# Costs of Investing in Re Asset Class by aqz42118

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Costs of Investing in Re Asset Class document sample

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```									Steps:
1. Understand the business of the company you are valuing
2. Find Inputs:
a)      Calculate the Discount Rate
      Weighted Average Cost of Capital (WACC)
b)      Build Future (Pro forma) Cash Flow and find the PV of these cash flow
      Free Cash Flow (FCF)
c)      Calculate Terminal Value
      EBITDA Multiple
d)      Perform Sensitivity Analysis
      Range vs. Point Estimate
3. Analyze Outputs:
a)      Enterprise value (EV)
b)      Equity (share price)
        There are many correct answers and many variations on methods and w
numbers to use (academics vs. practitioners). Some of these will be cov
next class
se cash flow

n methods and which
these will be covered in the
ISBE Kellogg Finance Club DCF Valuation Class
Company                                           KFT
10-K year                                        2007

Discount rate
βe                                                 0.69   Google Finance
rf                                               4.00%                                           3.86%
10-yr treasury, http://www.bloomberg.com/markets/rates/index.html
rm                                                  6%    rule of thumb 6%
re                                               8.14%    by CAPM re = rf + βe * rm
rd                                                  6%    KFT is BBB+ (S&P), or have a look at 10-K
D                                               12,902    Balance sheet (in mm)
share price                                      30.60    Google Finance (Fri 4/25)
no of outstanding shares                         1,534    pg 78 10-K (in mm)
E                                               46,934    check this against the market cap number in Google finance
V                                               59,836    V = D+E
D/V                                                0.22
E/V                                                0.78
Tc                                                 34%
WACC                                             7.24%

Income Statement
Year                                             2007                2008          2009      2010       2011      2012
Period                                               0                   1             2         3          4         5
Net revenues                                    37,241              40,344        43,370    46,623     50,119    53,878                growth     7.5%
Gross profit                                    12,590              13,314        14,312    15,385     16,539    17,780
Gross margin                                      34%                 33%           33%       33%        33%       33%           % of revenue
EBIT                                             4,331               4,260         4,580     4,923      5,293     5,690
34%                 32%           32%       32%        32%       32%        % of gross profit
EBITDA                                           5,217               5,199         5,575     5,979      6,411     6,875

Balance Sheet
Total current assets                            10,737              13,958        18,146     23,589    30,666    39,866                growth     30%
Total current liabilities                       17,086              21,699        27,558     34,999    44,448    56,449                growth     27%
Net working capital                             -6,349              -7,741        -9,412    -11,409   -13,782   -16,584
Change in networking capital                                        -1,392        -1,671     -1,997    -2,373    -2,801

Cash Flow Statements
Capital expenditures                             1,241               1,315         1,394     1,478      1,567     1,661                growth     6.0%
Depreciation & Amortization (D&A)                  886                 939           996     1,055      1,119     1,186                growth     6.0%
Terminal Value Calculation
Equity                                                       46,934
Debt                                                         12,902
Cash                                                            567
Enterprise Value (EV)                                        59,269
EBITDA                                                        5,217
EBITDA X (year 0)                                             11.4 X
Terminal EBITDA X                                              9.5 X in general, it must be < EBITDA X in year 5
check what the mean EBITDA X is for KFT's peers/food industry
Calculations
Year                                                             2007             2008           2009       2010       2011      2012
Period                                                              0                1              2          3          4         5
EBIT(1-Tc)                                                                       2,812          3,023      3,249      3,493     3,755   tax rate   34%
add: Depreciation & Amortization (D&A)                                             939            996       1055       1119      1186
minus: change in networking capital                                              1,392          1,671      1,997      2,373     2,801
minus: capex                                                                    -1,315         -1,394     -1,478     -1,567    -1,661
Free Cash Flow (FCF)                                                             3,828          4,295      4,824      5,418     6,081
Terminal Value (TV)                                                                                                            65,314
PV FCF                                                                            3,569         3,735     3,911      4,097     50,340
Sum PV FCF                                                   65,652

Equity Calculations
(in mm)
Enterprise Value (EV)                                        65,652
Debt                                                         12,902
Cash                                                             567
Equity                                                       53,317
no of outstanding shares                                       1,534
Share Price                                                    34.76               14% above current share price

KFT share price today                                            30.60

Sensitivity Analysis                                                                 TV EBITDA X
34.76            8.5 X             9.5 X       10.5 X
7.0%             31.99             35.19       38.38
discount rate   8.5%             29.62             32.60       35.59
10.0%            27.44             30.22       33.00

