DCF method (valuation) (FCFF, FCFE) Flashcards
(91 cards)
1
Q
Name 4 Valuation approaches!
A
Asset based
flows of results
economic profit
relative valuation
2
Q
Asset based valuation can be devided into what valuation methods? (2)
A
Simple
Complex
3
Q
Flows of results (valuation approach) can be devided into which valuation methods? (2)
A
Earnings-based
Financial (DCF -> Discounted Cash Flow)
4
Q
Economic profit (valuation approach) can be devided into which valuation methods? (2)
A
Mixed method with goodwill
Economic value added
5
Q
Relative valuation (valuation approach) can be devided into which valuation methods? (2)
A
Traded multiples
Comparable transactions
6
Q
The valuation with the DCF model considers what?
A
Considers that the value of a company is equal to the present value of the cash flows generated in the future.
7
Q
What is the Discounted Cash Flow (DCF) method?
A
DCF is an ANALYTICAL method based on the PRESENT VALUE of CASH FLOWS
8
Q
When is the Discounted Cash Flow (DCF) method used? (2)
A
projects with a limited duration
stable businesses, with limited growth or with foreseeable results
9
Q
Asset Side Perspective (Unlevered Method)
Looks at the company as ?(1)?
Does not consider the ?(2)?
Considers cash flows for ?(3)?
the value of the company (EQUITY) is the difference between the ?(4)? and the ?(5)?
A
(1) investment
(2) financial structure
(3) investors
(4) market value of the invested capital (ENTERPRISE VALUE)
(5) net financial debt
10
Q
Equity Side Perspective (Levered Method)
Looks at the company from the viewpoint of ?(1)?
Considers the ?(2)?
Considers cash flows for ?(3)?
The value of a company (EQUITY) is obtained ?(4)?
A
(1) shareholders
(2) financial structure
(3) shareholders
(4) directly
11
Q
Does the Unlevered Method or the Levered Method considers the cash flow for investors?
A
Unlevered Method (Asset Side Perspective)
12
Q
The Equity Side Perspective (Levered Method) does not consider the financial structure.
True/False?
A
FALSE!!
-> it considers the financial structure
-> The Asset Side Perspective (Unlevered Method) doesn’t consider the financial structure
13
Q
With an asset side perspective, it is possible to estimate the value of the economic capital in an ?(1)? way, evaluating the ?(2)? at first and subtracting the ?(3)? of the ?(4)?
A
(1) indirect
(2) invested capital (Enterprise value)
(3) market value
(4) net financial position (NFP)
-> Folie 5 !!
14
Q
Asset side perspective
How can we get to the Value of the Equity (Equity Value)? (2 ways)
A
- way: Free Cash Flows to Equity (FCFE)
- way:
Free Cash Flows to Firm (FCFF)
-> Value of invested Capital (Enterprise Value)
MINUS
market value of net financial debts
15
Q
Asset side
To evaluate the Enterprise Value of a company, it is fundamental to know what?
A
the free cash flow to form (FCFF)
the appropriate discount rate which represents the average expected return of the investors (WACC -> Weighted average cost of capital))
16
Q
Asset side
The value of the economic capital is the sum of ?(1)? generated by the company in the future, discounted with a ?(2)? less the ?(3)? expressed at ?(4)? at the date in which the evaluation is performed
A
(1) operating free cash flows
(2) weighted average cost of capital rate
(3) net financial position of the company
(4) market values
17
Q
With an equity side perspective, the value of the economic capital is estimated in a ?(1)? way, discounting the ?(2)? with a rate which expresses their expected ?(3)?.
A
(1) direct
(2) cash flows available to shareholders (FCFE -> Free Cash Flows to Equity)
(3) remuneration (Deutsch: Vergütung)
-> Folie 7
18
Q
Valuation period
Describe the analytical forecast period!
A
Single cash flows are estimated
Usually between 5 and 10 years
–> cash flows: 1-year cash flows, every year
-> Folie 8 ansehen !!
19
Q
Valuation period
Describe the synthetic forecast period.
A
One number for all future cash flows
steady state
–> cash flow: Terminal value
-> Folie 8 ansehen
20
Q
Steps of DCF: ?? (3)
A
- Cash flows:
Company value component during the analytical period - Discount rate:
Factor incorporating the time value of money - Terminal value:
Company value component after the analytical period
21
Q
Example Folie 10!
A
…
22
Q
Free Cash Flow to Firm (FCFF)
Wie lässt sich der FCFF berechnen?
