632598256894

More documents

Recommendations

Info

An error when using the income approach is mismatching the level of cash flows and the type of discount rate. The net cash flow to equity holders represents the return to investors. Thus, the discount rate for this level of cash flows is the firm‟s cost of equity capital. Alternatively, the net cash flow to the firm is the return the firm generates to pay the investors and lenders. For this level of cash flows, the DCF model should use the firm‟s weighted average cost of capital as the discount rate. In summary, it is very important to think about the level of cash flows in the valuation model and match it with the proper type of discount rate. Forecasted Financial Statements Acme‟s managers have prepared a financial forecast and discuss it with Victoria. The forecasts are presented in Exhibits 16.5, 16.6, and 16.7. Key assumptions in the forecasts include: • Sales would grow 12% in 2009 and 2010, 11% in 2011 and 2012, and 10% in 2013. • Costs of goods sold are 69% of sales. • Operating expenses (exclusive of officers‟ wages) are 12% of sales. • Officers‟ wages (at market amounts) are 3.1% of sales. • The 2009 capital expenditures are $2.8 million and increase thereafter 5% per year. • The firm needs a minimum cash balance of $200,000. • The dividend payout ratio (the amount of cash flows actually distributed to shareholders; the remainder is reinvested in the firm) ranges from 55% to 65% per year. Residual Value The DCF valuation methodology assumes that the firm will be sold in the future and the shareholders will receive the proceeds at that time. Victoria assumes Acme will be sold five years in the future on December 31, 2013. (Five years is common among analysts for mature firms. Start-up firms, however, may require financial forecasts for a longer period until the firm‟s earnings growth rate becomes stable.) The value of a firm at that time is called the residual value, as discussed earlier. The residual value of Acme is estimated from its forecasted net cash flows in 2013 and then by estimating the cash flows for the following year, 2014. The model assumes that the firm will be sold at the end of 2013, its earnings growth rate is stable on average, and a hypothetical new owner would expect to receive the amount of 2014 cash flows reflected in the model. Next, a price multiple is applied to Acme‟s estimated 2014 net cash flow in order to estimate the firm‟s residual value at December 31, 2013. The multiple is based on a formula: the reciprocal of the firm‟s weighted average cost of capital less its estimated sustainable long-term earnings growth rate. This formula is: Discount Rate - Sustainable Long-Term Earnings Growth Rate = Capitalization Rate 1 ÷ Capitalization Rate = Price Multiple
Exhibit 16.5 Acme Manufacturing, Inc.: Forecasted income statements, 2009-2013. Discount Rate for the Valuation Model As discussed earlier, since Acme is being valued using a debt-free methodology, Victoria uses the weighted average cost of capital (WACC) as the discount rate in her valuation model. WACC uses both the firm‟s cost of debt and cost of equity and weights them based on the firm‟s ideal capital structure. Each element of Acme‟s weighted average cost of capital is discussed in the following sections. Exhibit 16.6 Acme Manufacturing, Inc.: Forecasted net cash flows to the firm, 2009-2013.
Page 1 and 2:
Table of Contents Title Page Copyri
Page 3 and 4:
Chapter 6 - Planning Capital Expend
Page 5 and 6:
For Further Reading Part IV - Manag
Page 7 and 8:
Successful Postmerger Implementatio
Page 10 and 11:
This book is printed on acid-free p
Page 12 and 13:
Syllabus How Chapter Topics in This
Page 14 and 15:
Some of these experts are full-time
Page 16 and 17:
About the Contributors Richard T. B
Page 18 and 19:
Advances in Quantitative Analysis o
Page 20 and 21:
enterprise development. Dr. Zachara
Page 22 and 23:
The left side shows Nutrimin‟s in
Page 24 and 25:
Gail, let‟s go over this balance
Page 26 and 27:
Gail, do you have any questions abo
Page 28 and 29:
11. Not all expenses are cash outfl
Page 30 and 31:
Financial Statements: Who Uses Them
Page 32 and 33:
profitability to keep investing for
Page 34 and 35:
Financial Accounting Standards It i
Page 36 and 37:
Downloadable Resources for this cha
Page 38 and 39:
Next, we explain each of these thre
Page 40 and 41:
liquidity. Or, more simply, achievi
Page 42 and 43:
If these ratios are seriously defic
Page 44 and 45:
The debt-to-equity ratio is evaluat
Page 46 and 47:
year 1 to year 3. The net effect wa
Page 48 and 49:
to rate of return on the equity. Th
Page 50 and 51:
Other types of comparisons of finan
Page 52 and 53:
income/sales), asset turnover (sale
Page 54 and 55:
successful businesspeople should ha
Page 58 and 59:
More than a decade ago, a special c
Page 60 and 61:
companies is used for illustration.
