




Michael C. Ehrhardt                                    Page 9                   2/8/2011
VALUE-BASED MANAGEMENT (Section 13.3)                                                                      11/7/2007

This is the second section of the Chapter 13 model. Click the tab labeled "Corporate Valuation" to see the other
section. Bell Electronics (Bell) has two divisions, Bell Memory and Bell Instruments. The preliminary strategic
plans of the two divisions are shown below. At this point, the plans have partial income statements and partial
balance sheets containing only the items needed to calculate free cash flow. After the plans are finalized, Bell will
complete the statements to determine the necessary financing using the techniques shown in Chapter 12.


Initial Projections for Bell Memory Division (Millions of Dollars, Except for Percentages)
                                      Actual      Projected       Projected    Projected   Projected Projected
                                       2008         2009            2010         2011        2012      2013
Panel A: Inputs
Sales Growth Rate                                          5%             5%          5%          5%        5%
Costs / Sales                             81%             81%            81%         81%         81%       81%
Depreciation / Net Plant                  10%             10%            10%         10%         10%       10%
Cash / Sales                               1%              1%             1%          1%          1%        1%
Acct. Rec. / Sales                         8%              8%             8%          8%          8%        8%
Inventories / Sales                       30%             30%            30%         30%         30%       30%
Net Plant / Sales                         59%             59%            59%         59%         59%       59%
Acct. Pay. / Sales                         5%              5%             5%          5%          5%        5%
Accruals / Sales                           6%              6%             6%          6%          6%        6%
Tax rate                                  40%             40%            40%         40%         40%       40%

Panel 2: Partial Income Statement
                                          2008           2009            2010         2011         2012         2013
Net Sales                             $1,000.0       $1,050.0        $1,102.5     $1,157.6     $1,215.5     $1,276.3
Costs (except depreciation)             $810.0         $850.5          $893.0       $937.7       $984.6     $1,033.8
Depreciation                             $59.0          $62.0           $65.0        $68.3        $71.7        $75.3
 Total operating costs                  $869.0         $912.5          $958.1     $1,006.0     $1,056.3     $1,109.1
Op. profit before int. & tax            $131.0         $137.6          $144.4       $151.6       $159.2       $167.2

Panel C: Partial Balance Sheets
Operating Assets                          2008           2009           2010          2011        2012          2013
Cash                                     $10.0          $10.5          $11.0         $11.6       $12.2         $12.8
Accounts receivable                      $80.0          $84.0          $88.2         $92.6       $97.2        $102.1
Inventories                             $300.0         $315.0         $330.8        $347.3      $364.7        $382.9
  Operating current assets              $390.0         $409.5         $430.0        $451.5      $474.0        $497.7
Net plant and equipment                 $590.0         $619.5         $650.5        $683.0      $717.1        $753.0

Operating Liabilities
Accounts Payable                         $50.0          $52.5          $55.1         $57.9       $60.8         $63.8
Accruals                                 $60.0          $63.0          $66.2         $69.5       $72.9         $76.6
 Operating current liabilities          $110.0         $115.5         $121.3        $127.3      $133.7        $140.4
Intitial Projections for Bell Instruments Division (Millions of Dollars, Except for Percentages)
                                       Actual       Projected     Projected      Projected   Projected Projected
                                        2008          2009           2010          2011        2012      2013
Panel A: Inputs
Sales Growth Rate                                           5%             5%           5%          5%        5%
Costs / Sales                              85%             85%            85%          85%         85%       85%
Depreciation / Net Plant                   10%             10%            10%          10%         10%       10%
Cash / Sales                                1%              1%             1%           1%          1%        1%
Acct. Rec. / Sales                          5%              5%             5%           5%          5%        5%
Inventories / Sales                        15%             15%            15%          15%         15%       15%
Net Plant / Sales                          30%             30%            30%          30%         30%       30%
Acct. Pay. / Sales                          5%              5%             5%           5%          5%        5%
Accruals / Sales                            6%              6%             6%           6%          6%        6%
Tax rate                                   40%             40%            40%          40%         40%       40%

Panel B: Partial Income Statement
                                        2008           2009          2010          2011        2012          2013
Net Sales                             $500.0         $525.0        $551.3        $578.8      $607.8        $638.1
Costs (except depreciation)           $425.0         $446.3        $468.6        $492.0      $516.6        $542.4
Depreciation                           $15.0          $15.8         $16.5         $17.4       $18.2         $19.1
 Total operating costs                $440.0         $462.0        $485.1        $509.4      $534.8        $561.6
Earning before int. & tax              $60.0          $63.0         $66.2         $69.5       $72.9         $76.6

