vALuA1lCn

Cynlc: A person who knows Lhe prlce of everyLhlng buL Lhe value of noLhlng..
Cscar Wllde
Aswath Damodaran 217
218
llrsL rlnclples
Aswath Damodaran
218
219
1hree approaches Lo valuauon
Aswath Damodaran
219
! lnLrlnslc valuauon: 1he value of an asseL ls a funcuon of
lLs fundamenLals - cash ows, growLh and rlsk. ln
general, dlscounLed cash ow models are used Lo
esumaLe lnLrlnslc value.
! 8elauve valuauon: 1he value of an asseL ls esumaLed
based upon whaL lnvesLors are paylng for slmllar asseLs.
ln general, Lhls Lakes Lhe form of value or prlce muluples
and comparlng rms wlLhln Lhe same buslness.
! ConungenL clalm valuauon: When Lhe cash ows on an
asseL are conungenL on an exLernal evenL, Lhe value can
be esumaLed uslng opuon prlclng models.
220
ulscounLed Cashow valuauon: 8asls for
Approach
Aswath Damodaran
220
where,
n = Llfe of Lhe asseL
r = ulscounL raLe reecung Lhe rlsklness of Lhe esumaLed
cashows
Value of an asset=
Expected Cash flow in period t
(1+r)
t
t=1
t=n
!
221
LqulLy valuauon
Aswath Damodaran
221
! 1he value of equlLy ls obLalned by dlscounung expecLed cashows
Lo equlLy, l.e., Lhe resldual cashows aer meeung all expenses,
Lax obllgauons and lnLeresL and prlnclpal paymenLs, aL Lhe cosL of
equlLy, l.e., Lhe raLe of reLurn requlred by equlLy lnvesLors ln Lhe
rm.
where,
Cl Lo LqulLy
L
= LxpecLed Cashow Lo LqulLy ln perlod L
ke = CosL of LqulLy
! 1he dlvldend dlscounL model ls a speclallzed case of equlLy
valuauon, and Lhe value of a sLock ls Lhe presenL value of expecLed
fuLure dlvldends.
Value of Equity=
CF to Equity
t
(1+k
e
)
t
t=1
t=n
!
222
llrm valuauon
Aswath Damodaran
222
! 1he value of Lhe rm ls obLalned by dlscounung expecLed
cashows Lo Lhe rm, l.e., Lhe resldual cashows aer
meeung all operaung expenses and Laxes, buL prlor Lo debL
paymenLs, aL Lhe welghLed average cosL of caplLal, whlch ls
Lhe cosL of Lhe dlerenL componenLs of nanclng used by Lhe
rm, welghLed by Lhelr markeL value proporuons.
where,
Cl Lo llrm
L
= LxpecLed Cashow Lo llrm ln perlod L
WACC = WelghLed Average CosL of CaplLal
Value of Firm=
CF to Firm
t
(1+WACC)
t
t=1
t=n
!
223
Chooslng a Cash llow Lo ulscounL
Aswath Damodaran
223
! When you cannoL esumaLe Lhe free cash ows Lo equlLy
or Lhe rm, Lhe only cash ow LhaL you can dlscounL ls
dlvldends. lor nanclal servlce rms, lL ls dlmculL Lo
esumaLe free cash ows. lor ueuLsche 8ank, we wlll be
dlscounung dlvldends.
! lf a rms debL rauo ls noL expecLed Lo change over
ume, Lhe free cash ows Lo equlLy can be dlscounLed Lo
yleld Lhe value of equlLy. lor Aracruz, we wlll dlscounL
free cash ows Lo equlLy.
! lf a rms debL rauo mlghL change over ume, free cash
ows Lo equlLy become cumbersome Lo esumaLe. Pere,
we would dlscounL free cash ows Lo Lhe rm. lor
ulsney, we wlll dlscounL Lhe free cash ow Lo Lhe rm.
224
1he lngredlenLs LhaL deLermlne value.
Aswath Damodaran
224
225
l. Lsumaung Cash llows
Aswath Damodaran
225
226
ulvldends and Modled ulvldends for ueuLsche
8ank
Aswath Damodaran
226
! ln 2007, ueuLsche 8ank pald ouL dlvldends of 2,146 mllllon Luros on neL
lncome of 6,310 mllllon Luros. ln early 2008, we valued ueuLsche 8ank
uslng Lhe dlvldends lL pald ln 2007. We are assumlng Lhe dlvldends are
noL only reasonable buL susLalnable.
