CS代考计算机代写 finance Excel ACCT6101 – Session #1: Introduction to Valuation
ACCT6101 – Session #1: Introduction to Valuation
PART 1 – Background
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ACCT7106 – Session #11: Forecasting & Valuation
overarching objective:
to conduct the fundamental valuation exercise for the purpose of estimating the ‘intrinsic value’ of a firm’s common shares
requires an understanding of the firm’s ‘value drivers’
need to accumulate a ‘tool kit’ as the basis for developing the pro forma Financial Statements
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2
projected over the forecast horizon
core inputs into the valuation model x g
Balance Sheet (B/S)
Income Statement (I/S)
Statement of Cash Flows (SCF)
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STEP 1
Understanding the past
Information collection
Understanding the business
Accounting analysis
Financial ratio analysis
Cash flow analysis
STEP 2
Forecasting the future
Structured forecasting
Income Statement forecasts
Balance sheet forecasts
Cash flow forecasts
STEP 3
Valuation
Cost of capital
Valuation models – AE, FCF, D
Valuation ratios
Complications
Negative values
Value creation and destruction
Figure 1.1 Lundholm & Sloan, Framework for Equity Valuation
Sessions #3 #10
Sessions #10 #11
Sessions #1 #3; #11 – #13
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beginning stock
Beginning Balance Sheet
Cash
+ Other assets
= Total Assets
– Liabilities
= Shareholders’ Equity (BVt-1)
Statement of Changes in S/E
Cash from operations
+ Net Income & OCI
= Net Change in S/E
Cash Flow Statement
Cash from operations
+ Cash from investing
+ Cash from financing
= Net change in cash
Income Statement
Revenue
– Expenses
= Net Income (NPAT)
Ending Balance Sheet
Cash
+ Other assets
= Total Assets
– Liabilities
= Shareholders’ Equity (BVt)
flows
ending stock
‘articulation’ Financial Statements constitute an ‘integrated system’
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Forecasting & Valuation
Objective of the forecasting exercise
to develop objective and realistic expectations of future value-relevant payoffs
How?
develop pro forma F/S containing unbiased predictions of the firm’s future operating, investing, and financing activities should be neither conservative nor optimistic
pro forma F/S should be comprehensive need to consider the growth rate for each item, not just assume items will grow at a constant rate with sales
need to make consistent assumptions and maintain the relation between items in the pro forma F/S (i.e., the F/S represent an integrated system, both reported and pro forma)
use external information to ensure that assumptions are realistic
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Steps comprising the Forecasting Exercise
Income Statement:
Step 1: Forecast Sales
Step 2: Forecast Core OI from Sales (before tax)
Step 3: Forecast Core Other OI (before tax)
Step 4: Calculate OI (before tax)
Step 5: Forecast Income Tax Expense attributable to OI
Step 6: Calculate OI (after tax)
Balance Sheet:
Step 7: Forecast OA and OL to obtain a forecast of NOA
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Unlevered Valuation valuing the firm
Step 8: Calculate RNOA, FCF and residual operating income (ReOI)
Step 9: Estimate the DCF and ReOI models with assumed terminal growth rate and firm’s weighted average cost of capital (WACC ) overall value of the firm
Step 10: Forecast Leverage and NFE (after tax)
Step 11: Calculate CI = OI (after tax) – NFE (after tax) & CSE = NOA – NFO
Step 12: Forecast Dividends (div = CI – S/E NCC)
Levered Valuation valuing common equity (value of common shares)
Step 13: Calculate RI (residual income or abnormal earnings)
Step 14: Estimate the DDM and RI models with assumed terminal growth rate (g) and cost of equity capital (k) value of the firm to the common shareholder
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PART 2 – Foundation for Forecasting
central focus – estimation of intrinsic value
selected approach to ‘valuation’ – fundamental analysis
core valuation model – residual income (abnormal earnings) based on the ‘reformulated F/S’
+
where now residual earnings = (ROCE – cost of equity capital BVt-1)
= (ROCEt – COEC) BVt-1 (dividing both terms by S/E and then multiplying by S/E)
value driven by growth in ‘abnormal’ earnings = AEt – AEt-1
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residual earnings = (ROCEt – COEC) BVt-1
support growth in abnormal earnings arises from
