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Cross-border valuation
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COMPANIES
3 basic legal forms of Business Organisation
1. sole proprietorship (sole trader):
easy setup (no legal paperwork)
profits taxed at personal marginal rate (single IRD number)
disadvantage: owner unlimited liability for debt & obligations (personal
assets risked)
2. partnership: 2+ owners
3. corporation (company):
shareholders limited liability
easy raise capital
Easy ownership transfer
US: disadvantage: double taxation (classical tax system)
profits before taxes
corporation tax 35%
100
(35)
65
(9.75)
available to shareholder
$55.25
a) company profits taxed twice; at corporation level then investor level
b) loss of company cannot be used to offset individual tax liabilities
Dividend imputation: corporate tax system, where some/all tax paid by company
may be attributed (imputed) to SHolders by tax credit, to reduce income tax
payable on distribution.
Other things equal, Sholders with LOWER marginal tax rates benefit more from
dividend imputation (as corporate tax rate is higher)
Public Companies
Separation of Ownership & Control
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if many SHolders, not feasible for owners to have direct control of firm
Board of Directors: appoint CEO (Chief Executive), set important policies
(the stick) & remuneration (carrot) for executives
SHolders elect directors; directors represent & accountable to SHolders
- theoretically, SH can pressure board to change poor-performing CEO
- realistically, vote with feet, ie. sell shares
CEO: runs company
hiring auditor & forming various board committees to monitor CEO (not
effective; Enron, companies w/entrenched CEOsgain so much power that
CEO able to use firm to further own interests than SHs; make managerspecific valuable investments to reduce probability of replacement)
provide incentive packages tied to performance (but potentially excessive
risk-taking)
FINANCIAL MANAGERS
Specialised financial managers = CFO, Treasurer, Controller
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Considers:
i)
ii)
EFFICIENT MARKETS
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investors try earning (+) alphas, beat market, identify (+) NPV trading
opp.
(+) alpha investment opp. expected to generate return above normal
s = E(Rs) - rs
profiting from non-zero alpha stocks makes market more efficient
- long stocks to profit from (+) alpha trading opp.
- short stocks to profit from (-) alpha, in anticipation future SPrice
decrease
Green leaf
Nat Sam
E(R)
Volatility
12%
10%
20%
40%
Consider:
a) at current market prices, which stock represents buying opp.?
b) on which stock should you put sell order?
c) how will transactions affect price, expected return & alpha of stocks?
Green leaf: CAPM normal return = 3 + 1.5 (7 3) = 9%; 12 9 = = 3%. Buy.
Price would increase, E(R) decreases, decreases to zero.
Nat Sam: CAPM normal return = 3 + 1.8 (7 3) = 10.2%; 10 10.2 = = -0.2%.
Sell. P drops, E(R) increases, increases to zero.
Factors making market Less efficient
1. limits to arbitrage: constraints increasing cost for investors to profit from
non-zero investment opp.
i) transaction costs
ii) short-sale constraints
iii) P can deviate from fundamental value for prolonged period of time
2. informed investors profit from uninformed (but uninformed could simply
hold market portfolio)
3. sufficiently large group of investors to hold portfolios w/negative so
some investors can earn (+)
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If know info from work, buy stock of target company before news
announced to public. Trade profitable, but illegal
If buy stock of target after news announced, legal but not as profitable
After paying fund manager salaries, bonus, expenses to buy computers & data,
average alpha = negative across all investment styles; more luck than skills.
Style-based Investing & Market Efficiency
Assume CAPM correct model to measure risk. If can use past returns to construct
trading strategy making money consistently (positive alpha), is it evidence
market not efficient?
Various (+) alpha trading strategies identified have persisted:
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Not easy to trick market by manipulating acctg numbers which do not affect
future cash flows
SUMMARY
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Acctg measures how many assets, amount profit generated, when cash coming
in & how used
PURCHASING & USING FIXED-ASSETS
eg. forecasting revenue, CAPEX, D&A & fixed assets using BASE method
000s
2012
2013
2014F
Revenue
17321
68
2239532
2239532 * 1.15
= 2575462
Revenue
growth
(22395321732168)/17321
steps &
assumptions
assume growth
rate 15%
68 = 29.3%
PPE
Beginning
356676
Addition
2239532*0.03 =
67186
Subtraction
(D&A)
Ending
capex =
2575462*0.03 =
77264
31391
310803
beginning = last
periods ending
assume CAPEX
3% of revenue
depreciation =
10.1% of
beginning PPE
E = B+A-S
2012
2013
2014F
Revenue
Revenue
growth
1732168
2239532
29.3%
2575462
OCA
OCL
OWC
OWC as %
Revenue
336988
170765
166223
166223/1732
168
= 9.6%
increase in
OWC
527109
308398
218711
9.77%
218711166223 =
52488
steps &
assumptions
assume 15%
revenue
growth in
2014
251623
32912
assum OWC
as % revenue
in 2014 =
2013
this year
last
CFO (cash flow from operations) measures amount cash profit operations
generate
1. project revenue
2. project EBITDA (earnings before interest, tax, depreciation, amortisation)
EBITDA = revenue * EBITDA%
EBITDA% = EBITDA margin assumption
EBITDA% = EBITDA/revenue
3. project EBIT
EBIT = EBITDA D&A
D&A from BASE method
4. directly tax EBIT = unlevered net income = EBIT * (1-t) = (revenue
costs D&A) * (1-t)
Unlevered: as if company 100% equity-financed & ignore financing effect
when projecting free cash flows
5. add back D&A = CFO
CFO = unlevered net income + D&A
eg. Forecasting EBIT, unlevered net income & CFO
000s
Revenue
2012
1732168
2013
2239532
2014F
2575462
Assumptions
assume 2014
revenue
growth 15%
EBITDA
138092
155255
178480
Assume 2014
EBITDA% =
2013
EBITDA%
7.97%
6.93%
D&A
41630
44017
31391
S in BASE
(assume
amort. = 0)
EBIT
96462
111238
147089
Unlevered net
income
CFO
105904
assume tax
rate 28%
137295
A = L + shareholder E
uses of funds = sources of funds
EV used to:
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value project
value business (amount to pay to purch. all shares & retire all debts)
Debt
market value of equity
(tends to be higher than
book value)
Referring to Fig. 1 & 2, net debt at 28th July, 2013 for Warehouse = $217mil
Enterprise Value
EV
net debt
equity
DCF (discounted CF) of all future cash flows renders EV
Enterprise Value (if firm has investment in associates & minority interests)
INVESTMENT IN
ASSOCIATES
EV
Net debt
equity
MINORITY INTEREST
EV = $1226mil
CORRECT & INCORRECT VALUATION MULTIPLES
EV must be divided by items ABOVE the interest lines
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Equity value (or share price) must be divided by items BELOW interest lines
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WRONG MULTIPLES: EV/net income, market cap/User (unless net debt = 0, thus
EV = market capitalisation)
SUMMARY
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