Range            27.44             38.38
Do KFT shares appear undervalued?
http://www.cnbc.com/id/23189397
Page 55 10-K

page 75

Page 78 10-K
page 58
KRAFT FOODS INC
10-K/A
02/26/2008

Income Statement

Average      2007

Net revenues                                                 \$37,241   8.40%
Cost of sales                                                 24,651

Gross profit                                           35%   12,590      34%

Marketing, administration and research                        7,809
costs
Asset impairment and exit costs                                  452
Gain on redemption of United Biscuits investment                   0
Gains on divestitures, net                                      (15)
Amortization of intangibles                                       13

Operating income                                     EBIT!    4,331      34%

Interest and other debt expense, net                             604

Earnings from continuing operations before                    3,727
income taxes

Provision for income taxes                                    1,137

Earnings from continuing operations                           2,590

Loss from discontinued operations, net                             0
of income taxes

Net earnings                                                 \$2,590     7.0%

Per share data:
Basic earnings per share:
Continuing Operations                                         \$1.64
Discontinued Operations                                           0

Net Earnings                                                  \$1.64

Diluted earnings per share:
Continuing Operations                                         \$1.62
Discontinued Operations                                           0

Net Earnings                                                  \$1.62

Dividends declared                                            \$1.04

____________________________
Created by 10-K Wizard.
http://www.10kwizard.com/
2006                        2005

growth    \$34,356   0.71%    growth   \$34,113
21,940                      21,845

% of rev    12,416     36% % of rev     12,268   36%

7,254                       7,138

1,002                         479
(251)                           0
(117)                       (108)
7                          10

% of GP      4,521     36%   % of GP     4,749   39%   % of GP

510                          636

4,011                       4,113

951                        1,209

3,060                       2,904

0                        (272)

\$3,060                      \$2,632

\$1.86                       \$1.72
0                      (0.16)

\$1.86                       \$1.56

\$1.85                       \$1.72
0                      (0.17)

\$1.85                       \$1.55

\$0.96                       \$0.87
KRAFT FOODS INC
10-K/A
02/26/2008

Balance Sheet

2007
ASSETS
Cash and cash equivalents                           \$567     137%
Receivables (less allowances of \$94 in             5,197      34%
2007 and \$84 in 2006)
Inventories:
Raw materials                                      1,605      16%
Finished product                                   2,491      18%

Total inventories                                  4,096      17%
Deferred income taxes                                575      49%
Other current assets                                 302      19%

Total current assets                              10,737      30%

Property, plant and equipment, at cost:
Land and land improvements                           454
Buildings and building equipment                   4,121
Machinery and equipment                           13,750
Construction in progress                             879

19,204
Less accumulated depreciation                      8,426

Property, plant and equipment, net                10,778      11%
Goodwill                                          31,193
Intangible assets, net                            12,200
Prepaid pension assets                             1,648
Other assets                                       1,437

TOTAL ASSETS                                      \$67,993

LIABILITIES
Short-term borrowings                             \$7,385     331%
Current portion of long-term debt                    722     -49%
Due to Altria Group, Inc. and affiliates               0    -100%
Accounts payable                                   4,065      56%
Accrued liabilities:
Marketing                                          1,833      13%
Employment costs                                     913      22%
Dividends payable                                    414     820%
Other                                              1,654       6%
Income taxes                                         100     -34%

Total current liabilities                         17,086      63%

Long-term debt                                    12,902
Deferred income taxes                              4,876
Accrued pension costs                                810
Accrued postretirement health care costs           2,846
Other liabilities                                  2,178

TOTAL LIABILITIES                                 40,698
Contingencies (Note 15)

SHAREHOLDERS EQUITY
Class A common stock, no par value (1,735,000,000         0
shares issued in
2007 and 555,000,000 shares issued in 2006)
Class B common stock, no par value (1,180,000,000         0
shares issued
and outstanding in 2006)
Additional paid-in capital                           23,445
Retained earnings                                    12,209
Accumulated other comprehensive losses              (1,835)
Treasury stock, at cost                             (6,524)

TOTAL SHAREHOLDERS EQUITY                           27,295

TOTAL LIABILITIES AND SHAREHOLDERS EQUITY           \$67,993

____________________________
Created by 10-K Wizard.
http://www.10kwizard.com/
2006

\$239
3,869

1,389
2,117

3,506
387
253

8,254

389
3,657
12,164
840

17,050
7,357

9,693
25,553
10,177
1,168
729

\$55,574

\$1,715
1,418
607
2,602

1,626
750
45
1,559
151

10,473

7,081
3,930
1,022
3,014
1,499

27,019
0

0

23,626
11,128
(3,069)
(3,130)