! ln early 2009, ln Lhe aermaLh of Lhe crlsls, ueuLsche 8anks dlvldend
pollcy was ln ux. 1he neL lncome had plummeLed and caplLal rauos were
belng reassessed. 1o forecasL fuLure dlvldends, we rsL forecasL neL
lncome (8CL* AsseL 8ase) and Lhen esumaLed Lhe lnvesLmenLs ln
regulaLory caplLal:
227
Lsumaung lClL : 1aLa Chemlcals
Aswath Damodaran
227

228
Lsumaung lCll: ulsney
Aswath Damodaran
228
!
229
ll. ulscounL 8aLes
Aswath Damodaran
229
! Crlucal lngredlenL ln dlscounLed cashow valuauon.
Lrrors ln esumaung Lhe dlscounL raLe or
mlsmaLchlng cashows and dlscounL raLes can lead
Lo serlous errors ln valuauon.
! AL an lnLuluve level, Lhe dlscounL raLe used should
be conslsLenL wlLh boLh Lhe rlsklness and Lhe Lype of
cashow belng dlscounLed.
! 1he cosL of equlLy ls Lhe raLe aL whlch we dlscounL
cash ows Lo equlLy (dlvldends or free cash ows Lo
equlLy). 1he cosL of caplLal ls Lhe raLe aL whlch we
dlscounL free cash ows Lo Lhe rm.
230
CosL of LqulLy: ueuLsche 8ank
2008 versus 2009
Aswath Damodaran
230
! ln early 2008, we esumaLed a beLa of 1.162 for ueuLsche 8ank,
whlch used ln con[uncuon wlLh Lhe Luro rlsk-free raLe of 4 (ln
!anuary 2008) and a rlsk premlum of 4.30 (Lhe maLure markeL
rlsk premlum ln early 2008), ylelded a cosL of equlLy of 9.23.
CosL of LqulLy
!an 2008
= 8lskfree 8aLe
!an 2008
+ 8eLa* MaLure MarkeL 8lsk
remlum
= 4.00 + 1.162 (4.3) = 9.23
(We used Lhe same beLa for early 2008 and early 2009. We could have looked
aL Lhe beLas for banks ln early 2008 and used LhaL number lnsLead)
! ln early 2009, Lhe Luro rlskfree raLe had dropped Lo 3.6 and Lhe
equlLy rlsk premlum had rlsen Lo 6 for maLure markeLs:
CosL of equlLy
!an 2009
= 8lskfree 8aLe
!an 2009
+ 8eLa (LqulLy 8lsk remlum)
= 3.6 + 1.162 (6) = 10.372
231
CosL of LqulLy: 1aLa Chemlcals
Aswath Damodaran
231
! We wlll be valulng 1aLa Chemlcals ln rupee Lerms.
(1haL ls a cholce. Any company can be valued ln any
currency).
! Larller, we esumaLed a beLa for equlLy of 0.943 for
1aLa Chemlcals operaung asseLs . WlLh a nomlnal
rupee rlsk-free raLe of 4 percenL and an equlLy rlsk
premlum of 10.31 for lndla (also esumaLed ln
ChapLer 4), we arrlve aL a cosL of equlLy of 13.93.
CosL of LqulLy = 4 + 0.943 (10.31) = 13.93
232
CurrenL CosL of CaplLal: ulsney
Aswath Damodaran
232
! 1he beLa for ulsneys sLock ln May 2009 was 0.9011. 1he 1. bond
raLe aL LhaL ume was 3.3. uslng an esumaLed equlLy rlsk premlum
of 6, we esumaLed Lhe cosL of equlLy for ulsney Lo be 8.91:
CosL of LqulLy = 3.3 + 0.9011(6) = 8.91
! ulsneys bond raung ln May 2009 was A, and based on Lhls raung,
Lhe esumaLed preLax cosL of debL for ulsney ls 6. uslng a
marglnal Lax raLe of 38, Lhe aer-Lax cosL of debL for ulsney ls
3.72.