A
- EBIT bestimmen:
Sales
- OpEx
= EBITDA
- D&A (Depreciation and Amortization)
= EBIT
- FCFF über EBIT bestimmen:
EBIT
- Taxes
+ D&A
+/- Net Working Capital Change
- Net Investments
= FCFF
-> hierzu auch Folie 12 - 17 ansehen!
23
Q
Wie lässt sich EBIT (Earning before interests and taxes) bestimmen?
A
Sales
- OpEx
= EBITDA
- D&A (Depreciation & Amortization)
= EBIT
24
Q
EBIT represents what?
A
the operating income of the ordinary operations
25
EBIT depends on ?(1)? and ?(2)? choices (i.e. leasing vs. properties purchase, ...)
(1) strategic
(2) operating
26
Wie lassen sich die Taxes für die FCFF Berechnung bestimmen?
1st method:
Tax Provision (from Income Statement)
+ financial expenses shield
- taxes on interest income
- taxes on non operating income
+/- change in deferred taxation provisions
= taxes on operating income
2nd method:
adopt the average tax rate to the EBIT
27
What does Depreciation and Amortization (D&A) include?
It includes the non financial costs detracted from the EBIT i.e.:
- intangible assets amortization (patents, licenses, ...)
- provisions for employee termination indemnities and others provisions
28
What does Depreciation and Amortization (D&A) depends on?
on particular operating choices and policies
29
What does the NWC (Net Working Capital) represent?
the company investment deriving (abgeleitet) from the PTS (purchase, transformation and sale) traditional operations
30
Change in NWC
How to calculate NWC?
+ Accounts Receivables
+ Inventories
- Accounts Payable
= Working capital
-> BE CAREFUL: only the balance sheet operating items have to be included (!)
31
Change in NWC
What does the change in NWC represents?
an investment increase or decrease which affects the Flows
32
Change in NWC
The increase of account receivables (sales, growth, higher clients deffered payments, ...) and inventories ?(1)? affects the flows
The increase of account payables ?(2)? affects the flows.
(1) negatively
(2) positively
33
Change in NWC
An ?(1)? in NWC absorbs cash funds, so it must be ?(2)? from the flow; a NWC decrease must be ?(3)? to the flow
(1) increase
(2) deducted (abgezogen)
(3) added
34
Net Investments
It comprehends (umfasst) the ?(1)?, both for maintenance and new investments (expansion, acquisition,...)
The cash inflows due to disinvestments have to be ?(2)?
(1) fixed capital investments
(2) deducted
35
The FCFF is a cash flow available for whom?
- the company "investors"
-> i.e. debt holders (banks, bondholders,...) and equity holders (shareholders)
36
The FCFFs are available for the whole panel of investors as they do not depend on the ?(1)? and they remunerate (entlohnen) both ?(2)? and ?(3)?
(1) company financial structure
(2) banks (finance costs, loan refunds, ...)
(3) shareholders (dividends, ...)
37
Equity side perspective
FCFEs are the cash flows available for ?(1)?, thus they are net of all the flows related to ?(2)?
(1) shareholders
(2) non operating activities (financial structure, variations in debt or equity, ...)
38
For the Equity Value we use FCFF or FCFE?
FCFE
39
What does FCFE stands for?
Free Cash Flow to Equity
40
What does FCFF stands for?
Free Cash Flow to Firm
or
operating free cash flow
41
For the Enterprise Value (EV) (= Assets) we use FCFF or FCFE?
FCFF
42
Enterprise Value (EV) = Net Debt (NFP) + Equity Value (E)
True / False ?
True
43
How can we get from the FCFF to the FCFE? (How do we calculate?)
FCFF
+/- Financial revenues/expenses (net of tax)
+/- Decrease/increase in share capital
+/- Change of the net debt
= Free Cash Flow to Equity
44
FCFE
Financial revenues / expenses (net of tax):
Financial revenues have to be reported net of taxes, therefore multiplied by ?(1)?, where t is the ?(2)?.
Also the financial expenses have to be reported net of taxes (please note the ?(3)?)
(1) (1-t)
(2) marginal tax rate
(3) positive effect on flows - debt fiscal shield
(Deutsch:
Die Finanzerträge sind nach Abzug von Steuern auszuweisen und daher mit (1-t) zu multiplizieren, wobei t der Grenzsteuersatz ist.
Auch die Finanzaufwendungen müssen nach Abzug der Steuern ausgewiesen werden (bitte beachten Sie die positive Auswirkung auf die Stromgrößen - die steuerliche Abschirmung der Schulden).
)
45
FCFE:
Decrease/Increase in share capital:
The increase in share capital (i.e. CAPITAL INCREASE) is an item which ?(1)? the FCFE beacuse, after having been charged in the equity, the flows are available and at service of ?(2)?
