Professional Documents
Culture Documents
Corporate Valuation,
Value-Based Management and
Corporate Governance
1
Topics in Chapter
Corporate Valuation
Value-Based Management
Corporate Governance
Net operating
profit after taxes
Required investments
in operating capital
FCF1
Value =
(1 + WACC)1
FCF2
+
(1 + WACC)2
FCF
+ +
(1 +
WACC)
Weighted average
cost of capital
(WACC)
Market interest rates
Market risk aversion
Corporate Valuation: A
company owns two types of
assets.
Assets-in-place
Financial, or nonoperating, assets
Assets-in-Place
Value of Operations
Vop =
t=
1
FCFt
(1 + WACC)t
Nonoperating Assets
Marketable securities
Ownership of non-controlling
interest in another company
Value of nonoperating assets
usually is very close to figure that
is reported on balance sheets.
Value of operations
Value of nonoperating assets
WACC = 11%
g = 5%
Marketable securities = $100 million
Debt = $200 million
Preferred stock = $50 million
Book value of equity = $210 million
Number of shares =n = 10 million
11
Value of Operations:
Constant FCF Growth at
Rate of g
Vop =
t=
1
t=1
FCFt
(1 + WACC)t
FCF0(1+g)t
(1 + WACC)t
12
FCF
Vop =
t=
1
1+ g
1 + WACC
13
Vop =
FCF1
(WACC - g)
FCF0(1+g)
(WACC - g)
14
FCF0 (1 + g)
=
(WACC - g)
24(1+0.05)
= 420
Vop =
(0.11
0.05)
15
VTotal
$420.00
100.00
$520.00
16
$420.00
+ ST Inv.
VTotal
100.00
$520.00
Preferred
Stk.
Debt
50.00
VEquity
200.00
$270.00
17
$420.00
+ ST Inv.
VTotal
100.00
$520.00
Preferred
Stk.
Debt
VEquity
50.00
200.00
$270.00
10
18
Breakdown of Corporate
Value
20
Expansion Plan:
Nonconstant Growth
22
Horizon Value
24
HV
=
Vop at time t
=
FCFt(1+g)
(WACC - g)
Value of operations is PV
of FCF discounted by
WACC.
0
WACC =10% 1
5.00
2
10.00
3 g = 6%
20.00
FCF3(1+g)
4.545
(WACCg)
8.264
$20(1.06)
0.100.06
15.026
$530 = V
398.197
416.942
Vop
op at
$530/
(1+WACC)3
26
$416.942
+ ST Inv.
VTotal
0
$416.942
Preferred
Stk.
Debt
VEquity
40.000
$376.942
10
27
Value-Based Management
(VBM)
28
Sales growth
Operating profitability
(OP=NOPAT/Sales)
Capital requirements (CR=Operating
capital / Sales)
Weighted average cost of capital
29
CR
OP WACC
(1+g)
30
Insights (Cont.)
CR
OP WACC
(1+g)
32
WACC is reduced
operating profitability (OP) increases
the capital requirement (CR)
decreases
33
Expected Return on
Invested Capital (EROIC)
EROICt
=
NOPATt+1
CRt
=
Capita
Capita
lt
lt
36
37
38
6%
78%
5%
6%
78%
6%
4%
27%
5%
4%
27%
6%
385.0
40
Division A
$780
$780
Division B
$270 $270
5%
6%
5%
$1,05 $1,060 $1,05
0
0
$63 $63.6
$42
8.1%
6%
$1,06
0
$42.4
(300.0 (360.0
)
)
300.0
385.0
41
Analysis of Growth
Strategies
(More . .)
43
Corporate Governance
45
Corporate Governance
Provisions Under a Firms
Control
Board of directors
Charter provisions affecting
takeovers
Compensation plans
Capital structure choices
Internal accounting control
systems
46
Effective Boards of
Directors
47
Effective Boards of
Directors
48
Effective Boards of
Directors (Continued)
49
Effective Boards of
Directors (Continued)
Anti-Takeover Provisions
51
Stock Options in
Compensation Plans
53
Block Ownership
55