Equity Valuation and Analysis - Mark Moore

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facility or building without assuming all the risk that comes along if they were to own it. Because of GAAP’s loose requirements, managers have the flexibility whether to distinguish it from a capital lease or an operating lease. By choosing to use an operating lease, firms are able to lower their long term liabilities by simply expensing these payments each year. However, this makes it hard to determine how much these expenses actually are because they are consolidated in the category of “Other long term expenses.” Due to the fact that there are such loose requirements set up by GAAP, managers have given very low disclosure based around these figures. Throughout Dow’s 10-k, they have given the figures of the bare minimum yearly payments of these leases. These payments include (2007) $251 million, (2008) $208 million, (2009) $179 million, (2010) $137 million, (2011) $85 million, and (2012 and thereafter) $565 million. Thus, it nearly impossible to determine how firms like Dow are accounting for these expenses. 2001 2002 2003 2004 2005 2006 $ $ $ $ $ $ Property 35,890 37,934 40,812 41,898 41,934 44,381 $ $ $ $ $ $ Net Sales 28,075 27,609 32,632 40,161 46,307 49,124 $ $ $ $ $ $ Inventories 4,440 4,208 4,050 4,957 5,319 6,058 Evaluating Accounting Strategy Given a firms accounting flexibility, management have the option of reporting or omitting key provisions within its financial statement. Through the use of an aggressive accounting strategy, a firm can choose to exclude imperative information on how Dow Chemical Analysis Page 44
certain numbers effecting key success factors where formed. On the other hand, a conservative accounting strategy would increase the transparency of the company, which in turn would increase investor confidence. To determine the type of accounting strategy used, one must focus on the level of disclosure a company provides within their financial reports. In the chemical and plastic industries, those which DOW competes in, there is a mixture of conservative and aggressive accounting. There is a high level of disclosure in the product segmentation reports, which gives not only an overview of the product line, but also the sales growth, volume of production, competition, and product licensing rights for each manufactured goods. In addition, subjects related to the growth of the company also have high disclosure of their values. In the areas that are crucial to the growth of the company such as properties, plant and equipment, net sales, and inventories, we see that Dow has made a considerable investment in all three sectors. Aside from the advances in these areas, the firm has also been restructuring their business model by cutting back on manufacturing labor, ceasing operations from inefficient production facilities, and increasing the R&D staff. Furthermore, in the areas of Research and Development, we are able to see a high level of disclosure. DOW has increased its intellectual capital by hiring 5,600 experienced and knowledgeable professionals, and built new state-of-the-art production facilities to yield new and innovative products. This shows that Dow, along with other competitors in this industry, know the importance of R&D, and seek to gain a competitive advantage by increasing the amount of funding associated with it in hopes of generating future cash flows. On the other hand, there is a low level of disclosure in Capital/Operating leasing. Firms can choose to capitalize their leases or expense them through Operating Leases. When using a capital lease, the lease is treated as an asset on the firms Balance Sheet, Dow Chemical Analysis Page 45
Page 1 and 2: Equity Valuation and Analysis Frank
Page 3 and 4: Executive Summary Investment Recomm
Page 5 and 6: Accounting Analysis When analyzing
Page 7 and 8: Valuations In determining Dow’s c
Page 9 and 10: in July of 2006. Comparing Dow’s
Page 11 and 12: Dow provides consumers with special
Page 13 and 14: States as well as some smaller area
Page 15 and 16: ample amount of excess capacity. Gi
Page 17 and 18: Market Share within United States 5
Page 19 and 20: It is also important to note that t
Page 21 and 22: First we must consider scale of eco
Page 23 and 24: The bargaining power of buyers can
Page 25 and 26: Price sensitivity of suppliers in t
Page 27 and 28: cases, firms will choose to impleme
Page 29 and 30: strategy to gain or maintain market
Page 31 and 32: cannot compete on a large scale of
Page 33 and 34: approximately $600-800M/yr. It is t
Page 35 and 36: company with the most innovative, c
Page 37 and 38: identification of accounting polici
Page 39 and 40: Post-Retirement Benefit Plans The c
Page 41 and 42: As seen in previous figures, firms
Page 43: policies. These variations can acco
Page 47 and 48: Operating leasing is considered a r
Page 49 and 50: transparent view of how a company o
Page 51 and 52: cards. In a perfect sales environme
Page 53 and 54: The inventory turnover is key indic
Page 55 and 56: The Asset Turnover ratio is one way
Page 57 and 58: This ratio is an indication of how
Page 59 and 60: determined that they were easily wi
Page 61 and 62: shown growth approaching just under
Page 63 and 64: inventories within a year; therefor
Page 65 and 66: how efficient a company is in exten
Page 67 and 68: inventory sit on the shelves, the l
Page 69 and 70: Liquidity Overview In the overall s
Page 71 and 72: OPERATING PROFIT MARGIN 2002 2003 2
Page 73 and 74: Net Profit Margin 2002 2003 2004 20
Page 75 and 76: Return on Assets 15% 10% 5% 0% -5%
Page 77 and 78: interest requirements on debt” (R
Page 79 and 80: to fall into debt financing and pos
Page 81 and 82: endeavors and cash flows. In 2006,
Page 83 and 84: Financial Statement Forecasting Ana
Page 85 and 86: Income Statement When forecasting t
Page 87 and 88: Balance Sheet To start on the balan
Page 89 and 90: To find the forecast for total liab
Page 91 and 92: Statement of Cash Flows Seeing as c
Page 93 and 94: Cost of Debt Liabilities Source Int
Page 95 and 96:
acquired at a rate of Ke. These 2 s
Page 97 and 98:
Trailing method divides the given p
Page 99 and 100:
DIVIDEND PPS D/P HUN N/A DD 1.48 48
Page 101 and 102:
EBITDA PPS P/EBITDA HUN 0.7365 18.9
Page 103 and 104:
EBITDA EV EV/EBITDA HUN 0.7365 7.23
Page 105 and 106:
financial statement, and a calculat
Page 107 and 108:
Out of all of the intrinsic valuati
Page 109 and 110:
This sensitivity analysis was used
Page 111 and 112:
fairly valued would be to have a RO
Page 113 and 114:
Net Sales/Cash from sales 2002 2003
Page 115 and 116:
Altman Z-score 2002 2003 2004 2005
Page 117 and 118:
SUMMARY OUTPUT 36 Month Regression
Page 119 and 120:
Page 121 and 122:
Page 123 and 124:
Page 125 and 126:
Page 127 and 128:
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Equity Valuation and Analysis - Mark Moore

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