The ?(3)? distributed come in this category and impact on FCFE, ?(4)? the amount
(1) increases
(2) shareholders
(3) DIVIDENDS
(4) lowering
46
FCFE
Change of the net debt:
Debt refund or its resolution are a cash ?(1)?, therefore they ?(2)? flows available to shareholders
New loans (mortgages, bond loans, ...) make available cash, which ?(3)? the FCFE
(1) outflow
(2) absorb
(3) increases
(Deutsch:
FCFE
Veränderung der Nettoverschuldung:
Die Rückzahlung von Schulden oder deren Auflösung ist ein Mittelabfluss und absorbiert daher die den Aktionären zur Verfügung stehenden Mittel.
Neue Kredite (Hypotheken, Anleihen, ...) machen Barmittel verfügbar, was den FCFE erhöht
)
47
Tax-shield/Steuerschild:
Von https://welt-der-bwl.de/Tax-Shield:
Der Begriff Tax Shield (deutsch: "Steuerschild") hat diesen Hintergrund: Zinsen für Fremdkapital (Kredite) sind steuerlich abzugsfähig, mindern also den Gewinn und damit die Steuerlast.
Im Gegensatz dazu sind Vergütungen, die Eigenkapitalgeber erhalten (Dividenden) nicht steuerlich abzugsfähig, sondern werden aus dem versteuerten Gewinn geleistet.
Fremdkapital hat also steuerliche Vorteile gegenüber Eigenkapital, es ist bildlich gesprochen wie ein Schutzschild gegen das Steuerschwert.
--> bei Quelle auch ein Rechenbeispiel zum tax shield
...
48
The Discount rate is the rate needed to?
compute the present value of future flows
(Deutsch: Der Abzinsungssatz ist der Zinssatz, der für die Berechnung des Gegenwartswerts künftiger Ströme erforderlich ist.)
49
Discount rate
Opportunity cost for investors:
It is the ?(1)? to which investors renounce for alternative opportunities, risk being ?(2)?
(1) yield
(2) equal
-> Folie 24
50
Discount rate
Cost of capital for the company:
represents the cost for the ?(1)? of investors, shareholders and debtholders
(1) remuneration (Vergütung)
-> Folie 24
51
The Discount Rate has to remunerate all the investors and it has to be ?? with the discounted flows.
COHERENT
(Deutsch: Der Abzinsungssatz muss alle Investoren berücksichtigen und er muss mit den diskontierten Flüssen übereinstimmen.)
(GTP: Zusammengefasst bedeutet der Satz, dass der Diskontsatz nicht nur die Investoren angemessen belohnen sollte, sondern auch in einer Weise gewählt werden muss, die mit den finanziellen Merkmalen der zukünftigen Zahlungsströme und den damit verbundenen Risiken übereinstimmt. Eine kohärente Wahl des Diskontsatzes ist wichtig, um genaue und sinnvolle finanzielle Bewertungen vorzunehmen.)
52
Flow and cost of capital
FCFFs are available for ?(1)? and thus remunerate both ?(2)? and ?(3)?
(1) investors
(2) banks
(3) shareholders
53
Discount rate COHERENT with FCFF
-> It corresponds to what?
the rate which represents the return required by all investors
--> W.A.C.C. (Weighted Average Cost of Capital (WACC))
(Deutsch: Discount rate KOHÄRENT mit FCFF -> entspricht dem Satz, der die von allen Investoren geforderte Rendite darstellt)
54
How to calculate the equity cost of capital ksube (like the minimum expected return for shareholders)? (Formel)
ksube =
rsubf
+
ß
x
(rsubm - rsubf)
--
ksube: cost of equity
rsubf: risk free return
ß: beta
rsubm: market return
(rsubm - rsubf): market premium
55
rsubf - risk free return
What means the rsubf in theory?
return of an investment with no default risk and no reinvestment risk
-> there should be a convergence between flows to be discounted and risk-free rates in both temporal terms and currency
(Deutsch: Rendite einer Investition ohne Ausfallrisiko und ohne Wiederanlagerisiko
-> es sollte eine Konvergenz zwischen den zu diskontierenden Strömen und den risikofreien Sätzen sowohl in zeitlicher Hinsicht als auch in der Währung bestehen)
56
rsubf - risk free return
What means the rsubf in practice?