Aer-1ax CosL of uebL = 6.00 (1 - 0.38) = 3.72
! 1he cosL of caplLal was calculaLed uslng Lhese cosLs and Lhe
welghLs based on markeL values of equlLy (43,193) and debL
(16,682):
CosL of caplLal =
!
8.91%
45,193
(16,682 +45,193)
+ 3.72%
16,682
(16,682 +45,193)
= 7.51%
233
8uL cosLs of equlLy and caplLal can and should
change over ume.
Aswath Damodaran
233
234
lll. LxpecLed CrowLh
Aswath Damodaran
234
Expected Growth
Net Income Operating Income
Retention Ratio=
1 - Dividends/Net
Income
Return on Equity
Net Income/Book Value of
Equity
X
Reinvestment
Rate = (Net Cap
Ex + Chg in
WC/EBIT(1-t)
Return on Capital =
EBIT(1-t)/Book Value of
Capital
X
235
Lsumaung growLh ln LS: ueuLsche 8ank ln
!anuary 2008
Aswath Damodaran
235
! ln 2007, ueuLsche 8ank reporLed neL lncome of 6.31 bllllon Luros on a book value
of equlLy of 33.473 bllllon Luros aL Lhe sLarL of Lhe year (end of 2006), and pald
ouL 2.146 bllllon Luros as dlvldends.
8eLurn on LqulLy =

8eLenuon 8auo =
! lf ueuLsche 8ank malnLalns Lhe reLurn on equlLy (8CL) and reLenuon rauo LhaL lL
dellvered ln 2007 for Lhe long run:
LxpecLed CrowLh 8aLe
Lxlsung lundamenLals
= 0.6703 * 0.1943 = 13.04
! lf we replace Lhe neL lncome ln 2007 wlLh average neL lncome of $3,934 mllllon,
from 2003 Lo 2007:
normallzed 8eLurn on LqulLy =
normallzed 8eLenuon 8auo =
LxpecLed CrowLh 8aLe
normallzed lundamenLals
= 0.4372 * 0.1181 = 3.40
!
Net Income
2007
Book Value of Equity
2006
=
6,510
33,475
=19.45%
!
1 "
Dividends
Net Income
=1 "
2,146
6,510
= 67.03%
!
Average Net Income
2003-07
Book Value of Equity
2006
=
3,954
33,475
=11.81%
!
1 "
Dividends
Net Income
=1 "
2,146
3,954
= 45.72%
236
Lsumaung growLh ln neL lncome: 1aLa
Chemlcals
Aswath Damodaran
236
normallzed LqulLy 8elnvesLmenL 8aLe =

normallzed 8eLurn on LqulLy =

LxpecLed CrowLh ln neL lncome = 63.62 * 17.34 = 11.03
!
Net Income
Total 2004-08
Book Value of Equity
Total 2004-08
=
31,033
178,992
=17.34%
!
Equity Reinvestment
Total 2004-08
Net Income
Total 2004-08
=
19,744
31,033
= 63.62%
237
8CL and Leverage
Aswath Damodaran
237
! A hlgh 8CL, oLher Lhlngs remalnlng equal, should yleld a
hlgher expecLed growLh raLe ln equlLy earnlngs.
! 1he 8CL for a rm ls a funcuon of boLh Lhe quallLy of lLs
lnvesLmenLs and how much debL lL uses ln fundlng Lhese
lnvesLmenLs. ln parucular
8CL = 8CC + u/L (8CC - l (1-L))
where,
8CC = (L8l1 (1 - Lax raLe)) / (8ook value of CaplLal)
8v of CaplLal = 8v of uebL + 8v of LqulLy - Cash
u/L = uebL/ LqulLy rauo
l = lnLeresL raLe on debL
L = 1ax raLe on ordlnary lncome.
238
uecomposlng 8CL
Aswath Damodaran
238
! Assume LhaL you are analyzlng a company wlLh a 13 reLurn
on caplLal, an aer-Lax cosL of debL of 3 and a book debL Lo
equlLy rauo of 100. LsumaLe Lhe 8CL for Lhls company.