growth in ROCE (i.e., profitability)
growth in S/E
beginning with ROCE (profitability) i.e., ROCE =
informed by the ‘financial leverage equation’ and the ‘DuPont System’ i.e.,
ROCE = RNOA + FLEV x ( RNOA – NBC) = {profit margin asset turnover} + {FLEV spread}
drivers
operating profit margin
asset turnover
leverage
spread
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further, in terms of the ‘income’ measures
Comprehensive Income (CI) = Operating Income (OI) – Net Financing Expenses (NFE)
where further
core operating income from sales
OI = + core other operating income
+ unusual operating income
sustainable (core) earning earnings that can repeat in the future and grow
form the basis for growth
transitory earnings (unusual items) earnings based on temporary factors
have no bearing on future earnings or earnings growth
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central focus on ‘sustainable (core) earning’ as the basis for growth
core operating income & core net borrowing costs
need to identify items that will have no bearing on the future so that they can be removed and the focus returned to the ‘core items’
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Identifying sustainable earnings: Items to consider
Deferred revenue – timing of recognition can be ‘manipulated’ and hence apparent growth may not be sustainable
Restructuring charges, asset impairments & special charges – typically ‘unusual’ but effects can be ongoing (e.g., impairments lower future expenses, needing adjustment)
R&D – reductions increase current income but impact future earnings
Advertising – reductions increase current income but impact future earnings
Pension expense – each of the components represents an opportunity for ‘manipulation’, especially expected returns which are not really a part of core earnings
Changes in estimates – ‘poor’ estimates will be adjusted in future earnings
Realised gains & losses – timing and details
Unrealised gain & losses on equity investments – timing and details; ‘transitory’
Unrealised gains & losses from applying fair value accounting – typically ‘transitory’
Income taxes – one-time items; special incentives
Other income – confirm whether it includes interest income
Deferred Revenue: Microsoft
firms may defer revenue into a “cookie jar” and then dip into the cookie jar later, often to “smooth” earnings
2010 2009 2008
Unearned revenue $29,374 $24,409 $24,532
Recognition of unearned revenue (28,813) (25,426) (21,944)
Merger & Restructuring Charges: IBM
Does this provide the scope for ‘false’ earning growth in the future?
note: core OI from sales
Year
1991
1992
1993
1994
1995
1996
1997
1998 Restructuring Charges ($B)
3.7
11.6
8.9
(2.8)
(2.1)
(1.5)
(0.5)
(0.4)
Does this provide the scope for ‘false’ earning growth in the future?
note: unusual items
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R&D Expenditures: Merck & Co
Is the drop temporary?
Will it affect future sales?
note: core OI from sales
Advertising Expenditures: Coca-Cola
Will the increase in R&D result in future sales?
note: core OI from sales
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Pension Costs: IBM
Net pension expense comprised of 6 components
notes:
net pension expense can be negative due to higher expected return on plan assets need to consider the assumed rate of return; core other OI, not core OI from sales
evaluate gains on pension fund assets
Gains & losses on sale of shares
gains often recorded to operating income but Statement of Cash Flows reveals true nature (unusual item)
timing e.g., realise ‘winners’; hold ‘loosers’
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PART 3 – Growth in Residual Income (Abnormal Earnings)
residual earnings = (ROCEt – cost of equity capital) BVt-1
support growth in abnormal earnings arises from
growth in ROCE (i.e., profitability)
growth in S/E
growth in ROCE
ROCE = = {profit margin asset turnover} + {FLEV spread}
NOA
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RNOA = =
=
=
where Core Sales Profit Margin =
profit margin ‘unaffected’ by Other Income or Unusual Items
captures the firm’s ability to generate profits from sales
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RNOA =
= (core sales PM) @ previous ATO + ATO @ new core sales PM
To illustrate –
General Mills
RNOA Profit Margin Asset Turnover
2010 10.1% 7.95% 1.27
2009 4.1% 3.41% 1.19
6.0% 4.54% 0.08
Can we gain any ‘deeper’ insights that might assist with forecasting?