Page 62 and 63:
The identification of nonrecurring
Page 64 and 65:
The Dow Chemical single-step income
Page 66 and 67:
is a pretax measure, but income fro
Page 68 and 69:
Sources: Companies‟ annual report
Page 70 and 71:
Exhibit 3.11 Examples of discontinu
Page 72 and 73:
amortization purposes, the Company
Page 74 and 75:
Examples of nonrecurring items disc
Page 76 and 77:
During Fiscal 2006, inventory quant
Page 78 and 79:
The nonrecurring items of Boston Sc
Page 80 and 81:
The disclosure presented earlier in
Page 82 and 83:
gains or losses that appear as part
Page 84 and 85:
ecurring as for Kimberly-Clark, the
Page 86:
Summarizing Nonrecurring Items and
Page 89 and 90:
This example of using the SEB works
Page 92 and 93:
Exhibit 3.27 Other income (expense)
Page 97 and 98:
Source: Pfizer, Inc., annual report
Page 99 and 100:
Exhibit 3.30 Acquisitions note: Pfi
Page 101 and 102:
Source: Pfizer, Inc., annual report
Page 103 and 104:
Exhibit 3.33 Cost-reduction initiat
Page 105 and 106:
Exhibit 3.36 Share-based payment no
Page 107:
The Pfizer Worksheet Analysis: Down
Page 110 and 111:
Some Further Points on the Pfizer W
Page 112 and 113:
• It is common to treat items as
Page 114 and 115:
FedEx Corporation (2007) First Sola
Page 116 and 117:
1 The American Institute of Certifi
Page 118 and 119:
28 These alternative translation me
Page 120 and 121:
If you need some instruction in Exc
Page 122 and 123:
To solve using Excel, open your Exc
Page 124 and 125:
As you can see from the previous ex
Page 126 and 127:
C6 = 5 • Now enter the “=” si
Page 128 and 129:
Ordinary Annuity An ordinary annuit
Page 130 and 131:
To confirm that the number of payme
Page 132 and 133:
The FV of this first payment into t
Page 134 and 135:
Exhibit 4.15 Finding the future val
Page 136 and 137:
Exhibit 4.18 Finding the present va
Page 138 and 139:
From Exhibit 4.20, we see that as t
Page 140 and 141:
Exhibit 4.22 Amortization schedule
Page 142 and 143:
Exhibit 4.25 Regular cash flows wit
Page 144:
Internet Links For Further Reading
Page 148 and 149:
Investors who are risk averse will
Page 150 and 151:
considering the risk of a single as
Page 152 and 153:
Portfolio Risk Stand-alone risk is
Page 154 and 155:
In spite of unique or diversifiable
Page 156 and 157:
If a particular stock is highly sus
Page 158 and 159:
The formula tells us that, to begin
Page 160 and 161:
for the entire market of stocks sin
Page 162 and 163:
The dividend per share for preferre
Page 164 and 165:
If you are able to determine the cu
Page 166 and 167:
Debt finance is the lower-cost meth
Page 168 and 169:
We don‟t observe many firms whose
Page 170 and 171:
Capital Structure in Practice Finan
Page 172 and 173:
are able to observe regularities in
Page 174 and 175:
dividends and capital gains. We wil
Page 176 and 177:
where EBIT is earnings before inter
Page 178 and 179:
Since long-term debt holders have a
Page 180 and 181:
accept more investment projects. Re
Page 184 and 185:
A beer company is considering build
Page 186 and 187:
accounts receivable, and tabulates
Page 188 and 189:
profit by the tax rate determines t
Page 190 and 191:
Accounting profit often mixes varia
Page 192 and 193:
The concept that future cash flows
Page 194 and 195:
Like project A, project C also cost
Page 196 and 197:
The after-tax interest rate is the
Page 198 and 199:
equal mix of debt and equity, its d
Page 200 and 201:
The payback period rule stipulates
Page 202 and 203:
The IRR rule is appealing in that i
Page 204 and 205:
complete with its real options is g
Page 208 and 209:
What does it matter that one invest
Page 210 and 211:
Exhibit 7.3 Time line in dollars an
Page 212 and 213:
There are a number of countries in
Page 214 and 215:
eturn of 10% on its investments in
Page 216 and 217:
Exhibit 7.12 Summary of exchange ra
Page 218 and 219:
and so will the value of the liabil
Page 220 and 221:
Source: CIA, World Factbook, availa
Page 222 and 223:
Exhibit 7.18 Net present value of c
Page 224 and 225:
equired interest payments to be pai
Page 226 and 227:
So if the assistant treasurer was r
Page 228 and 229:
This theory is far from perfect, as
Page 230 and 231:
The Consulting Firm Jennifer, Jean,
Page 232 and 233:
part by a statute, the Uniform Limi
Page 234 and 235:
formation in Delaware (or any state
Page 236 and 237:
purpose of requiring qualification.
