Company Valuation Under IFRS : Interpreting and Forecasting ...

Company valuation under IFRS
spread. And the third part contains two capitalisations. The first capitalised the
stream represented by the t+1 year investment. The second applies the Gordon
Growth model to it to calculate the present value of an infinite stream, with each
year’s investment being bigger by (1+g). Do not forget that, as ever, this is a
value at the end of our forecast period, and will need to be brought back to a
current value:
PV 0 =PV t /(1+WACC) t
before we go ahead and enter these two components of the terminal value into
our model, let us just linger a moment on what the PV t formula above is telling
us. It is giving us the present value of a stream of investments that will be made
to infinity, starting in one year’s time, by capitalising the value that each annual
investment will create. This has an application that goes well beyond the
construction of economic profit models.
The economic profit terminal value formula is applicable to all sectors of
industry in which it is practical to value the existing assets of the company
and separately to put a value on the future investment stream. This permits
complete emancipation from accounting entities if the assets (franchises,
properties, oil fields, drug patents) can be valued directly, and then an
additional component of value be put on the firm’s incremental
investment opportunities.
So we now have two components to our economic profit terminal value.
The first represents the present value of a flat stream of economic profit
generated by the assets as at the end of the forecasting period, valued as a flat
perpetuity, and then brought back to year zero.
The second represents the value that will be added by incremental net
investments made after the forecasting period, derived from the same retention
formula that we used in the DCF model. The value added by the first year’s
investment is then calculated and extrapolated as a constant growth series of
additions to value. We are not valuing an annual cash flow here. We are valuing
an annual accrual of additional value to the company.
So, does it give us the same answer as the DCF? Exhibit 5.2 illustrates the complete
economic profit valuation of Metro, with the same balance sheet adjustments that
we used for the DCF valuation. And, yes, it gives us the same answer.
What is very different about this analysis is its attribution of that value, which is
sliced four ways: the current balance sheet, the economic profit that is expected
to be generated over the next 5 years, the economic profit that would be
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