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from Penman Exhibit 13.2 re: General Mills
2010 2009
Core Operating Revenues 14,797 14,691
Core Operating Income from Sales (after tax) 1,435 1,174
Core Other Operating Income (after tax) 370 352
Unusual Items (after tax) (628) (1,025)
Operating Income (after tax) 1,177 501
Net Financing Expenses (after tax) (251) (239)
Noncontrolling Interest (5) (9)
Comprehensive Income 921 253
Core sales PM = 1.71% 0.0970 0.0799
also given = 2.85%
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RNOA = (1.71% 1.19) + (0.08 9.70%) + 0.33% + 2.85%
= {2.04% + 0.78%} + 0.33% + 2.85%
2.82% increase related to core income from sales
increase in RNOA due to 0.33% increase related to other core income (outside of sales)
2.85% increase related to unusual (one-time) items
for General Mills, slightly less then ½ of the increase in RNOA is related to ‘core operating income from sales’ (2.82% out of 6%)
(core sales PM)
ATO
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critical ‘drivers’ of growth (increases) in ROCE
core sales PM; asset turnover; financial leverage (FLEV); and spread (i.e., NBC)
for core sales PM:
changes in the ‘core sales PM’ are determined by how costs change as sales change
notions of variable & fixed costs
Operating leverage (OLEV) – the extent to which the firm’s operating costs are fixed
OLEV = % core OI = % core sales OLEV
** operating leverage should not be confused with operating liability leverage (OLLEV) that appears in the ‘operating leverage equation relating ROOA to RNOA
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re: growth in S/E
S/E = NOA – NFO
where NOA = sales recall: ATO =
S/E = (sales – NFO
drivers of the change (growth) in S/E
growth in sales
change in NOA (through sales & ATO)
change in FLEV (amount of net debt used to finance the change in NOA, as opposed to equity)
CSE = NOA – NFO
NOA
NFO
Sales
Changes in Sales for
Business Segments
Or Product Lines
Changes in Individual
Asset Turnovers
Changes in NFO
Components
NOA = Sales
Change in S/E
=
Change due to change in sales at previous level of asset turnover
Change in financial leverage
Change due to change in asset turnover
+
+
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In summary
what is a ‘growth firm’ a firm that can increase its ‘residual earnings’
a ‘growth firm’ features:
sustainable, growing sales
high or increasing core profit margins
high or improving asset turnovers
note: sustaining high ‘core profit margins’ indicates the presence of ‘competitive advantage’
without a ‘durable’ competitive advantage, the firm’s residual earnings (abnormal earnings) will ultimately decline
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PART 4 – Valuation Exercise applied to Coles
caveats !!!
largely an ‘art’ rather than a science
involves considerable interpretation and use of judgement (subjective)
you would each most likely arrive at slightly different interpretations and thereby different estimates that the ones I am about to propose
– this doesn’t make any particular set of estimates either ‘more correct’ or ‘more incorrect’; just different!
(although clearly some estimates appear more plausible than others, at least on the surface, until explained or justified)
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PART 4 – Step 1: Forecast Sales
sales ‘drive’ the system !!
a consideration of historical sales growth rates can be a starting point BUT …. need to develop a thorough understanding of the business and its environment to make meaningful sales forecasts
the firm’s business strategy
the market for the firm’s products
the firm’s marketing plan
how the broader economic factors and the industry dynamics affect the business
‘constraints’ – regression to mean; sustainable growth rate; plausible terminal growth rate
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re: Coles ***IBISWorld https://my.ibisworld.com/au/en/industry/g4111
Industry Outlook
Price competition in the Supermarkets and Grocery Stores industry is forecast to remain strong over the next five years.
Profit
Industry profitability is projected to increase over the next five years, despite weak household incomes and high unemployment.
Competition
Internal industry competition is forecast to remain high over the next five years
Investing in technology
Major supermarkets will likely become more innovative and use new technologies to attract customers to increase their market share over the next five years.