Page 238 and 239:
Phil‟s death may terminate the bu
Page 240 and 241:
the transfer. This means that if Br
Page 242 and 243:
These rules extend to tort liabilit
Page 244 and 245:
In the absence of a meeting, stockh
Page 246 and 247:
A more detailed discussion on the b
Page 248 and 249:
Partnerships If possible, the resul
Page 250 and 251:
associated with this arrangement ar
Page 252 and 253:
Partnerships are also not separate
Page 254 and 255:
For most start-up businesses, howev
Page 256 and 257:
form, even at the risk of some unli
Page 258 and 259:
likely that our consultants will be
Page 260 and 261:
Thus, the corporation and LLC, with
Page 264 and 265:
It is not possible to fully describ
Page 266 and 267:
usiness corporation for all purpose
Page 268 and 269:
a cash-basis taxpayer to be taxed a
Page 270 and 271:
The Tax Reform Act of 1986 substant
Page 272 and 273:
limit is the product of the value o
Page 274 and 275:
he would have spent anyway. In fact
Page 276 and 277:
protect Brad from the scenario of h
Page 278 and 279:
paying for the privilege. If the st
Page 280 and 281:
The second tax scenario attaches to
Page 282 and 283:
include that nullity in his taxable
Page 284 and 285:
then the capital gain to be taxed h
Page 286 and 287:
Most relevant to Morris is Section
Page 288 and 289:
To begin with, the ESOP will have t
Page 290 and 291:
general partner of a limited partne
Page 292 and 293:
small businesses) is also subject t
Page 294 and 295:
oth Lisa and Brad would be free to
Page 296 and 297:
Assume that a limited liability com
Page 298 and 299:
corporations, and had been audited
Page 300 and 301:
There is plenty of blame from the c
Page 302 and 303:
• An important study about top ma
Page 304 and 305:
• The federal government made at
Page 306 and 307:
$79.7 million for other services, a
Page 308 and 309:
Budgets offer a variety of benefits
Page 310 and 311:
determine the impact of specific pr
Page 312 and 313:
Exhibit 11.2 Budget variance report
Page 314 and 315:
udget, we just add more to it next
Page 316:
income statement. The financial bud
Page 319 and 320:
For a manufacturing company, cost o
Page 321 and 322:
C&G‟s Gift Shop has a policy to m
Page 323 and 324:
Meeting cash obligations as they co
Page 325 and 326:
was unusually low, say, due to the
Page 327 and 328:
A fixed budget, sometimes called a
Page 329 and 330:
A large part of the budget selling
Page 331 and 332:
• Centralized resource allocation
Page 333:
Merewitz, Leonard, and Stephen H. S
Page 337 and 338:
This chapter starts with a discussi
Page 339 and 340:
Interestingly the numbers for quart
Page 341 and 342:
Exhibit 12.4 Scenarion analysis.
Page 343 and 344:
Pitfalls Although this analytic tec
Page 345 and 346:
Exhibit 12.6 Variable cost element
Page 347 and 348:
Variable Cost as a Function of Outp
Page 349 and 350:
If scenario 2 yields a lower profit
Page 351 and 352:
Microsoft certainly does not price
Page 353 and 354:
If it is determined that dumping ha
Page 357 and 358:
Leaving government agencies and not
Page 359 and 360:
transaction processing. Each proces
Page 361 and 362:
Exhibit 13.3 E-commerce transaction
Page 363 and 364:
To summarize the analysis, the busi
Page 365 and 366:
Capacity costs are probably the mos
Page 367 and 368:
which it was, but for the inventory
Page 369 and 370:
They called this strategic cost man
Page 371 and 372:
A closer study, however, revealed s
Page 373 and 374:
the benefits of business planning.
