Vietnam Master in Management – HCMC 2003 Valuatio n Valuation • Creation of value • Valuation of a stock listed company • Valuation of a non listed company • Net Asset • Price-earning Ratio • Present Value of Dividends • Present Value of Free Cash flow
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Vietnam Master in Management – HCMC 2003 Valuation Creation of value Valuation of a stock listed company Valuation of a non listed company Net Asset Price-earning.
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Vietnam Master in Management – HCMC 2003Valuation
Valuation
• Creation of value• Valuation of a stock listed company• Valuation of a non listed company• Net Asset• Price-earning Ratio• Present Value of Dividends• Present Value of Free Cash flow
Vietnam Master in Management – HCMC 2003Valuation
Creation of value
• The goal of any company : to create value This means : increase the value of the company for
the shareholders With full respect for the legal framework
• social, fiscal, environmental regulations
And for all the other stakeholders• employees• customers• suppliers• neighbors
Vietnam Master in Management – HCMC 2003Valuation
Creation of value
• How can the value be increased ? by buying assets at a price lower than their economic
value• real estate : buying during a depression (crisis)
by selling assets at a price higher than their economic value
• real estate : selling during a boom
Vietnam Master in Management – HCMC 2003Valuation
Creation of value
• The best way to create value : Innovation introducing new products
• Microsoft• Cellular phones
introducing new production processes• Car manufacturers
improving the productivity of labor improving the quality of products etc.
Vietnam Master in Management – HCMC 2003Valuation
Market capitalization of a stock listed company
• For listed companies the share price is known daily the value of the company is equal to the price share
multiplied by the number of shares V = pshare.nshares
V = Market capitalization (“market cap”)
• If the market is efficient the Market Cap is always the true value of the company Efficient market means that at any time all the market
has all the information on the company
Vietnam Master in Management – HCMC 2003Valuation
Fair value of a stock listed company
• There is often a difference between the share price and the true value unequal distribution of the information
• good or bad news for the future not known by the market from inside information … to ... inside trading booming or bubble effect (psychology) misinterpretation of the facts by the market
Vietnam Master in Management – HCMC 2003Valuation
Fair value of a stock listed company
• Even for a stock listed company it is useful to calculate a “fair value” based on : All the information available on the company Comparison of the share price and of the financial ratios
with similar listed companies
• It is interesting to buy When the share price is lower than the fair value
• It is interesting to sell When the share price is higher than the fair value
Vietnam Master in Management – HCMC 2003Valuation
Valuation of a non listed company
• A valuation of a non listed company can only be known when : Shares of the company are sold The sale price is known
• But it is possible to estimate the value of a non-listed company by using different methods Based on the book value Based on comparison with similar listed companies Based on the present value of the future financial
flows of the company
Vietnam Master in Management – HCMC 2003Valuation
Net Asset
• Is the book-value of the equity a correct valuation of a company ? No : difference between book-value and market price
of the assets & liabilities• It is possible to replace in the Balance Sheet all
the book-values by the market prices• and to calculate a revised value of the equity
Equity Provision Long term debt ST oper debt ST fin debt Other debt
4.998
91 4.091
409 1.128
0
TOTAL 10.717 10.717
Vietnam Master in Management – HCMC 2003Valuation
Saigon Hotel - Net Asset
• Additional information The company owns the hotel building
• The book-value is 6.045 and the market price estimation 9.055
The director is an art collector and the company owns art pieces
• The book value is 125 and the market price 850 There are bad receivables for a book-value of 45 In the cash placement the company owns Microsoft
shares bought in 1992 for 10 and whose present stock price is 100
The tax rate on all profits is 40%
• What is the Net Asset of the Saigon Hotel ?
Vietnam Master in Management – HCMC 2003Valuation
Price-earning Ratio
• A second valuation method for a company is the Price-Earning Ratio (PER)
• The Price-earning Ratio is equal to the value of the company divided by the net result PER V / EAT
• For listed companies it can be calculated directly by dividing the share price by the net result per share eps = EAT / nshares
PER = pshare / eps
Vietnam Master in Management – HCMC 2003Valuation
Price-earning Ratio
• The PER is higher for a company with higher growth prospects for the earnings
• the risks being equal with lower risks
• the growth prospects being equal
• The PER is published daily in the financial papers on the financial Websites (cfr bourses)
Vietnam Master in Management – HCMC 2003Valuation
Price-earning ratios Examples (Oct 30, 2001)
Company pshare eps PER
Vodafone (GBP) 157,8 3,48 45,3
Telecom Ita Mob 5,9 0,29 ?
British Telecom 3,4 0,13 ?
France Telecom 40,0 ? 28,3 Volkswagen 41,7 5,87 7,1
Renault 32,8 4,49 ?