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Industry Life Cycle
The life cycle stage of this industry is Growth
LIFE CYCLE REASONS
The industry is growing slightly faster than the overall economy
Fierce competition is restricting the entry of new players, but established players are expanding store networks
Technological change in the industry is moderate and increasing
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Industry Performance Data Historical & Prospective
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2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenues 54,505.7 55,492.2 58,921.7 61,155.0 60,868.4 58,276.0 55,669.0 56,726.0 59,984.0 63,675.0
ave = 1.82% 1.81% 6.18% 3.79% -0.47% -4.26% -4.47% 1.90% 5.74% 6.15%
EBIT 3,329.90 3,919.60 3,733.70 3,783.10 3,748.40 2,564.00 2,326.00 2,548.00 2,724.00 3,219.00
ave = 0.79% 17.71% -4.74% 1.32% -0.92% -31.60% -9.28% 9.54% 6.91% 18.17%
CFO 2,991.10 2,873.80 2,719.90 3,472.70 3,345.10 2,358.00 3,122.00 2,930.00 2,948.00 4,561.00
ave = 7.42% -3.92% -5.36% 27.68% -3.67% -29.51% 32.40% -6.15% 0.61% 54.72%
Op Margin 7.70 8.70 8.00 7.80 8.00 6.20 6.00 6.40 6.60 8.90
NPAT (%) 4.00 4.90 4.00 4.00 4.00 4.70 2.50 2.80 2.90 2.50
dividends 1.22 1.26 1.33 1.37 1.39 0.77 0.84 1.03 1.02 0.94
Payout ratio 69.00 56.00 70.00 70.00 71.00 36.00 76.00 84.00 77.00 74.00
Woolworths
Industry
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
ave = 3.14% 2.89% 4.68% 3.97% 5.87% 3.99% -0.88% 1.08% 1.15% 5.48%
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Year Revenue
(%) IVA
(%) Establishments
(%) Enterprises
(%) Employment
(%) Exports
(%) Imports
(%) Wages
(%) Domestic
Demand
(%)
2020–21 0.51 -0.11 -0.84 -0.55 -1.12 N/A N/A -0.67 N/A
2021–22 2.64 2.64 0.13 -0.60 -0.01 N/A N/A 1.50 N/A
2022–23 1.76 3.00 -0.37 -1.40 0.01 N/A N/A 1.12 N/A
2023–24 2.31 2.30 0.09 -0.82 -0.26 N/A N/A 1.08 N/A
2024–25 2.37 2.37 0.41 -0.72 -0.15 N/A N/A 1.25 N/A
2025–26 1.49 1.50 0.98 1.23 0.01 N/A N/A 1.40 N/A
Industry Performance Data Outlook (from IBISWorld)
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caveats moving from industry forecasts to firm-level forecasts
historical industry patterns can be a good ‘starting’ point, especially if the future is likely to be similar to the past … however, also need to recognise broad indicators to the contrary
gov’t or trade statistics that forecast change in global economy, or the specific industry
forecasts of a recession or slowdown in GDP
shifts in industry-wide demand with changing demographics and/ consumer tastes
need to have a knowledge of industry trends and of the susceptibility of the industry to macroeconomic changes
need to tailor the industry projections to fit with the specific firm features
firms have idiosyncratic features that yield ‘drivers’ that are predictably different from industry patterns
need to consider how the firm’s future drivers may or will be different from the typical pattern in the industry (arguably the main factor relates to competition and the firm’s reaction to it)
focus on the drivers that are key to understanding the firm’s profitability
start with industry ‘drivers’ (e.g., Table 16.3) and then
adjust for firm-specific features
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Sales forecasts – Coles
2019 A 2020 A 2021 E 2022 E 2023 E 2024 E 2025 E
Revenues 38,176 37,408 38,343 39,110 39,990 40,890 41,708
-2.01% 2.50% 2.00% 2.25% 2.25% 2.00%
Based on the macroeconomic outlook, the industry outlook, and Coles historical performance and prospects to “exploit” growth opportunities:
growth rates in ‘core sales revenue’ will range between 2.0% and 2.5% over the next 5 years, with the pattern largely following predicted industry growth pattern
ultimately Coles’ sales growth will stabilise at 3% (terminal growth rate)
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Step 1: Forecast Sales
Step 2: Forecast Core OI from Sales (before tax)
next steps:
2a forecast ATO and calculate NOA implied by sales forecasts and forecasted ATO
2b revise sales forecasts (if necessary) in recognition of ‘asset constraints’
Explain changes in ATO by looking at individual asset turnovers
A/R; inventory; property, plant & equipment
A/P; operating liability turnover
Also consider
operating asset composition ratios
operating liabilities composition ratios
OLLEV
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ATO forecast – Coles
2020 ATO = 3.065
2019 ATO = 38,176/13,102 = 2.914 (based on the adjusted 2019 NOA)
is there any reason to believe that the ATO might or could change?
which accounts are sufficiently material to influence the ATO, and can they be changed? see the third level break down of ROCE (next slide)
‘material’ accounts: inventory; property, plant & equipment; intangible assets
accounts payable; provisions
examine related NOTES to the F/S to understand the roles of each account and the likelihood that they can be changed
is the level of NOA implied by the estimated ATO and the sales forecasts supportable?
