1、12-1CHAPTER 12Corporate Valuation and Value-Based ManagementnCorporate ValuationnValue-Based ManagementnCorporate Governance12-2Corporate Valuation:List the two types of assets that a company owns.nAssets-in-placenFinancial,or nonoperating,assets 12-3Assets-in-PlacenAssets-in-place are tangible,such
2、 as buildings,machines,inventory.nUsually they are expected to grow.nThey generate free cash flows.nThe PV of their expected future free cash flows,discounted at the WACC,is the value of operations.12-4Value of Operations1tttOp)WACC1(FCFV12-5Nonoperating AssetsnMarketable securitiesnOwnership of non
3、-controlling interest in another companynValue of nonoperating assets usually is very close to figure that is reported on balance sheets.12-6Total Corporate ValuenTotal corporate value is sum of:lValue of operationslValue of nonoperating assets12-7Claims on Corporate ValuenDebtholders have first cla
4、im.nPreferred stockholders have the next claim.nAny remaining value belongs to stockholders.12-8Applying the Corporate Valuation ModelnForecast the financial statements,as shown in Chapter 11.nCalculate the projected free cash flows.nModel can be applied to a company that does not pay dividends,a pr
5、ivately held company,or a division of a company,since FCF can be calculated for each of these situations.12-9Data for ValuationnFCF0=$20 millionnWACC=10%ng=5%nMarketable securities=$100 millionnDebt=$200 millionnPreferred stock=$50 millionnBook value of equity=$210 million12-10Value of Operations:Co
6、nstant GrowthSuppose FCF grows at constant rate g.1ttt01tttOpWACC1)g1(FCFWACC1FCFV12-11Constant Growth FormulanNotice that the term in parentheses is less than one and gets smaller as t gets larger.As t gets very large,term approaches zero.1tt0OpWACC1g1FCFV12-12Constant Growth Formula(Cont.)nThe sum
7、mation can be replaced by a single formula:gWACC)g1(FCFgWACCFCFV01Op12-13Find Value of Operations42005.010.0)05.01(20VgWACC)g1(FCFVOp0Op12-14Value of EquitynSources of Corporate ValuelValue of operations=$420lValue of non-operating assets=$100nClaims on Corporate ValuelValue of Debt=$200lValue of Pr
8、eferred Stock=$50lValue of Equity=?12-15Value of EquityTotal corporate value=VOp+Mkt.Sec.=$420+$100 =$520 millionValue of equity =Total-Debt-Pref.=$520-$200-$50 =$270 million12-16Market Value Added(MVA)nMVA=Total corporate value of firm minus total book value of firmnTotal book value of firm=book va
9、lue of equity+book value of debt+book value of preferred stocknMVA=$520-($210+$200+$50)=$60 million12-17Breakdown of Corporate Value0100200300400500600Sourcesof ValueClaimson ValueMarketvs.BookMVABook equityEquity(Market)Preferred stockDebtMarketablesecuritiesValue of operations12-18Expansion Plan:N
10、onconstant GrowthnFinance expansion by borrowing$40 million and halting dividends.nProjected free cash flows(FCF):lYear 1 FCF=-$5 million.lYear 2 FCF=$10 million.lYear 3 FCF=$20 millionlFCF grows at constant rate of 6%after year 3.(More)12-19nThe weighted average cost of capital,rc,is 10%.nThe compa
11、ny has 10 million shares of stock.12-20Horizon ValuenFree cash flows are forecast for three years in this example,so the forecast horizon is three years.nGrowth in free cash flows is not constant during the forecast,so we cant use the constant growth formula to find the value of operations at time 0
12、.12-21Horizon Value(Cont.)nGrowth is constant after the horizon(3 years),so we can modify the constant growth formula to find the value of all free cash flows beyond the horizon,discounted back to the horizon.12-22Horizon Value FormulanHorizon value is also called terminal value,or continuing value.
