Professional Documents
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Corporate Valuation, Value-Based Management, and Corporate Governance
Corporate Valuation, Value-Based Management, and Corporate Governance
Corporate Valuation:
List the two types of assets that a
company owns.
Assets-in-place
Financial, or nonoperating,
assets
15 - 3
Assets-in-Place
Value of Operations
FCFt
VOp
t 1 (1 WACC ) t
15 - 5
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.
15 - 6
FCF0 (1 g ) t
t 1 1 WACC
t
15 - 11
FCF0 (1 g )
VOp
WACC g
20 (1 0.05)
VOp 420
0.10 0.05
15 - 14
Value of Equity
Sources of Corporate Value
Value of operations = $420
Value of non-operating assets = $100
Claims on Corporate Value
Value of Debt = $200
Value of Preferred Stock = $50
Value of Equity = ?
15 - 15
Value of Equity
Total corporate value = VOp + Mkt. Sec.
= $420 + $100
= $520 million
600 MVA
100 Debt
0
Marketable
Sources Claims Market securities
of Value on Value vs. Book Value of operations
15 - 18
Expansion Plan: Nonconstant Growth
Finance 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 million
FCF grows at constant rate of 6%
after year 3.
(More…)
15 - 19
Horizon Value
FCFt (1 g )
HV VOp at time t
WACC g
Horizon value is also called terminal
value, or continuing value.
15 - 23
g = 6%
FCF= -5.00 10.00 20.00 21.2
-4.545
8.264
15.026
$21.2
398.197 Vop at 3 $530.
0 .10 0.06
416.942 = Vop
15 - 24
Find the price per share of common
stock.
Value of equity = Value of operations
- Value of debt
= $416.94 - $40
= $376.94 million.
MVA t
Sales t (1 g ) CR
WACC g OP WACC (1 g )
15 - 28
Insights from the Constant Growth
Model
The 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.
Sales t (1 g )
WACC g
15 - 29
Insights (Cont.)
CR
OP WACC
(1 g )
15 - 32
NOPAT t 1
EROICt
Capital t
15 - 34
Entrenched Management
Anti-Takeover Provisions
Board of Directors