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Asset Turnover Drivers turnover = sales / item inverse = item / sales
Operating Assets
cash & cash equivalents 187 200.043 0.0050
receivables 434 86.194 0.0116
inventories 2,166 17.271 0.0579
assets held for resale 75 498.773 0.0020
other assets 190 196.884 0.0051
property, plant & equipment 4,127 9.064 0.1103
right-of-use assets 7,660 4.884 0.2048
intangible assets 1,597 23.424 0.0427
deferred tax assets 849 44.061 0.0227
equity accounted investments 217 172.387 0.0058
Total Operating Assets (OA) 17,502 2.137 0.4679
Operating Liabilities
trade payables 3,737 10.010 0.0999
provisions 1,333 28.063 0.0356
other 227 164.793 0.0061
Total Operating Liabilities (OL) 5,297 7.062 0.1416
Net Operating Assets (NOA) 12,205 3.065 0.3263
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2019 A 2020 A 2021 E 2022 E 2023 E 2024 E 2025 E
Revenues 38,176 37,408 38,343 39,110 39,990 40,890 41,708
NOA = sales / ATO of 3 13,102 12,205 12,781 13,037 13,330 13,630 13,903
% NOA 4.72% 2.00% 2.25% 2.25% 2.25%
2020 ATO = 3.065
2019 ATO = 38,176/13,102 = 2.914 (based on the adjusted 2019 NOA)
is there any reason to believe that the ATO might or could change?
not obvious that any of the ‘material’ accounts can or will change
set ATO = 3.00
(also sensitivity under the assumption that ATO could increase slightly over time)
is the level of NOA implied by the estimated ATO and the sales forecasts supportable? YES sustainable growth rate for 2020 g* = 3.4%
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2c gross profit margin = (core sales revenue – COGS) / sales
2020 (37,408 – 28,043) / 37,408 = 0.2504
2019 (38,176 – 29,253) / 38,176 = 0.2337
slight improvement but is there any reason to believe that it could improve further?
no NOTE to help understand
Woolworth’s gross profit margins: 2020 – 0.2916 2019 – 0.2908
(but no reason to believe that the 2 companies aggregate expenses the same way e.g., branch and admin expenses)
set gross profit margin at 0.260 (and conduct sensitivity between 0.25 and 0.275)
2021 E 2022 E 2023 E 2024 E 2025 E
Revenues 38,343 39,110 39,990 40,890 41,708
Gross Margin (@ 0.260) 9,969 10,169 10,397 10,631 10,844
2 factors
price
cost
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2d core operating expenses administrative expenses
2020: (8,081 – 41) / 37,408 = 0.2149 2019: (8,031 + 42) / 38,176 = 0.2115
administrative expense ratio up slightly when sales down
consistent with a ‘fixed cost’ component
2021 E 2022 E 2023 E 2024 E 2025 E
Revenues 38,343 39,110 39,990 40,890 41,708
Administrative Expense (%) 0.210 0.2095 0.209 0.2085 0.208
= Admin Expense (8,052) (8,194) (8,358) (8,526) (8,675)
assume a modest decline over the 5-year horizon 6 from 0.21 to 0.208 as sales increase, and then stabilise at 0.208
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2f tax expense
current effective tax rate on PBT (i.e., after int) 2020: 25.85% 2019: 23.65%
assume 30% tax rate on ‘core OI’
2g other operating revenue; equity accounted investments
no NOTE to explain; assume constant at 2020 level of $500 million
2h unusual OI
given definition as ‘non-recurring’, assume 0
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2021 E 2022 E 2023 E 2024 E 2025 E
Revenues 38,343 39,110 39,990 40,890 41,708
Gross Margin (0.26) 9,969 10,169 10,397 10,631 10,844
