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					Corporate Valuation and Financing
FCFM review
Prof H. Pirotte
Introduction                                                                   Prof H. Pirotte   2

  Investment rules
   Net Present Value (NPV)
        » Discounted incremental free cash flows
        » Rule: invest if NPV>0                                    NPV

   Internal Rate of Return (IRR)
                                                                         IRR
        » IRR: discount rate such that NPV=0
        » Rule: invest if IRR > Cost of capital
                                                                                       r
   Payback period
        » Numbers of year to recoup initial investment
        » No precise rule
   Profitability Index (PI)
        » PI = NPV / Investment
        » Useful to rank projects if capital spending is limited
Introduction                                                                                                                                          Prof H. Pirotte   3

  What do CFOs Use? – Capital budgeting (2)
                                           How freqently does your firm use the following techniques when deciding which project or acquisition to
                                                                                            pursue?
                                                                             Source: Graham Harvey JFE 2001 n =392


                                              IRR

                                             NPV

                                      Hurdle rate

                                         Payback
      Evaluation technique




                              Sensitivity analysis

                                     P/E multiple

                             Discounted payback

                                    Real options

                              Book rate of return

                             Simulation analysis

                                Profitability index

                                              APV

                                                 0.00%      10.00%       20.00%        30.00%        40.00%        50.00%       60.00%       70.00%        80.00%
                                                                                            % always or almost always
Introduction                                                                                                                      Prof H. Pirotte   4

  What do CFOs Use? – Cost of Equity

                                                   How do you determine your firm's cost of equity capital?




                                      CAPM




         Arithmetic average historical return




                            Multibeta CAPM




                   Dividend discount model




                       Investor expectations




                       Regulatory decisions



                                           0.00%   10.00%       20.00%       30.00%       40.00%       50.00%   60.00%   70.00%      80.00%
                                                                                 % always or almost always
Introduction                                                       Prof H. Pirotte   5

  Cash Flows
   Only interested in financial cash flows…
        » Their timely impact…
        » And the degree of certainty attached to them.
   Example of income statement:
        Revenu                           Revenues                         2’262
        - Coûts des ventes               - Costs of goods sold           -1’655
        - Autres dépenses (...)          - Other expenses (...)            -327
        - Amortissement                  - Depreciation                     -90
        = Revenu opérationnel            = Operating Income               = 190
        + Autres revenus                 + Other Income                     +29
        = Bén. av Intérêts et Impôts     = EBIT                              190
        - Intérêts                       - Interest expenses                 -49
        Bén. avant impôts                Pretax Income                    = 170
        - Impôts (act:71+rep:13)         - Taxes (act:71+def:13)            -84
        Bénéfice Net                     Net Income                         = 86
         Bén. reporté                    Retained Earnings                  43
         Dividendes                      Dividends                          43
Introduction                                                                         Prof H. Pirotte   6

  Cash Flows
 Cash-Flow of the Firm:
  Bén. Av Intérêts et Impôts                    EBIT                                       219
  + Amortissements                              + Depreciation                             +90
  - Impôts                                      - Taxes                                    -71
  = Cash-Flow Opérationnel                     = Operating Cash-Flow                   = 238
  Acquisitions d’actifs fixes                   Acquisition of fixed assets                198
  - Ventes d’actifs fixes                       - Sales of fixed assets                    - 25
  = Dépenses en capital                        = Capital spending                      = 173
  Additions au Fonds de Roulement Net          Additions to Net Working Capital           23
  CASH-FLOW TOTAL (++)                       TOTAL CASH-FLOW (++)                     42

  Cash-Flow to Investors in the Firm:
  Cash-flows pour la dette                       Cash-flows pour l’actionnariat
  Intérêts                                  49 Dividendes                                   43
  + Retrait de la dette                    +73 +Rachats                                     +6

  = Service de la dette                   = 122 Cash aux actionnaires                     = 49
  - Dette nouvellement émise                -86 - Nouvelles émissions                     - 43
  Total                                    = 36  Capital-actions                           =6
Introduction                                                         Prof H. Pirotte   7

  Accounting Statement of Cash Flows
        Cash Flow Opérationnel         Bénéfice Net                        86
                                       Dépreciation                        90
                                       Taxes Différées                     13
                                        Actifs/Passifs Circulants         10
                                                                         199
        + Cash Flow d’Investissement   Acquisitions d’actifs fixes      -198
                                       Ventes d’actifs fixes              25
                                                                        -173
        + Cash Flow de Financement     Retrait de la dette                -73
                                       Nouvelle dette reçue                86
                                       Dividendes                         -43
                                       Rachat d’actions                    -6
                                       Nouvelles actions                   43
                                                                            7
        = Cash                                                            33
Introduction   Prof H. Pirotte   8
Introduction   Prof H. Pirotte   9
Introduction                                  Prof H. Pirotte 10

  Difference(s) between project and firm valuation?
Introduction       Prof H. Pirotte 11

  Modus operandi
Introduction    Prof H. Pirotte 12

  Application
Introduction            Prof H. Pirotte 13

  Actuarial shortcuts

				
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