It corresponds to the less Treasury bond rate in the same currency area
-> in general, the German 10-Y Bond proxies the risk free rate in Europe (i.e. companies with EUR-currency) but it should be aligned with the maturity of the flows
-> Source: financial software, business and economic newspapers
(Deutsch: Er entspricht dem niedrigsten Zinssatz für Staatsanleihen im gleichen Währungsraum.
-> im Allgemeinen entspricht die deutsche 10-Jahres-Anleihe dem risikofreien Zinssatz in Europa (d.h. Unternehmen mit EUR-Währung), sollte aber an die Fälligkeit der Geldströme angepasst werden
-> Quelle: Finanzsoftware, Wirtschafts- und Fachzeitschriften)
Zusatz:
- ob man short term oder long term bonds (for example 30 years) verwendet hängt auch von den eigenen Interessen ab
-> risk of long term bonds usually higher but in history it hasn't always been the case
- use credit rankings and only use the less risky once as a reference (ONLY AAA, AA, A, BBB)
- If we compare the rates of different bonds, we have to keep in mind that they are in local currency
-> so you can't just compare UK and EU government bonds(!)
57
To find a suitable risk free rate, use a credit ranking. Oly use the less risky treasury bond rates.
Which once?
AAA
AA
A
BBB
58
- If we compare the rates of different bonds, we have to keep in mind that they are in local currency
-> so you can't just compare UK and EU government bonds(!)
for example:
1,000€
-> German treasury bond rate: 2,78% -> 1,0278€
-> it is 1,060 US $ and the US treasury bond is 4,8% -> so 1,111 US $
1,111 US $ <-- €/$ ; $/€ --> 1,0278€
...
59
Usually you use the government bonds of your cash flow
What are the 2 options in case of an MNE?
1. you can split the assumption in currencies
2. you do it in one single currency
60
Beschreibe kurz&knapp das Vorgehen bei der Bestimmung von rsubf (risk free rate)!
Government bonds
->
Only AAA-BBB (Ranking)
-->
set period of time
-->
chose the currency (for Europe usually we take the german government bonds as long they still have the lowest rate)
61
In South America and Africa you usually chose which currency?
US $
62
The market risk premium
In theory it corresponds to the difference between the ?(1)? of a market portfolio and the ?(2)?
(1) expected return (rsubm)
(2) risk free rate (rsubf)
(rsubm - rsubf)
63
The market risk premium
In theory it corresponds to the difference between the expected return (rsubm) of a market portfolio and the risk free rate (rsubf)
In practice the market portfolio is generally proxied by a ?(1)?. Thus, the rsubm is the ?(2)?
Historically, the market risk premium has been about ?(3)? and ?(4)? in Europe and US
(1) stock exchange index (e.g. FTSE MIB in Italy or S&P 500 in US).
(Zusatzinfo: The shareholder can be from different countries, so for each investor the average return needs to be investigated)
(2) return of such index
(3) 4% and 6%
64
The market risk premium is showing the difference between investing in the company vs. investing in the less risky government bond.
-> the market risk premium wird also dem zusätzlichen Risiko gerecht
...
65
The beta
What does it indicate (angeben)?
the systematic risk of a company
66
The beta
What does it represent?
the volatility of a share compared to the market trend
67
The beta
How is it defined?
As the ratio between the covariance of the asset with the market portfolio and the variance of the market portfolio (i.e. an ideal portfolio composed of all the stocks presented in the market)
(Deutsch: Als Verhältnis zwischen der Kovarianz des Vermögenswerts mit dem Marktportfolio und der Varianz des Marktportfolios (d. h. eines idealen Portfolios, das sich aus allen auf dem Markt angebotenen Aktien zusammensetzt))
68
Name determinants for the beta! (3)
Financial leverage
Operating leverage
Industry leverage
69
The beta could assume a different value, in particular:
What does ß < 1 mean?
Means that the security (Wertpapier) has been less volatile than the market, and the security is said to be "defensive".
-> It includes the case ß < 0 which means that the security has moved against the market
(Deutsch: Das bedeutet, dass das Wertpapier weniger volatil war als der Markt und dass das Wertpapier als "defensiv" bezeichnet wird.
-> Er umfasst den Fall ß < 0, was bedeutet, dass sich das Wertpapier gegen den Markt bewegt hat.)
70
The beta could assume a different value, in particular:
What does ß = 1 mean?
the security has moved with the market
(das Wertpapier hat sich mit dem Markt entwickelt)
71
The beta could assume a different value, in particular:
What does ß > 1 mean?
the security has been more volatile than the market, and the security is said to be "aggressive"
72
Sharpe (1964) reports: It is common practice for investment counselors to accept a lower expected return from defensive securities [ß<1] (those which rerspond little to changes in the economy) than they require from aggressive securities [ß>1] (which exhibit significant response)
(Irgendwie logisch, weil man für höheres Risiko auch entsprechend entlohnt werden möchte?!)