! now assume LhaL anoLher company ln Lhe same secLor has
Lhe same 8CL as Lhe company LhaL you have [usL analyzed
buL no debL. Wlll Lhese Lwo rms have Lhe same growLh raLes
ln earnlngs per share lf Lhey have Lhe same dlvldend payouL
rauo?
! Wlll Lhey have Lhe same equlLy value?
239
Lsumaung CrowLh ln L8l1: ulsney
1he 8elnvesLmenL 8aLe
Aswath Damodaran
239
! We begln by esumaung Lhe relnvesLmenL raLe and reLurn on
caplLal for ulsney ln 2008 uslng Lhe numbers from Lhe laLesL
nanclal sLaLemenLs.
8elnvesLmenL 8aLe
2008
=
! We lnclude $316 mllllon ln acqulsluons made durlng 2008 ln
caplLal expendlLures, buL Lhls ls a volaule lLem. ulsney does
noL make large acqulsluons every year, buL lL does so
lnfrequenLly - $ 7.3 bllllon Lo buy lxar ln 2006 and $ 11.3
bllllon Lo buy CaplLal Clues ln 1996. Averaglng ouL
acqulsluons from 1994-2008, we esumaLe an average annual
value of $1,761 mllllon for acqulsluons over Lhls perlod:
8elnvesLmenL 8aLe
normallzed
=
(2,752- 1,839+ 241)
7,030 (1-.38)
= 26.48%
(3,939- 1,839+ 241)
7,030 (1-.38)
= 53.72%
240
Lsumaung CrowLh ln ulsney
8CC and LxpecLed CrowLh
Aswath Damodaran
240
! We compuLe Lhe reLurn on caplLal, uslng operaung
lncome ln 2008 and caplLal lnvesLed aL Lhe sLarL of
2008 (end of 2007):
8eLurn on CaplLal
2008
=
! lf ulsney malnLalns lLs 2008 normallzed
relnvesLmenL raLe of 33.72 and reLurn on caplLal of
9.91 for Lhe nexL few years, lLs growLh raLe wlll be
3.32 percenL.
LxpecLed CrowLh 8aLe = 33.72 * 9.91 = 3.32
!
EBIT (1 - t)
(BV of Equity + BV of Debt - Cash)
=
7,030 (1 -.38)
(30,753 + 16,892 - 3,670)
= 9.91%
241
lv. Cemng Closure ln valuauon
Aswath Damodaran
241
! Slnce we cannoL esumaLe cash ows forever, we esumaLe cash ows for a
growLh perlod and Lhen esumaLe a Lermlnal value, Lo capLure Lhe value
aL Lhe end of Lhe perlod:
! When a rms cash ows grow aL a consLanL raLe forever, Lhe presenL
value of Lhose cash ows can be wrluen as:
value = LxpecLed Cash llow nexL erlod / (r - g)
where,
r = ulscounL raLe (CosL of LqulLy or CosL of CaplLal)
g = LxpecLed growLh raLe forever.
! 1hls consLanL growLh raLe ls called a sLable growLh raLe and cannoL be
hlgher Lhan Lhe growLh raLe of Lhe economy ln whlch Lhe rm operaLes.
Value =
CF
t
(1+r)
t
+
Terminal Value
(1+r)
N
t=1
t=N
!
242
Cemng Lo sLable growLh.
Aswath Damodaran
242
! A key assumpuon ln all dlscounLed cash ow models ls Lhe perlod
of hlgh growLh, and Lhe pauern of growLh durlng LhaL perlod. ln
general, we can make one of Lhree assumpuons:
! Lhere ls no hlgh growLh, ln whlch case Lhe rm ls already ln sLable growLh
! Lhere wlll be hlgh growLh for a perlod, aL Lhe end of whlch Lhe growLh raLe
wlll drop Lo Lhe sLable growLh raLe (2-sLage)
! Lhere wlll be hlgh growLh for a perlod, aL Lhe end of whlch Lhe growLh raLe
wlll decllne gradually Lo a sLable growLh raLe(3-sLage)
! 1he assumpuon of how long hlgh growLh wlll conunue wlll depend
upon several facLors lncludlng:
! Lhe slze of Lhe rm (larger rm -> shorLer hlgh growLh perlods)
! currenL growLh raLe (lf hlgh -> longer hlgh growLh perlod)
! barrlers Lo enLry and dlerenual advanLages (lf hlgh -> longer growLh
perlod)
243
Chooslng a CrowLh erlod: Lxamples
Aswath Damodaran
243
244
Lsumaung SLable erlod lnpuLs: ulsney
Aswath Damodaran
244
! 8especL Lhe cap: 1he growLh raLe forever ls assumed Lo be 3. 1hls ls seL lower
Lhan Lhe rlskfree raLe (3.3).
