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Lecture Intermediate corporate finance – Chapter 11: Corporate valuation and value-based management

Lecture Intermediate corporate finance: Chapter 11 - Corporate valuation and value-based management. This chapter presents the following content: Corporate valuation, value-based management, corporate governance. | CHAPTER 11 Corporate Valuation and Value-Based Management Topics in Chapter Corporate Valuation Value-Based Management Corporate Governance 1 Corporate Valuation: A company owns two types of assets. Assets-in-place Financial, or nonoperating, assets Assets-in-Place Assets-in-place are tangible, such as buildings, machines, inventory. Usually they are expected to grow. They generate free cash flows. The PV of their expected future free cash flows, discounted at the WACC, is the value of operations. Value of Operations Vop = Σ ∞ 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. Total Corporate Value Total corporate value is sum of: Value of operations Value of nonoperating assets Claims on Corporate Value Debtholders have first claim. Preferred stockholders have the next claim. Any remaining value belongs to stockholders. Applying the Corporate Valuation Model Forecast the financial statements, as shown in Chapter 9. Calculate the projected free cash flows. Model can be applied to a company that does not pay dividends, a privately held company, or a division of a company, since FCF can be calculated for each of these situations. Data for Valuation FCF0 = $20 million WACC = 10% g = 5% Marketable securities = $100 million Debt = $200 million Preferred stock = $50 million Book value of equity = $210 million Value of Operations: Constant FCF Growth at Rate of g Vop = Σ ∞ t = 1 FCFt (1 + WACC)t = Σ ∞ t = 1 FCF0(1+g)t (1 + WACC)t Constant Growth Formula Notice that the term in parentheses is less than one and gets smaller as t gets larger. As t gets very large, term approaches zero. Vop = Σ ∞ t = 1 FCF0 1 + WACC 1+ g t Constant Growth Formula (Cont.) The summation can be replaced by a single formula: Vop = FCF1 (WACC - g) = FCF0(1+g) (WACC - g) Find Value of . | CHAPTER 11 Corporate Valuation and Value-Based Management Topics in Chapter Corporate Valuation Value-Based Management Corporate Governance 1 Corporate Valuation: A company owns two types of assets. Assets-in-place Financial, or nonoperating, assets Assets-in-Place Assets-in-place are tangible, such as buildings, machines, inventory. Usually they are expected to grow. They generate free cash flows. The PV of their expected future free cash flows, discounted at the WACC, is the value of operations. Value of Operations Vop = Σ ∞ 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. Total Corporate Value Total corporate value is sum of: Value of operations Value of nonoperating assets Claims on Corporate Value Debtholders have first claim. Preferred stockholders have the next claim. Any remaining value