Administrative Expense (8,052) (8,194) (8,358) (8,526) (8,675)
Tax Expense (30%) (575) (593) (612) (632) (651)
Core OI from Sales (after tax) 1,342 1,382 1,427 1,473 1,518
Core Other OI 500@ (1 – 0.3) 350 350 350 350 350
Unusual Items 0 0 0 0 0
Total OI (after tax) 1,692 1,732 1,777 1,823 1,868
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Step 1: Forecast Sales
Steps 2 – 6: Forecast components of OI after tax
Step 7: Forecast OA and OL to obtain NOA
** given the previous arguments surrounding the stability of asset turnover (ATO) and the inability to alter the ‘material’ accounts, will assume that the turnovers for the OA and OL items remain unchanged
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Asset Turnover Drivers Current turnover Assumed turnover 2021 2022 2023 2024 2025
(38,343) (39,110) (39,990) (40,890) (41,708)
Operating Assets
cash & cash equivalents 200.043 200 192 196 200 204 209
receivables 86.194 86 446 455 465 475 485
inventories 17.271 17.25 2,223 2,267 2,318 2,370 2,418
assets held for resale 498.773 500 77 78 80 82 83
other assets 196.884 200 192 196 200 204 209
property, plant & equipment 9.064 9 4,260 4,346 4,443 4,543 4,634
right-of-use assets 4.884 4.75 8,072 8,234 8,419 8,608 8,781
intangible assets 23.424 23 1,667 1,700 1,739 1,778 1,813
deferred tax assets 44.061 44 871 889 909 929 948
equity accounted investments 172.387 175 219 223 229 234 238
Total Operating Assets (OA) 2.137 2.105 18,219 18,583 19,001 19,429 19,818
Operating Liabilities
trade payables 10.010 10 3,834 3,911 3,999 4,089 4,171
provisions 28.063 28 1,369 1,397 1,428 1,460 1,490
other 164.793 165 232 237 242 248 253
Total Operating Liabilities (OL) 7.062 7.053 5,436 5,545 5,670 5,798 5,914
Net Operating Assets (NOA) 3.065 3.000 12,782 13,038 13,331 13,631 13,904
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Step 1: Forecast Sales
Steps 2 – 4: Forecast components of OI after tax
Step 5: Forecast NOA
Step 8: Calculate RNOA, FCF, and ReOI
RNOA = FCF = OI – NOA
ReOI (to firm) = OIt – kF*NOAt-1
WACC = (NBC) + (kE) = (3.36%) +(7.40%) = 6.25%
Session #3
Session #10
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2021 E 2022 E 2023 E 2024 E 2025 E
Revenues 38,343 39,110 39,990 40,890 41,708
Core OI from Sales (after tax) 1,342 1,382 1,427 1,473 1,518
% 2.98% 3.26% 3.22% 3.06%
Total OI (after tax) 1,692 1,732 1,777 1,823 1,868
% 2.36% 2.60% 2.59% 2.47%
NOA 12,782 13,038 13,331 13,631 13,904
RNOA 0.1324 0.1328 0.1333 0.1337 0.1344
%RNOA 0.0269 0.0004 0.0005 0.0004 0.0007
FCF 1,115 1,476 1,484 1,523 1,595
%FCF 0.0500 0.0446 0.005 2.63% 4.73%
ReOI (k = 6.25%) (to firm) 929 933 962 990 1,016
%ReOI 0.43% 3.11% 2.91% 2.63%
Step 9: ‘unlevered valuation’ overall value of the firm
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Illustrative Calculations
Free Cash Flow (FCF) = OI – NOA
2021: 1,692 – (12,782 – 12,205) = 1,115
2022: 1,732 – (13,038 – 12,782) = 1,476
2023: 1,777 – (13,331 – 13,038) = 1,484
2024: 1,823 – (13,631 – 13,331) = 1,523
2025: 1,868 – (13,904 – 13,631) = 1,595
Residual Income (ReOI) = OI – ke* NOAt-1
2021: 1,692 – 0.0625 * 12,205 = 929
2022: 1,732 – 0.0625 * 13,038 = 933
2023: 1,777 – 0.0625 * 13,331 = 962
2024: 1,823 – 0.0625 * 13,631 = 990
2025: 1,868 – 0.0625 * 13,904 = 1,016
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Abnormal Earnings (Residual Income) valuation model
+
= 12,205 + + + + +
