Kế toán, kiểm toán - Chapter 11: Corporate valuation and value - Based management

CHAPTER 11Corporate Valuation and Value-Based Management1Topics in ChapterCorporate ValuationValue-Based ManagementCorporate Governance2Corporate Valuation: A company owns two types of assets.Assets-in-placeFinancial, or nonoperating, assets 3Assets-in-PlaceAssets-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.4Value of OperationsVop = Σ∞t = 1FCFt(1 + WACC)t5Nonoperating AssetsMarketable securitiesOwnership of non-controlling interest in another companyValue of nonoperating assets usually is very close to figure that is reported on balance sheets.6Total Corporate ValueTotal corporate value is sum of:Value of operationsValue of nonoperating assets7Claims on Corporate ValueDebtholders have first claim.Preferred stockholders have the next claim.Any remaining value belongs to stockholders.8Applying the Corporate Valuation ModelForecast 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.9Data for ValuationFCF0 = $20 millionWACC = 10%g = 5%Marketable securities = $100 millionDebt = $200 millionPreferred stock = $50 millionBook value of equity = $210 million10Value of Operations: Constant FCF Growth at Rate of gVop = Σ∞t = 1FCFt(1 + WACC)t = Σ∞t = 1FCF0(1+g)t(1 + WACC)t11Constant Growth FormulaNotice 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 = 1FCF0 1 + WACC1+ gt12Constant Growth Formula (Cont.)The summation can be replaced by a single formula:Vop = FCF1(WACC - g) = FCF0(1+g)(WACC - g)13Find Value of OperationsVop = FCF0 (1 + g)(WACC - g)Vop = 20(1+0.05)(0.10 – 0.05)= 42014Value of Intrinsic Value of EquitySources of Corporate ValueValue of operations = $420Value of non-operating assets = $100Claims on Corporate ValueValue of Debt = $200Value of Preferred Stock = $50Intrinsic Value of Equity = ?15Intrinsic Value of EquityTotal corporate value = Vop + Mkt. Sec. = $420 + $100 = $520 millionIntrinsic val. of equ. = Total - Debt - Pref. = $520 - $200 - $50 = $270 million16Intrinsic Market Value Added (MVA)Intrinsic MVA = Total corporate value of firm minus total book value of firmTotal book value of firm = book value of equity + book value of debt + book value of preferred stock MVA = $520 - ($210 + $200 + $50) = $60 million17Breakdown of Corporate Value18Expansion Plan: Nonconstant GrowthFinance expansion by borrowing $40 million and halting dividends.Projected free cash flows (FCF):Year 1 FCF = -$5 million.Year 2 FCF = $10 million.Year 3 FCF = $20 millionFCF grows at constant rate of 6% after year 3.(More)19The weighted average cost of capital, WACC, is 10%.The company has 10 million shares of stock.20Horizon ValueFree cash flows are forecast for three years in this example, so the forecast horizon is three years.Growth in free cash flows is not constant during the forecast, so we can’t use the constant growth formula to find the value of operations at time 0. 21Horizon Value (Cont.)Growth is constant after the horizon (3 years), so we can modify the constant growth formula to find the value of all free cash flows beyond the horizon, discounted back to the horizon. 22Horizon Value FormulaHorizon value is also called terminal value, or continuing value.Vop at time t = FCFt(1+g)(WACC - g)HV =23Vop at 30 -4.5458.26415.026398.1971234rc=10%416.942 = Vopg = 6%FCF= -5.00 10.00 20.00 21.2$21.2..06 $530.1000Value of operations is PV of FCF discounted by WACC.24Find the price per share of common stock.Value of equity = Value of operations - Value of debt = $416.94 - $40 = $376.94 million.Price per share = $376.94 /10 = $37.69.25Value-Based Management (VBM)VBM is the systematic application of the corporate valuation model to all corporate decisions and strategic initiatives.The objective of VBM is to increase Market Value Added (MVA)26MVA and the Four Value DriversMVA is determined by four drivers:Sales growthOperating profitability (OP=NOPAT/Sales)Capital requirements (CR=Operating capital / Sales)Weighted average cost of capital27MVA for a Constant Growth FirmMVAt = OP – WACC CR(1+g)Salest(1 + g)WACC - g28Insights from the Constant Growth ModelThe first bracket is the MVA of a firm that gets to keep all of its sales revenues (i.e., its operating profit margin is 100%) and that never has to make additional investments in operating capital.Salest(1 + g)WACC - g29Insights (Cont.)The second bracket is the operating profit (as a %) the firm gets to keep, less the return that investors require for having tied up their capital in the firm.OP – WACC CR(1+g)30Improvements in MVA due to the Value DriversMVA will improve if:WACC is reducedoperating profitability (OP) increasesthe capital requirement (CR) decreases31The Impact of GrowthThe second term in brackets can be either positive or negative, depending on the relative size of profitability, capital requirements, and required return by investors.OP – WACC CR(1+g)32The Impact of Growth (Cont.)If the second term in brackets is negative, then growth decreases MVA. In other