Page 375 and 376:
The last type of plan is called a d
Page 377 and 378:
The Business Plan We will progress
Page 379 and 380:
Hook the Reader That means having t
Page 381 and 382:
Industry The goal of this section i
Page 383 and 384:
upscale suburban client who wants p
Page 385 and 386:
Company and Product Description Com
Page 387 and 388:
Exhibit 14.8 shows the competitive
Page 389 and 390:
Exhibit 14.9a Advertising schedule.
Page 391 and 392:
Scope of Operations What is the pro
Page 393 and 394:
Development Time Line A development
Page 395 and 396:
By law, most organization types req
Page 397 and 398:
As mentioned in the development pla
Page 399 and 400:
that can be depreciated, you should
Page 401 and 402:
1 Special thanks to Matt Feczko, Mi
Page 405 and 406: For better or worse, the business e
Page 407 and 408: Leeson bet and lost. Japanese stock
Page 409 and 410: Between February and April 1994, Da
Page 411 and 412: LTCM could be picky when it came to
Page 413 and 414: An investor who wished to invest in
Page 415 and 416: Similarly, the swaps market has rev
Page 417 and 418: speculator would suffer losses equa
Page 419 and 420: American manufacturer will suffer l
Page 421 and 422: The ease with which futures facilit
Page 423 and 424: Exhibit 15.1 Call option payoff dia
Page 425 and 426: Exhibit 15.2 Payoff diagram for a w
Page 427 and 428: Notice that the put option payoff r
Page 429 and 430: Bank, owns a large block of NASDAQ
Page 431 and 432: can be tailored so that the money r
Page 433 and 434: Finally, the last step is to choose
Page 435: 3 Fischer Black, who co-invented th
Page 439 and 440: not include assets that the firm ha
Page 441 and 442: Thus, a business valuation will usu
Page 443 and 444: Negative • Acme is highly depende
Page 445 and 446: Exhibit 16.3 Acme Manufacturing, In
Page 447 and 448: Profitability ratios reflect the re
Page 449 and 450: When we talk about the value of a b
Page 451 and 452: This example illustrates that with
Page 453: Income Approach: Discounted Cash Fl
Page 457 and 458: Victoria explains that the second p
Page 459 and 460: Victoria analyzes Acme‟s audited
Page 461 and 462: In summary, the discounted cash flo
Page 463 and 464: Adjustment for Illiquidity As previ
Page 465 and 466: 51% position sells for a higher pri
Page 467 and 468: examples. The proper application of
Page 471 and 472: The subject of this chapter is grow
Page 473 and 474: Finally, an acquisition can be effe
Page 475 and 476: M&A activity has been the focus of
Page 477 and 478: companies continue to make the same
Page 479 and 480: equals was taking on a distinctive
Page 481 and 482: Anatomy of a Successful Acquirer: T
Page 483 and 484: employees kept their original jobs
Page 485 and 486: where ΔCF t is the incremental cas
Page 487 and 488: where it‟s ultimately buried. Suc
Page 489 and 490: The following example summarizes th
Page 491 and 492: make sure that you are at least awa
Page 493 and 494: acquisition, there is no immediate
Page 495 and 496: its vascular business, which was so
Page 497 and 498: While all employees should be part
Page 499 and 500: makes strategic and financial sense
Page 501 and 502: Bhagat, Sanjai, Ming Dong, David Hi
Page 505 and 506:
The 2008 financial crisis underscor
Page 507 and 508:
Source: Plunkett’s Outsourcing &
Page 509 and 510:
To summarize: Trends • Large numb
Page 511 and 512:
Companies are becoming increasingly
Page 513 and 514:
What steps should a company follow
Page 515 and 516:
• Results of meetings with vendor
Page 517 and 518:
• Breach of contract and remedies
Page 519 and 520:
Assuming the project or service rev
Page 521 and 522:
The answer is: profits. The company
Page 523:
19 Information Technology and You D
Page 527 and 528:
People‟s lives have been turned u
Page 529 and 530:
its self-contained rechargeable bat
Page 531 and 532:
Random-Access Memory (RAM) Random-a
Page 533 and 534:
On laptop computers and PDAs, the s
Page 535 and 536:
Operating System An operating syste
Page 537 and 538:
the spreadsheet software together w
Page 539 and 540:
Exhibit 19.5 Pro forma sales and in
Page 541 and 542:
Database Software A database is a c
Page 543 and 544:
Internet e-mail addresses often con
Page 545 and 546:
Personal Finance Software There are
Page 547 and 548:
There are several different approac
Page 549 and 550:
One of the major attractions of the
Page 551 and 552:
While not a new version of the Web
Page 553 and 554:
industrial revolution, and has occu
Page 555:
Dummies Inc. has a series of books
Page 559 and 560:
organization. This chapter is desig
Page 561 and 562:
As technology has evolved, the term
Page 563 and 564:
While the software mentioned earlie
Page 565 and 566:
Most of the focus of the investor c
Page 567 and 568:
Data Access and OLAP Before the lat
Page 569 and 570:
Exhibit 20.5 illustrates a differen
Page 571 and 572:
Productivity Tools Workers expect t
Page 573 and 574:
Client-server technology is based o
Page 575 and 576:
Today, most programmers write in C+
Page 577 and 578:
Exhibit 20.6 is a model of a typica
Page 579 and 580:
No treatment of relational database
Page 581 and 582:
Online analytical processing (OLAP)
Page 583 and 584:
server) and the rest on the users
Page 585 and 586:
the other operational departments w
Page 587:
The world of business has changed d
Page 591:
Chaffey, Dave, E-Commerce and E-Com
Page 595 and 596:
According to the results of the sur
Page 597 and 598:
understand the financial situation
Page 599 and 600:
MBA graduates who are hoping to ent
Page 601 and 602:
Summary Financial services opportun
Page 603 and 604:
Let‟s begin with the “I left it
Page 605 and 606:
MBA student: “Well, I go to [Grea
Page 607 and 608:
Aiming for Your Goals For career ch
Page 609 and 610:
Networking is generally regarded as
Page 611 and 612:
Let‟s begin with some key assumpt
Page 613 and 614:
like, or moving ahead in the compan
Page 618 and 619:
Accrual accounting: An accounting m
Page 620 and 621:
Cash flow: Cash that is spent or re
Page 622 and 623:
Distribution channel: A chain of in
Page 624 and 625:
Goodwill: As it relates to valuatio
Page 626 and 627:
Management’s discussion and analy
Page 628 and 629:
Ordinary annuity: An annuity that p
Page 630 and 631:
Securities and Exchange Commission
Page 632 and 633:
Vertical merger: A merger in which
Page 634 and 635:
about activity-based costing progre
Page 636 and 637:
Application systems ARPAnet Arthur
Page 638 and 639:
Bell Labs Benefit measurement Beta
Page 640 and 641:
goal orientation legal and contract
Page 642 and 643:
segment information note share-base
Page 644 and 645:
process of purpose of real world us
Page 646 and 647:
uy/build decision capital budget in
Page 648 and 649:
written resume Careers in corporate
Page 650 and 651:
Cell Center for Research in Securit
Page 652 and 653:
Compensation and ownership Competit
Page 654 and 655:
Corporate culture Corporate debt in
Page 656 and 657:
profit planning from an internal pe
Page 658 and 659:
Data Data access and OLAP Database
Page 660 and 661:
Askin Capital Management Barings Ba
Page 662 and 663:
market approach publicly traded gui
Page 664 and 665:
Electronic data interchange (EDI) E
Page 666 and 667:
Extensible markup language (XML) Ex
Page 668 and 669:
short term liquidity users and uses
Page 670 and 671:
Fourth generation programming (4GL)
Page 672 and 673:
Going private Going private transac
Page 674 and 675:
Hypertext links Hypertext markup la
Page 676 and 677:
Information technology and the firm
Page 678 and 679:
International Accounting Standards
Page 680 and 681:
Last-in-first out (LIFO) vs. curren
Page 682 and 683:
Long call option payoff Longer-term
Page 684 and 685:
Market risks Market size and struct
Page 686 and 687:
Motivation to outsource Multiple IR
Page 688 and 689:
Nonrecurring items defined disclosu
Page 690 and 691:
Operational complexity Operational
Page 692 and 693:
Outsourcing metrics Overhead Over-t
Page 694 and 695:
Personal end game Personal expense
Page 696 and 697:
Price competition Price decreases P
Page 698 and 699:
Projected cash flow statements Proj
Page 700 and 701:
Relevant range Relevant range assum
Page 702 and 703:
Risk sharing Risk transfer Risk vs.
Page 704 and 705:
Short call option payoff Short part
Page 706 and 707:
Spot price Spreadsheet software Spr
Page 708 and 709:
Summarizing nonrecurring items and
Page 710 and 711:
acquisition the business dividends
Page 712 and 713:
Timmon‟s Model of Opportunity Rec
Page 714 and 715:
U.S. immigration quotas U.S. Intern
Page 716 and 717:
discounting with discount rate form
show all

632598256894

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?