...
73
How to compute (errechnen) beta in case of a listed company:
It is possible to compute the beta through what?
through a regression of the stock returns against the market returns
74
How to compute (errechnen) beta in case of a listed company:
It is possible to compute the beta through a regression of the stock returns against the market returns
Otherwise, financial press publishes the ones of the most relevant companies. In this case, it should be paid attention to what?
the way in which the beta is computed
(i.e. which stock exchange index has been chosen, which period of time)
(-> Finally, Damodaran reports some industry betas)
75
How to compute beta in case of an unlisted company
The beta could be estimated starting from a sample of comparable companies according to their main business, size, geographical exposition, competitive positioning
But the comparable companies beta should be cleaned up of the ?(1)? and ?(2)? structure effects
(1) financial
(2) fiscal
76
How to compute beta in case of an unlisted company, steps:
Name the steps 1. - 5. !
1. Find a sample of listed comparable companies with hard similarities.
-> Sometimes, it is possible to consider comparable companies even those which are not in the same industry (e.g. luxury)
2. Find the unlevered beta for each comparable company
ßsub(U, comparable) =
ß^Lsub(comp.)
/
[1+(1-tsub(s,comp.) x (D/E)sub(comp.)]
3. Compute the average unlevered beta for the comparable companies, which corresponds to the unlevered one of the target company
4. Compute the target company levered beta with its financial and fiscal structure
ß^Lsub(target) =
ß^U
x
[1 + (1-tsub(c,target)) x (D/E)sub(target)]
5. In case the company is a start-up or a very risky company (e.g. predominant exposure to emerging markets, in a turnaround, very innovative), the final beta should be adjusted to consider this issue
77
Example - beta industry
--> Folie 34!!!!
...
78
Weighted Average Cost of Capital
How is it calculated? (Formel)
WACC =
D / (D+E)
x
ksubD
x
(1-tsubc)
+
E/(D+E)
x
ksubE
----
WACC: Weighted Average Cost of Capital
D: Company debt
E: Company equity
ksubD: Cost of debt
tsubC: Tax rate
ksube: Equity cost of capital
79
The components of WACC: cost of debt (ksubD x (1-tsubC))
The ksubD corresponds to
-> a weighted average of the ?(1)? the company has
-> the ?(2)? plus the associated ?(3)?
The tsubC instead corresponds to the ratio between the ?(4)? and the ?(5)?
ksubD x (1-tsubC) corresponds to the ?(6)?, i.e. net of the tax shield financial interest payables give to the company
(1) cost of the different laons
(2) risk-free rate
(3) credit default spread (Kreditausfallspanne)`
(4) P&L account tax item
(5) Earning Before Taxes (EBT)
(6) net cost of debt
80
The components of WACC: financial structure (D/(D+E)) & E/(D+E))
1) In case of a listed company, the Debt and the Equity of the company should be computed with what?
2) In case of an unlisted company, these are?
3) The financial structure could be either what? (3)
1) their market values
2) Balance Sheet data
3)
the target one
the average one
the implicit one
81
beta das Verhältnis von company risk zu average equity-risk.
Falls company risk > average equity risk ist was notwendig?
extra return required
-> ß von 1.1 or higher
82
Das Unternehmensrisiko (company risk) ergibt sich durch die Industry, in welchem das Unternehmen tätig ist und die finanzielle Situation.
...
83
Wenn company risk = average equity-risk how high is beta then?
ß = 1
84
Wie lautet die Formel zur Berechnung von beta?
ß =
COV(rsubm, rsubshare)
/
Var(rsubm)
-> von Software meist berechnet
85
Folie57+58 (eigene Aufzeichnungen zu beta) ansehen!!!!
...
86
Für die Berechnung von beta sollte man was für Daten verwenden?
weekly data (3-5 year)
or
montly basis (but than 5years)
87
Beispiel:
Was meint ein ß von 0,9?
Means f. ex. 10% lower in volatility in comparison with the market
88
Can beta be negative?
yes, theoretically
-> is very good for a balancing portfolio
89
If a company has no loans then the only source of investments is equity.
Is this advisable?
No it's not very clever because someone can take over the company, than push loans to try to reach the optimum (WACC*) -> Folie 58
90
What does a negative beta means?
Means that an asset moves in the opposite direction of the stock market (an example of this could be gold during economic downturns)
-> daher vermutlich so beliebt für Portfolio-Balancing
91