= $40,015 million
FCF valuation model
= + + + +
= $43,298 million
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Step 10 leverage (FLEV) and financing costs (NFE)
interest expense on long-term debt and lease liabilities
2020: FLEV = 3.6673
2020: NFE = 322
assume property, plant & equipment (both purchased & leased) grow at 1.5%
assume capital structure remains largely unchanged FLEV = 3.67
assume interest rates ̴ 0.5-0.6% current NBC = 3.36% NBC = 4%
2020 A 2021 E 2022 E 2023 E 2024 E 2025 E
NFO (@ 1.5%) 9,590 9,734 9880 10,028 10,179 10,331
NFE (after tax) 322 389 394 401 407 413
what happens to FLEV when S/E is calculated
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2021 E 2022 E 2023 E 2024 E 2025 E
Revenues 38,343 39,110 39,990 40,890 41,708
Gross Margin (0.26) 9,969 10,169 10,397 10,631 10,844
Administrative Expense (8,052) (8,194) (8,358) (8,526) (8,675)
Tax Expense (30%) (575) (593) (612) (632) (651)
Core OI from Sales (after tax) 1,342 1,382 1,427 1,473 1,518
Core Other OI 500@ (1 – 0.3) 350 350 350 350 350
Unusual Items 0 0 0 0 0
Total OI (after tax) 1,692 1,732 1,777 1,823 1,868
Core NFE (389) (395) (401) (407) (413)
Comprehensive Income 1,303 1,337 1,376 1,416 1,455
** assumes OCI = 0
Steps 11 , 12 & 13 CI, S/E, dividends, ReCI
56
2021 E 2022 E 2023 E 2024 E 2025 E
Revenues 38,343 39,110 39,990 40,890 41,708
Comprehensive Income 1,303 1,337 1,376 1,416 1,455
%CI 2.61% 2.92% 2.91% 2.75%
NOA 12,782 13,038 13,331 13,631 13,904
NFO 9,734 9,880 10,028 10,179 10,331
S/E = NOA – NFO 3,048 3,158 3,303 3,452 3,573
%S/E 3.61% 4.59% 4.51% 3.51%
Dividends 870 1,227 1,231 1,267 1,336
%Div 3.26% 2.92% 5.29%
ReCI (k = 7.4%) (to S/E) 1,109 1,111 1,142 1,172 1,200
%ReOI 0.20% 2.79% 2.63% 2.39%
57
Illustrative Calculations
Dividends (Div) = CI – S/E NCC assume NCC = 0 (on average)
2021: 1,303 – (3,048 – 2,615) = 870
2022: 1,337 – (3,158 – 3,048) = 1,227
2023: 1,376 – (3,303 – 3,158) = 1,231
2024: 1,416 – (3,452 – 3,303) = 1,267
2025: 1,455 – (3,571 – 3,452) = 1,336
Residual Income (ReCI) = CI – ke* BVt-1
2021: 1,303 – 0.074 * 2,615 = 1,109
2022: 1,337 – 0.074 * 3,048 = 1,111
2023: 1,376 – 0.074 * 3,158 = 1,142
2024: 1,416 – 0.074 * 3,303 = 1,172
2025: 1,455 – 0.074 * 3,452 = 1,200
58
Abnormal Earnings (Residual Income) valuation model
+
= 2,615 + + + + +
= $26,911.5 million (** possible rounding errors – if all calculations carried through an Excel spreadsheet with no rounding, this figure becomes 26,905.0)
DDM valuation model
= + + + +
= $26,606.7 million
context
current share price (20 January 2021) = $17.94
market capitalisation $18 * 1,334 million shares = $24,012 million
Abnormal Earnings (Residual Income) valuation model
market capitalisation = $26,911.5 million
DDM valuation model
market capitalisation = $26,606.7 million
Sensitivity – assume g = 2.5% (instead of 3%)
AE $24,819.8 million
DDM $24,281.5 million
59
‘gap’ suggests not quite to ‘steady state’
increased ‘gap’ perhaps a bit ‘extra’ g left in DIV, or a a bit less in AE before reach ‘steady state’
Summary of significant assumptions
Sales growth 2.5% 2.0% 2.25% 2.25% 2.0%
ATO constant @ 3.00 (had increased from 2.914 to 3.065) if higher ROCE
Gross profit margin @ 0.26 (had increased from 0.234 to 0.250)
Admin expenses assumed to decline from 0.21 to 0.208 (had increased from 0.212 to 0.215)
Financing costs assumed growth in PPE of 1.5%, NBC up 0.6%