Panel C: Partial Balance Sheets
Operating Assets                        2008           2009          2010          2011        2012          2013
Cash                                    $5.0           $5.3          $5.5          $5.8        $6.1          $6.4
Accounts receivable                    $25.0          $26.3         $27.6         $28.9       $30.4         $31.9
Inventories                            $75.0          $78.8         $82.7         $86.8       $91.2         $95.7
  Operating current assets            $105.0         $110.3        $115.8        $121.6      $127.6        $134.0
Net plant and equipment               $150.0         $157.5        $165.4        $173.6      $182.3        $191.4

Operating Liabilities
Accounts Payable                        $25.0         $26.3         $27.6         $28.9        $30.4        $31.9
Accruals                                $30.0         $31.5         $33.1         $34.7        $36.5        $38.3
 Operating current liabilities          $55.0         $57.8         $60.6         $63.7        $66.9        $70.2

PROBLEM
Using the projected statements, calculate the free cash flow for each division. Assume growth remains constant

FCF Valuation of the Bell Memory Division (Millions of Dollars, Except for Percentages)

                                     Actual      Projected     Projected      Projected    Projected    Projected
Calculation of FCF:                   2008         2009          2010           2011         2012         2013
Net operating working capital         $280.0         $294.0        $308.7        $324.1       $340.3       $357.4
Net Plant                             $590.0         $619.5        $650.5        $683.0       $717.1       $753.0
Net operating capital                 $870.0         $913.5        $959.2      $1,007.1     $1,057.5     $1,110.4
Req'd new investment in op cap                        $43.5         $45.7         $48.0        $50.4        $52.9
NOPAT (Tax rate = 40%)                  $78.6         $82.5         $86.7         $91.0        $95.5       $100.3
Free cash flow (FCF)                                  $39.0         $41.0         $43.0        $45.2        $47.4

Value of Operations:
WACC                                   10.5%
Free cash flow                                        $39.0         $41.0         $43.0        $45.2        $47.4   $ 49.8
Growth in FCF                                                         5%            5%           5%           5%
Horizon value                                                                                              $905.7
   Total cash flow                                    $ 39.0         $ 41.0       $ 43.0       $ 45.2      $953.1
Value of operations =                $709.6

Divisional MVA
(Val. of ops - net op. capital) =   ($160.4)
FCF Valuation of the Bell Instruments Division (Millions of Dollars, Except for Percentages)

                                       Actual       Projected      Projected      Projected    Projected    Projected
Calculation of FCF                      2008          2009           2010           2011         2012         2013
Net operating working capital            $50.0           $52.5          $55.1         $57.9        $60.8        $63.8
Net Plant                               $150.0          $157.5         $165.4        $173.6       $182.3       $191.4
Net operating capital                   $200.0          $210.0         $220.5        $231.5       $243.1       $255.3
Req'd new investment in op cap                           $10.0          $10.5         $11.0        $11.6        $12.2
NOPAT (Tax rate = 40%)                    $36.0          $37.8          $39.7         $41.7        $43.8        $45.9
Free cash flow (FCF)                                     $27.8          $29.2         $30.6        $32.2        $33.8

Value of Operations
WACC                                      10.5%
Free cash flow                                           $27.8           $29.2        $30.6        $32.2        $33.8     $ 35.5
Growth in FCF                                                              5%           5%           5%           5%
Horizon value                                                                                                  $645.1
  Total cash flow                                        $ 27.8          $ 29.2       $ 30.6       $ 32.2      $678.9
Value of operations =                  $505.5

Divisional MVA
(Val. of ops - net op. capital) =      $305.5

Notes: The horizon value at 2013 is calculated using the constant growth formula for free cash flows: HV 2013 =
[FCF2013 * (1+g)] / (WACC-g). The value of operations at 2008 is equal to the PV of horizon value plus the PVs of
the free cash flows for 2009 through 2013. You should recognize (1) that the 2008 cash flow has already been
realized, hence it does not enter into the calculation of the firm's value, and (2) that the formula used is in exactly
the same format as the one for the discounted dividend model.

PROBLEM
Summarize the key inputs and results for each division. Use Scenario Manager to analyze several different
projections for each division: (1) Preliminary projections for each division, based on the initial inputs; (2)
Proposal 1, with high growth for Bell Memory (g=6%) and no changes for Bell Instruments; and (3) Final plan,
with improved capital requirements for Bell Memory (g=5%, Inventory/Sales = 20%, PPE/Sales = 50%) and high
growth for Bell Instruments (g=6%, Inventory/Sales=16%).