LVMH 38,2 ? 25,7
Vietnam Master in Management – HCMC 2003Valuation
Price-earning ratios Examples (Oct 30, 2001)
Company pshare eps PER
Vodafone (GBP) 157,8 3,48 45,3
Telecom Ita Mob 5,9 0,29 20,5
British Telecom 3,4 0,13 26,2
France Telecom 40,0 1,41 28,3 Volkswagen 41,7 5,87 7,1
Renault 32,8 4,49 7,3
LVMH 38,2 1,49 25,7
Vietnam Master in Management – HCMC 2003Valuation
Price-earning ratios Historic (Nov 2, 2000)
Company pshare eps PER
Vodafone (GBP) 35,3 1,73 20,4
Telecom Ita Mob 10,1 0,23 43,3
British Telecom 7,6 0,32 24,1France Telecom 121,9 2,71 45,0
Volkswagen 59,3 2,93 20,2
Renault 56,5 2,23 25,3LVMH 85,4 7,17 11,9
Vietnam Master in Management – HCMC 2003Valuation
Price-earning ratios - exercises
• What is the value of the Saigon Hotel in 2002 EAT = 432.000 $ PER = 15
• High level due to excellent location and future prospects
• Explain the difference between the PER Coca-cola & Pepsico Compaq & IBM
• Which industry should have the higher PER electricity or telecom classical telecom or cellular companies
Vietnam Master in Management – HCMC 2003Valuation
Present Value of Dividends
• Let us start from a very simple approach• Suppose that we know
that the expected value of the share of a company one year from now is v1
that a dividend div1 will be paid at that time that the Cost of the Capital for this company is r
• Then we can write the equation for the Present Value of the share
v0 = (div1 + v1) / (1+r)
Vietnam Master in Management – HCMC 2003Valuation
Present Value of Dividends
• We can repeat this calculation by writing the value of the share at time 1 based upon the value and dividend at time 2 v1 = (div2 + v2) / (1+r)
• and so on . . . v2 = (div3 + v3) / (1+r)
• We can then write v0 = (div1 + (div2 + v2) / (1+r))/(1+r) v0 = div1/(1+r) + div2/(1+r)2 +…+ pT/(1+r)T
Vietnam Master in Management – HCMC 2003Valuation
Present Value of Dividends
• If we consider that the company lives in perpetuity we can write v0 = div1/(1+r) + div2/(1+r)2 +…+ divt/(1+r)t + … V0= DIV1/(1+r) + DIV2/(1+r)2 +…+ DIVt/(1+r)t + …
• Or v0 = t=1
divt/(1+r)t
V0 = t=1 DIVt/(1+r)t
Vietnam Master in Management – HCMC 2003Valuation
Present Value of Dividends
• If we consider that : the company will live in perpetuity the growth rate of the dividend is constant and equal
to g
• Then divt = div1.(1+g)t-1
• Gordon & Shapiro proved mathematically that v0 = div1 / (r-g) V0 = DIV1 / (r-g) of course one must have r>g
• The lower the Cost of Capital the higher the value
• The higher the growth rate the higher the value
Vietnam Master in Management – HCMC 2003Valuation
PV of Dividends - Examples
• What is the Present Value of the Quiz Company ? the next dividend will be 12.000.000 $ the Cost of Capital is 14% the growth rate of dividend (perpetual) is 2%
• What is the Cost of capital of company B ? the next dividend will be 100.000 $ the present value is 1.000.000 $ the growth rate of dividend (perpetual) is 4%
Vietnam Master in Management – HCMC 2003Valuation
DCF modelPresent Value of Free Cash Flow
• An improved approach is to use the prospected Cash Flows from the Business Plan to estimate the value
• The Total Entreprise Value is equal to the PV of all FCF Entreprise Value = Equity + Financial Debt Free Cash Flow before Interest
• FCF = Net Operating Earning After Tax + Depreciation• Net Operating Earning After Tax (NOPAT) = EBIT.(1 - Tc)
EV0 = t=1 FCFt/(1+r)t
The Enterprise Value is equal to the PV of all Free Cash Flows
« Discounted Cash Flow Model »
Vietnam Master in Management – HCMC 2003Valuation
DCF ModelHow to use it ?
• Using the Business Plan one can calculate the EV Calculating the NOPAT and the FCF
• Problem : The Business Plan is made for a limited period of time 5, 10 or 20 years
• We need to estimate the value of the Cash Flows after the Business Plan period
Vietnam Master in Management – HCMC 2003Valuation
DCF ModelTerminal Value
The Terminal Value represents the EV for the perpetuity after the end of the Business Plan period
• Based on the Gordon-Shapiro formula VT = DIVT+1 / (r-g) or EVT = FCFT+1 / (r-g)
• T = last year of the Financial Plan « Normalized » FCF for the perpetuity FCFT+1 = NOPATT+1
• Future capex = Future depreciation (keep the production capacity)
g = perpetual growth rate• To be estimated cautiously (2% to 4%)
• Total Enterprise Value is then
EV0 = t=1T FCFt/(1+r)t + (NOPATT+1/(r-g))/(1+r)T
Vietnam Master in Management – HCMC 2003Valuation
DCF modelEquity Value
• The Value of the Equity is equal to The Enterprise Value (EV)Less The Financial Debt (Dfin)
• All interest bearing debts– Long term– Short term– Eventually others (if bearing interest)– Less Financial placement