28,555

\$55,574
KRAFT FOODS INC
10-K/A
02/26/2008

Cash Flows

2007.00
CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES
Net earnings                                              \$2,590
Adjustments to reconcile net earnings
to operating cash flows:
Depreciation and amortization                                   886
Deferred income tax benefit                                   (436)
Gain on redemption of United Biscuits investment                  0
Gains on divestitures, net                                     (15)
Loss on sale of discontinued operations                           0
Asset impairment and exit costs, net of                         209
cash paid
Change in assets and liabilities, excluding
the effects of
acquisitions and divestitures:
Receivables, net                                              (268)
Inventories                                                   (191)
Accounts payable                                                241
Income taxes                                                    124
Amounts due to Altria Group, Inc. and affiliates               (93)
Other working capital items                                   (116)
Change in pension assets and postretirement                      81
liabilities, net
Other                                                           559

Net cash provided by operating activities                     3,571

CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES
Capital expenditures                                     (1,241)
Acquisitions, net of cash received                       (7,437)
Proceeds from divestitures                                   216
Other                                                         46

Net cash (used in) / provided by investing               (8,416)
activities

CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES
Net issuance / (repayment) of short-term                      5,649
borrowings
Long-term debt proceeds                                    6,495
Long-term debt repaid                                    (1,472)
(Decrease) / increase in amounts due to                    (149)
Altria Group, Inc.
and affiliates
Repurchase of Common Stock                               (3,708)
Dividends paid                                           (1,638)
Other                                                       (56)

Net cash provided by / (used in) financing                    5,121
activities

Effect of exchange rate changes on cash                          52
and cash equivalents
Cash and cash equivalents:
Increase / (Decrease)               328
Balance at beginning of period      239

Balance at end of period           \$567

Cash paid:
Interest                           \$628

Income taxes                     \$1,366

____________________________
Created by 10-K Wizard.
http://www.10kwizard.com/
2006.00           2005.00

\$3,060            \$2,632

891               879
(168)             (408)
(251)                 0
(117)             (108)
0                32
793               315

(200)                65
(149)              (42)
256                74
(105)              (33)
(133)               273
(197)             (432)
(128)              (10)

168               227

3,720             3,464

(1,169)           (1,171)
0                 0
946             1,668
107                28

(116)               525

343        (1,005)

69                   69
(1,324)                (775)
62                  107

(1,254)           (1,175)
(1,562)           (1,437)
(54)               265

(3,720)           (3,951)

39               (4)
(77)        34
316       282

\$239      \$316

\$628      \$679

\$1,560   \$1,957
KRAFT FOODS INC
10-K/A
02/26/2008

Segment Reporting

Fo
Pro Forma
2008                        2007

Net revenues:                                    Growth                      Growth
North America Beverages                  3,364    4.00%             \$3,235    4.76%
North America Cheese & Foodservice       6,733    5.50%              6,382    5.00%
North America Convenient Meals           5,326    4.50%              5,097    4.81%
North America Grocery                    2,699    0.00%              2,699   -1.17%
North America Snacks & Cereals           6,657    2.00%              6,526    2.64%
European Union                           9,147   15.00%              7,954   19.21%
Developing Markets                       6,418   20.00%              5,348   17.13%

Net revenues                            40,344    8.33%         \$37,241       8.40%

Fo

2007.00

Operating income:
Segment operating income:
North America Beverages                                               \$337
North America Cheese & Foodservice                                     621
North America Convenient Meals                                         695
North America Grocery                                                  817
North America Snacks & Cereals                                       1,018
European Union                                                         571
Developing Markets                                                     491
General corporate expenses                                           (206)
Amortization of intangibles                                           (13)

Operating income                                                    \$4,331

____________________________
Created by 10-K Wizard.
http://www.10kwizard.com/
For the Years Ended
December 31,
2006                        2005
(in millions)
Growth
\$3,088     1.05%             \$3,056
6,078    -2.66%              6,244
4,863     3.05%              4,719
2,731    -9.69%              3,024
6,358     1.73%              6,250
6,672    -0.63%              6,714
4,566    11.20%              4,106

\$34,356    0.71%          \$34,113

For the Years Ended
December 31,
2006.00                   2005.00
(in millions)

\$205                         \$463
886                          921
914                          793
919                          724
829                          930
548                          722
416                          400
(189)                        (194)
(7)                         (10)

\$4,521                       \$4,749
2007   Revenue      P/E   EBITDA
GDNNY          19.4   25.87