Scenarios are exactly what the name implies--the model is run using different values for the key drivers so as to
show results under different sets of operating conditions. To create a Scenario, click on Tools > Scenarios. In the
first dialog box, click Add, give the scenario a name, and then define the cells that you want to let change in the
different scenarios. Click OK, and then in the dialog box give the different cells the values that you want for the
scenario. Click OK. Click Show, and the values for the scenario will be placed in the cells in the sheet. Repeat
for the other scenarios. Click on Close to return to the sheet. Following is a demonstration.


Click Tools > Scenarios to bring up the Scenario Manager dialog box shown below. Then click Add.
Now type in the name, such as "Preliminary." Then select the cells that you want to let vary. Then click OK.




Now enter the desired values for the scenario. Click Cancel.




Now click Add to add additional scenarios. Then click Close.




To show a Scenario, click on Tools > Scenarios. Select a scenario and then click on Show. Click on Close to
return to the worksheet. For example, to show the Proposal 1, follow the instructions below. Results are shown
below this.
Note: The Preliminary scenarios are always shown in columns C and E. The current scenarios are
shown in columns D and F. To change the current scenario, Click Tools > Scenarios, and then select
the desired scenario.

                                                     Bell Memory           Bell Instruments
                    Scenario name              Preliminary Preliminary Preliminary Preliminary
Inputs:
                        Growth, g                       5%            5%          5%           5%
                   Inventory/Sales                     30%           30%         15%          15%
                        PPE/Sales                      59%           59%         30%          30%
Value Drivers:
                         Growth, g                      5%            5%           5%          5%
                      Profitability
           (NOPAT2013 / Sales2013)                    7.9%          7.9%         7.2%        7.2%
              Capital requirement
            (Capital2013 / Sales2013)                87.0%         87.0%          40%         40%
                            WACC                     10.5%         10.5%        10.5%       10.5%
Results:
                  Expected ROIC
   (NOPAT2013(1+g) / Capital2013)                     9.5%           9.5%       18.9%       18.9%
         Operating Capital (2013)                 $1,110.4       $1,110.4      $255.3      $255.3
Current value of operations (2008)                  $709.6         $709.6      $505.5      $505.5
            Current MVA (2008)                     ($160.4)       ($160.4)     $305.5      $305.5
Notice that in the Preliminary scenario, Bell Memory has a negative MVA. This is because its Expected ROIC is
less than the WACC, so Bell Memory is earning less on its capital than its investors require. Notice that in
Proposal 1, growth goes up for Bell Memory but value goes down. Again, this is because the Expected ROIC is
less than the WACC. In the Final scenario, Bell Memory's Expected ROIC improves because it becomes the
division requires less capital to support its sales. This causes the ROIC to become greater than the WACC,
leading to positive MVA.
SECTION 13.2
SOLUTIONS TO SELF-TEST

4 A company expects a FCF of -$10 million at Year 1 and a FCF of $20 million at Year 2. FCF is expected to
grow at a 5% rate after Year 2. If the WACC is 10%, what is the horizon value of operations; i.e., Vop(Year 2)?
What is the current value of operations; i.e., Vop(Year 0)?

Long-term growth rate                   5%
WACC                                   10%
                                                      Year
                                                         1          2
                                                     FCF1       FCF2
Expected FCF                                       -$10.00    $20.00

Vop(Year 2)                                                  $420.00

PV of expected FCF                  $7.44
PV of expected Vop(Year 2)        $347.11

Vop(Year 0)                       $354.55




5 A company has a current value of operations of $800 million. The company has $100 million in short-term
investments. If the company has $400 million in debt and has 10 million shares outstanding, what is the price
per share?

Vop                                  $800
ST investments                       $100
                  Total value        $900
Debt                                 $400
           Value of equity           $500
Number of shares                        10

Price per share                    $50.00
 FCF is expected to
ons; i.e., Vop(Year 2)?




million in short-term
ding, what is the price
SECTION 13.3
SOLUTIONS TO SELF-TEST


3 You are given the following forecasted information for a constant growth company: Sales = $10 million; Operating p
5%; Capital requirements (CR) = 40%; Growth (g) = 6%; and the weighted average cost of capital (WACC) = 10%. What
of capital? What is the current level of NOPAT? What is the EROIC? What is the value of operations?


Problem inputs:
Sales =                                           $10                                    $10
OP =                                              5.0%                                    5%
CR =                                             40.0%                                   40%
g=                                                6.0%                                    6%
WACC =                                           10.0%                                   10%

Capital = Sales x CR =                                                   $4

NOPAT = Sales x OP =                                                  $0.50

EROIC = NOPAT(1+g)/Capital =                                         13.25%

Vop = Capital + {[Capital(EROIC-WACC)]/[WACC-g]} =                    $7.25
 y: Sales = $10 million; Operating profitability (OP) =
ost of capital (WACC) = 10%. What is the current level
ue of operations?

								
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