! 1hlnk abouL sLable perlod excess reLurns: 1he reLurn on caplLal for ulsney wlll
drop from lLs hlgh growLh perlod level of 9.91 Lo a sLable growLh reLurn of 9.
1hls ls sull hlgher Lhan Lhe cosL of caplLal of 7.93 buL Lhe compeuuve advanLages
LhaL ulsney has are unllkely Lo dlsslpaLe compleLely by Lhe end of Lhe 10Lh year.
! 8elnvesL Lo grow: 1he expecLed growLh raLe ln sLable growLh wlll be 3. ln
con[uncuon wlLh Lhe reLurn on caplLal of 9, Lhls ylelds a sLable perlod
relnvesLmenL raLe of 33.33:
! 8elnvesLmenL 8aLe = CrowLh 8aLe / 8eLurn on CaplLal = 3 /9 = 33.33
! Ad[usL rlsk and cosL of caplLal: 1he beLa for Lhe sLock wlll drop Lo one, reecung
ulsneys sLaLus as a maLure company.
! CosL of LqulLy = 8lskfree 8aLe + 8eLa * 8lsk remlum = 3.3 + 6 = 9.3
! 1he debL rauo for ulsney wlll sLay aL 26.73. Slnce we assume LhaL Lhe cosL of debL remalns
unchanged aL 6, Lhls wlll resulL ln a cosL of caplLal of 7.93
! CosL of caplLal = 9.3 (.733) + 6 (1-.38) (.267) = 7.93
245
v. lrom rm value Lo equlLy value per share
Aswath Damodaran
245
Approach used To get to equity value per share
Discount dividends per share at the cost
of equity
Present value is value of equity per share
Discount aggregate FCFE at the cost of
equity
Present value is value of aggregate equity.
Subtract the value of equity options given
to managers and divide by number of
shares.
Discount aggregate FCFF at the cost of
capital
PV = Value of operating assets
+ Cash & Near Cash investments
+ Value of minority cross holdings
- Debt outstanding
= Value of equity
- Value of equity options
=Value of equity in common stock
/ Number of shares
246
valulng ueuLsche 8ank ln early 2008
Aswath Damodaran
246
! 1o value ueuLsche 8ank, we sLarLed wlLh Lhe normallzed lncome over Lhe
prevlous ve years (3,934 mllllon Luros) and Lhe dlvldends ln 2008 (2,146
mllllon Luros). We assumed LhaL Lhe payouL rauo and 8CL, based on
Lhese numbers wlll conunue for Lhe nexL 3 years:
! ayouL rauo = 2,146/3934 = 34.28
! LxpecLed growLh raLe = (1-.3428) * .1181 = 0.034 or 3.4
! CosL of equlLy = 9.23
247
ueuLsche 8ank ln sLable growLh
Aswath Damodaran
247
! AL Lhe end of year 3, Lhe rm ls ln sLable growLh. We assume LhaL Lhe cosL
of equlLy drops Lo 8.3 (as Lhe beLa moves Lo 1) and LhaL Lhe reLurn on
equlLy also drops Lo 8.3 (Lo equal Lhe cosL of equlLy).
SLable erlod ayouL 8auo = 1 - g/8CL = 1 - 0.03/0.083 = 0.6471 or 64.71
LxpecLed ulvldends ln ?ear 6 = LxpecLed neL lncome
3
*(1+g
SLable
)* SLable ayouL 8auo
= t3,143 (1.03) * 0.6471 = t3,427 mllllon
1ermlnal value =

v of 1ermlnal value =

! value of equlLy = t9,633+ t40,079 = t49,732 mllllon Luros
! value of equlLy per share=

SLock was Lradlng aL 89 Luros per share aL Lhe ume of Lhe analysls.