words, profits are not enough to offset the return on capital required by investors.If the second term in brackets is positive, then growth increases MVA.33Expected Return on Invested Capital (EROIC)The expected return on invested capital is the NOPAT expected next period divided by the amount of capital that is currently invested:EROICt =NOPATt + 1Capitalt34MVA in Terms of Expected ROIC If the spread between the expected return, EROICt, and the required return, WACC, is positive, then MVA is positive and growth makes MVA larger. The opposite is true if the spread is negative.MVAt = Capitalt (EROICt – WACC)WACC - g35The Impact of Growth on MVAA company has two divisions. Both have current sales of $1,000, current expected growth of 5%, and a WACC of 10%.Division A has high profitability (OP=6%) but high capital requirements (CR=78%).Division B has low profitability (OP=4%) but low capital requirements (CR=27%).36What is the impact on MVA if growth goes from 5% to 6%?Division ADivision BOP6%6%4%4%CR78%78%27%27%Growth5%6%5%6%MVA(300.0)(360.0)300.0 385.0Note: MVA is calculated using the formula on slide 11-28.37 Expected ROIC and MVA Division ADivision BCapital0$780$780$270$270Growth5%6%5%6%Sales1$1,050$1,060$1,050$1,060NOPAT1$63$63.6$42$42.4EROIC08.1%8.2%15.6%15.7%MVA(300.0)(360.0)300.0385.038Analysis of Growth StrategiesThe expected ROIC of Division A is less than the WACC, so the division should postpone growth efforts until it improves EROIC by reducing capital requirements (e.g., reducing inventory) and/or improving profitability.The expected ROIC of Division B is greater than the WACC, so the division should continue with its growth plans.39Six Potential Problems with Managerial BehaviorExpend too little time and effort.Consume too many nonpecuniary benefits.Avoid difficult decisions (e.g., close plant) out of loyalty to friends in company.(More . .)40Six Problems with Managerial Behavior (Continued)Reject risky positive NPV projects to avoid looking bad if project fails; take on risky negative NPV projects to try and hit a home run.Avoid returning capital to investors by making excess investments in marketable securities or by paying too much for acquisitions.Massage information releases or manage earnings to avoid revealing bad news.41Corporate GovernanceThe set of laws, rules, and procedures that influence a company’s operations and the decisions made by its managers.Sticks (threat of removal)Carrots (compensation) 42Corporate Governance Provisions Under a Firm’s ControlBoard of directorsCharter provisions affecting takeoversCompensation plansCapital structure choicesInternal accounting control systems43Effective Boards of DirectorsElection mechanisms make it easier for minority shareholders to gain seats:Not a “classified” board (i.e., all board members elected each year, not just those with multi-year staggered terms)Board elections allow cumulative voting(More . .)44Effective Boards of DirectorsCEO is not chairman of the board and does not have undue influence over the nominating committee.Board has a majority of outside directors (i.e., those who do not have another position in the company) with business expertise.(More . .)45Effective Boards of Directors (Continued)Is not an interlocking board (CEO of company A sits on board of company B, CEO of B sits on board of A).Board members are not unduly busy (i.e., set on too many other boards or have too many other business activities)(More . .)46Effective Boards of Directors (Continued)Compensation for board directors is appropriateNot so high that it encourages cronyism with CEONot all compensation is fixed salary (i.e., some compensation is linked to firm performance or stock performance)47Anti-Takeover ProvisionsTargeted share repurchases (i.e., greenmail)Shareholder rights provisions (i.e., poison pills)Restricted voting rights plans48Stock Options in Compensation PlansGives owner of option the right to buy a share of the company’s stock at a specified price (called the strike price or exercise price) even if the actual stock price is higher.Usually can’t exercise the option for several years (called the vesting period).49Stock Options (Cont.)Can’t exercise the option after a certain number of years (called the expiration, or maturity, date).50Problems with Stock OptionsManager can underperform market or peer group, yet still reap rewards from options as long as the stock price increases to above the exercise cost.Options sometimes encourage managers to falsify financial statements or take excessive risks.51Block OwnershipOutside investor owns large amount (i.e., block) of company’s sharesInstitutional investors, such as CalPERS or TIAA-CREFBlockholders often monitor managers and take active role, leading to better corporate governance 52Regulatory Systems and LawsCompanies in countries with strong protection for investors tend to have:Better access to financial marketsA lower cost of equityIncreased market liquidityLess noise in stock prices53