13、gWACC)g1(FCFVHVtttimeatOp12-23Vop at 3Find the value of operations by discounting the free cash flows at the cost of capital.0-4.5458.26415.026398.1971234rc=10%416.942 =Vopg=6%FCF=-5.0010.00 20.00 21.2$21.2.$530.100 06 012-24Find the price per share of common stock.Value of equity=Value of operation
14、s -Value of debt =$416.94-$40 =$376.94 million.Price per share =$376.94/10=$37.69.12-25Value-Based Management(VBM)nVBM is the systematic application of the corporate valuation model to all corporate decisions and strategic initiatives.nThe objective of VBM is to increase Market Value Added(MVA)12-26
15、MVA and the Four Value DriversnMVA is determined by four drivers:lSales growthlOperating profitability(OP=NOPAT/Sales)lCapital requirements(CR=Operating capital/Sales)lWeighted average cost of capital12-27MVA for a Constant Growth Firm )g1(CRWACCOPgWACC)g1(SalesMVAtt12-28Insights from the Constant G
16、rowth ModelnThe 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.gWACC)g1(Salest12-29Insights(Cont.)nThe second bracket is the operating profit(as a%)the firm
17、 gets to keep,less the return that investors require for having tied up their capital in the firm.)g1(CRWACCOP12-30Improvements in MVA due to the Value DriversnMVA will improve if:lWACC is reducedloperating profitability(OP)increaseslthe capital requirement(CR)decreases12-31The Impact of GrowthnThe
18、second term in brackets can be either positive or negative,depending on the relative size of profitability,capital requirements,and required return by investors.)g1(CRWACCOP12-32The Impact of Growth(Cont.)nIf the second term in brackets is negative,then growth decreases MVA.In other words,profits ar
19、e not enough to offset the return on capital required by investors.nIf the second term in brackets is positive,then growth increases MVA.12-33Expected Return on Invested Capital(EROIC)nThe expected return on invested capital is the NOPAT expected next period divided by the amount of capital that is
20、currently invested:t1ttCapitalNOPATEROIC12-34MVA in Terms of Expected ROICgWACCWACCEROICCapitalMVAtttIf the spread between the expected return,EROICt,and the required return,WACC,is positive,then MVA is positive and growth makes MVA larger.The opposite is true if the spread is negative.12-35The Impa
21、ct of Growth on MVAnA company has two divisions.Both have current sales of$1,000,current expected growth of 5%,and a WACC of 10%.nDivision A has high profitability(OP=6%)but high capital requirements(CR=78%).nDivision B has low profitability(OP=4%)but low capital requirements(CR=27%).12-36What is th
22、e impact on MVA if growth goes from 5%to 6%?Division A Division BOP6%6%4%4%CR78%78%27%27%Growth5%6%5%6%MVA(300.0)(360.0)300.0 385.0Note:MVA is calculated using the formula on slide 12-27.12-37 Expected ROIC and MVA Division A Division BCapital0$780$780$270$270Growth5%6%5%6%Sales1$1,050$1,060$1,050$1
23、,060NOPAT1$63$63.6$42$42.4EROIC08.1%8.2%15.6%15.7%MVA(300.0)(360.0)300.0 385.012-38Analysis of Growth StrategiesnThe expected ROIC of Division A is less than the WACC,so the division should postpone growth efforts until it improves EROIC by reducing capital requirements(e.g.,reducing inventory)and/o
24、r improving profitability.nThe expected ROIC of Division B is greater than the WACC,so the division should continue with its growth plans.12-39Two Primary Mechanisms of Corporate Governancen“Stick”lProvisions in the charter that affect takeovers.lComposition of the board of directors.n“Carrot:Compen
25、sation plans.12-40Entrenched ManagementnOccurs when there is little chance that poorly performing managers will be replaced.nTwo causes:lAnti-takeover provisions in the charterlWeak board of directors12-41How are entrenched managers harmful to shareholders?nManagement consumes perks:lLavish offices
26、and corporate jetslExcessively large staffslMemberships at country clubsnManagement accepts projects(or acquisitions)to make firm larger,even if MVA goes down.12-42Anti-Takeover ProvisionsnTargeted share repurchases(i.e.,greenmail)nShareholder rights provisions(i.e.,poison pills)nRestricted voting r
27、ights plans12-43Board of DirectorsnWeak boards have many insiders(i.e.,those who also have another position in the company)compared with outsiders.nInterlocking boards are weaker(CEO of company A sits on board of company B,CEO of B sits on board of A).12-44Stock Options in Compensation PlansnGives o
28、wner of option the right to buy a share of the companys stock at a specified price(called the exercise price)even if the actual stock price is higher.nUsually cant exercise the option for several years(called the vesting period).12-45Stock Options(Cont.)nCant exercise the option after a certain number of years(called the expiration,or maturity,date).
