Objective: To value your firm, based upon its existing management, and your expectations for the future.

Key Questions:

• What type of cash flow (dividends, FCFE or FCFF) would you choose to discount for this firm?

• What growth pattern would you pick for this firm? How long will high growth last?

• What is your estimate of value of equity in this firm? How does this compare to the market value?

Framework for Analysis:

1 Cash Flow Estimation

• What is this firm’s accounting operating income? Would you adjust it for your valuation?

• What is your firm’s effective tax rate? What is its marginal tax rate? Which would you use in your valuation?

• How much did your firm reinvest last year in internal investments, acquisitions, R&D and working capital?

2 Growth Pattern Choice

• How fast have this company’s earnings grown historically?

• How fast do analysts expect this company’s earnings to grow in the future?

• What do the fundamentals suggest about earnings growth at this company?

(How much is being reinvested and at what rate of return?)

• If there is anticipated high growth, what are the barriers to entry that will allow this high growth to continue? For how long?

3 Valuation

• What is the value of the operating assets of the firm, based upon a discounted cash flow model?

• Does the firm have cash and non-operating assets and what is their value?

• Are there equity options outstanding (management options, convertible bonds)
and how much are they worth?
• What is the value of equity per share?
4 Relative Valuation • What multiple would you use to value the firm or its equity?
• What industry does the firm belong to, and what are the comparable firms?
• How does your firm’s valuation (in multiple terms) compare to those of the other firms in the industry?
• What value would you assign your firm (or its equity), given how comparable firms are valued?
Getting Information for valuation Most of the information that you need for valuation come from your current or past financial statements. You will also need a beta (see risk and return section) and a debt ratio (see risk and return section) to estimate the free cash flows to equity. You can get analyst estimates of growth in several sources including Zacks and I/B/E/S.
Online sources of information:
http://www.stern.nyu.edu/~adamodar/cfin2E/project/data.htm