Unchanged capital structure
Terminal growth (g) = 3%
60
61
overarching objective:
to conduct fundamental value for the purpose of estimating the ‘intrinsic value’ of a firm’s common shares
requires an understanding of the firm’s ‘value drivers’
need to accumulate a ‘tool kit’ as the basis for developing the pro forma Financial Statements
STEP 1
Understanding the past
Information collection
Understanding the business
Accounting analysis
Financial ratio analysis
Cash flow analysis
STEP 2
Forecasting the future
Structured forecasting
Income Statement forecasts
Balance sheet forecasts
Cash flow forecasts
STEP 3
Valuation
Cost of capital
Valuation models – AE, FCF, D
Valuation ratios
Complications
Negative values
Value creation and destruction
PART 5 – Summary
62
external environment
economic prospects
macroeconomic factors
socio-cultural forces
political / regulatory
Industry dynamics
Porter’s five forces
(suppliers, buyers, new entrants, substitutes, rivalry)
Analysis of Financial Statements
understanding current F/S
re-formulating the F/S
accounting quality
ratio analysis
analysts’ reports
management forecasts
financial press
???
0V =
tx
( 1+ tk
t)t =1
∞
∑ =
E( tx )
t
(1+k)t=1
n
∑ +
E( nx ) (1+ g)
k − g
1
n
(1+k)
0
V
=
t
x
(
1+
t
k
t
)
t=1
¥
å
=
E(
t
x
)
t
(1+k)
t=1
n
å
+
E(
n
x
)
(1+g)
k-g
1
n
(1+k)
(In billions of dollars)
2010 2009 2008
Revenues 35.1 31.0 31.9
Cost of goods sold 12.7 11.1 11.4
Gross profit 22.4 19.9 20.5
Selling, administrative and general 14.0 11.7 12.1
Operating income (before tax) 8.4 8.2 8.4
Advertising expenses 2.9 2.8 3.0
Advertising expenses/Sales 8.3% 9.0% 9.4%
(In billions of dollars)
2010 2009 2008
Sales 46.0 27.4 23.8
R&D 11.0 5.8 4.8
R&D-to-Sales 23.9% 21.2% 20.2%
(In millions of dollars)
(In billions of dollars)
2010
2009
2008
Revenues
35.1
31.0
31.9
Cost of goods sold
12.7
11.1
11.4
Gross profit
22.4
19.9
20.5
Selling, administrative and general
14.0
11.7
12.1
Operating income (before tax)
8.4
8.2
8.4
Advertising expenses
2.9
2.8
3.0
Advertising expenses/Sales
8.3%
9.0%
9.4%
(In millions of dollars)
(In billions of dollars)
2010
2009
2008
Sales
46.0
27.4
23.8
R&D
11.0
5.8
4.8
R&D-to-Sales
23.9%
21.2%
20.2%
_____________________________________________________________________
International Business Machines (IBM)
Components of pension expense, 2001-2004
(In millions of dollars)
2004 2003 2002 2001
Service cost 1,263 1,113 1,155 1,076
Interest cost 4,071 3,995 3,861 3,774
Expected return on plan assets (5,987) (5,931) (6,253) (6,264)
Amortization of transition asset (82) (159) (156) (153)
Amortization of prior service
cost
66 78 89 80
Actuarial losses (gains) 764 101 105 (24)
Net pension expense 95 (803) (1,199) (1,511)
_____________________________________________________________________
_____________________________________________________________________
International Business Machines (IBM)
Components of pension expense, 2001-2004
(In millions of dollars)
2004
2003
2002
2001
Service cost
1,263
1,113
1,155
1,076
Interest cost
4,071
3,995
3,861
3,774
Expected return on plan assets
(5,987)
(5,931)
(6,253)
(6,264)
Amortization of transition asset
(82)
(159)
(156)
(153)
Amortization of prior service cost
66
78
89
80
Actuarial losses (gains)
764
101
105
(24)
Net pension expense
95
(803)
(1,199)
(1,511)
ATO
1
D
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