Expected Dividends
6
(Cost of Equity-g)
=
3,247
(.085-.03)
= 62, 318 million Euros
Terminal Value
n
(1+Cost of Equity
High growth
)
n
=
62,318
(1.0923)
5
= 40, 079 mil Euros
Value of Equity
# Shares
=
49,732
474.2
=104.88 Euros/share
248
WhaL does Lhe valuauon Lell us? Cne of Lhree
posslblllues.
Aswath Damodaran
248
! SLock ls under valued: 1hls valuauon would suggesL
LhaL ueuLsche 8ank ls slgnlcanLly overvalued, glven
our esumaLes of expecLed growLh and rlsk.
! ulvldends may noL reecL Lhe cash ows generaLed
by ueuLsche 8ank. 1he lClL could have been
slgnlcanLly lower Lhan Lhe dlvldends pald.
! LsumaLes of growLh and rlsk are wrong: lL ls also
posslble LhaL we have over esumaLed growLh or
under esumaLed rlsk ln Lhe model, Lhus reduclng our
esumaLe of value.
249
valulng 1aLa Chemlcals ln early 2009:
1he hlgh growLh perlod
Aswath Damodaran
249
! We used Lhe normallzed reLurn on equlLy of 17.34 (see earller
Lable) and Lhe currenL book value of equlLy (8s 33,717 mllllon) Lo
esumaLe neL lncome:
normallzed neL lncome = 33,717 *.1734 = 8s, 6,193 mllllon
(We removed lnLeresL lncome from cash Lo arrlve aL Lhe normallzed reLurn on
equlLy)
! We use Lhe average equlLy relnvesLmenL raLe of 63.62 percenL and
Lhe normallzed reLurn on equlLy of 17.34 Lo esumaLe growLh:
LxpecLed CrowLh ln neL lncome = 63.62 * 17.34 = 11.03
! We assume LhaL Lhe currenL cosL of equlLy (see earller page) of
13.93 wlll hold for Lhe nexL 3 years.

250
SLable growLh and value..
Aswath Damodaran
250
! Aer year ve, we wlll assume LhaL Lhe beLa wlll lncrease Lo 1 and LhaL
Lhe equlLy rlsk premlum wlll decllne Lo 7.3 percenL (we assumed lndla
counLry rlsk would drop). 1he resulung cosL of equlLy ls 11.3 percenL.
CosL of LqulLy ln SLable CrowLh = 4 + 1(7.3) = 11.3
! We wlll assume LhaL Lhe growLh ln neL lncome wlll drop Lo 4 and LhaL
Lhe reLurn on equlLy wlll rlse Lo 11.3 (whlch ls also Lhe cosL of equlLy).
LqulLy 8elnvesLmenL 8aLe
SLable CrowLh
= 4/11.3 = 34.78
lClL ln ?ear 6 = 10,449(1.04)(1 - 0.3478) = 8s 7,087 mllllon
1ermlnal value of LqulLy = 7,087/(0.113 - 0.04) = 8s 94,497 mllllon
! 1o value equlLy ln Lhe rm Loday
value of equlLy = v of lClL durlng hlgh growLh + v of Lermlnal value + Cash
= 10,433 + 94,497/1.13933 +1,739 = 8s 61,423 mllllon
! ulvldlng by 233.17 mllllon shares ylelds a value of equlLy per share of 8s 261, abouL
20 hlgher Lhan Lhe sLock prlce of 8s 222 per share.
251
ulsney: lnpuLs Lo valuauon
Aswath Damodaran
251
Current Cashflow to Firm
EBIT(1-t)= 7030(1-.38)= 4,359
- Nt CpX= 2,101
- Chg WC 241
= FCFF 2,017
Reinvestment Rate = 2342/4359
=53.72%
Return on capital = 9.91%
Expected Growth
in EBIT (1-t)
.5372*.0991=.0532
5.32%
Stable Growth
g = 3%; Beta = 1.00;
Cost of capital =7.95%
ROC= 9%;
Reinvestment Rate=3/9=33.33%
Terminal Value
10
= 4704/(.0795-.03) = 94,928
Cost of Equity
8.91%
Cost of Debt
(3.5%+2.5%)(1-.38)
= 3.72%
Based on actual A rating
Weights
E = 73% D = 27%
Cost of Capital (WACC) = 8.91% (0.73) + 3.72% (0.27) = 7.52%
Op. Assets 65,284
+ Cash: 3,795
+ Non op inv 1,763
- Debt 16,682
- Minority int 1,344
=Equity 73,574
-Options 528
Value/Share $ 28.16
Riskfree Rate:
Riskfree rate = 3.5%
+
Beta
0.90
X
Risk Premium
6%
Unlevered Beta for
Sectors: 0.7333
Disney - Status Quo in 2009
Reinvestment Rate
53.72%
Return on Capital
9.91%
Term Yr
7055
2351
4704
On June 1, 2009, Disney
was trading at $24.34
/share
First 5 years
Growth decreases
gradually to 3%
D/E=36.91%
Year 1 2 3 4 5 6 7 8 9 10
EBIT (1-t) $4,591 $4,835 $5,093 $5,364 $5,650 $5,924 $6,185 $6,428 $6,650 $6,850
- Reinvestment $2,466 $2,598 $2,736 $2,882 $3,035 $2,941 $2,818 $2,667 $2,488 $2,283
FCFF $2,125 $2,238 $2,357 $2,482 $2,615 $2,983 $3,366 $3,761 $4,162 $4,567
Cost of capital gradually
increases to 7.95%
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Ways of changlng value.
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Cashflows from existing assets
Cashflows before debt payments,
but after taxes and reinvestment to
maintain exising assets
Expected Growth during high growth period
Growth from new investments
Growth created by making new
investments; function of amount and
quality of investments
Efficiency Growth
Growth generated by
using existing assets
better
Length of the high growth period
Since value creating growth requires excess returns,
this is a function of
- Magnitude of competitive advantages
- Sustainability of competitive advantages
Stable growth firm,
with no or very
limited excess returns
Cost of capital to apply to discounting cashflows
Determined by
- Operating risk of the company
- Default risk of the company
- Mix of debt and equity used in financing
How well do you manage your
existing investments/assets?
Are you investing optimally for
future growth?
Is there scope for more
efficient utilization of
exsting assets?
Are you building on your
competitive advantages?
Are you using the right
amount and kind of
debt for your firm?
Current Cashflow to Firm
EBIT(1-t)= 7030(1-.38)= 4,359
- Nt CpX= 2,101
- Chg WC 241
= FCFF 2,017
Reinvestment Rate = 2342/4359
=53.72%
Return on capital = 9.91%
Expected Growth
in EBIT (1-t)
.5372*.12=.0645
6.45%
Stable Growth
g = 3%; Beta = 1.00;
Cost of capital =7.19%
ROC= 9%;
Reinvestment Rate=3/9=33.33%
Terminal Value
10
= 5067/(.0719-.03) = 120,982
Cost of Equity
9.74%
Cost of Debt
(3.5%+2.5%)(1-.38)
= 3.72%
Based on synthetic A rating
Weights
E = 60% D = 40%
Cost of Capital (WACC) = 9.74% (0.60) + 3.72% (0.40) = 7.33%
Op. Assets 81,089
+ Cash: 3,795
+ Non op inv 1,763
- Debt 16,682
- Minority int 1,344
=Equity 68621
-Options 528
Value/Share $ 36.67
Riskfree Rate:
Riskfree rate = 3.5%
+
Beta
1.04
X
Risk Premium
6%
Unlevered Beta for
Sectors: 0.7333
Disney - Restructured
Reinvestment Rate
53.72%
Return on Capital
12%
Term Yr
7600
2533
5067
On June 1, 2009, Disney
was trading at $24.34
/share
First 5 years
Growth decreases
gradually to 3%
D/E=66.67%
Cost of capital gradually
decreases to 7.19%
Year 1 2 3 4 5 6 7 8 9 10
EBIT (1-t) $4,640 $4,939 $5,257 $5,596 $5,957 $6,300 $6,619 $6,909 $7,164 $7,379
- Reinvestment $2,492 $2,653 $2,824 $3,006 $3,200 $3,127 $3,016 $2,866 $2,680 $2,460
FCFF $2,147 $2,286 $2,433 $2,590 $2,757 $3,172 $3,603 $4,043 $4,484 $4,919
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llrsL rlnclples
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