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MOD 7 Valuation using REI

MOD 7 Valuation using REI. YIWEN LIN. Agenda. Derivation of the Residual Income Valuation Model Effects of Accounting Choices on the Residual Enterprise Income Model Adverse influences on sales growth in the long-run Use of Parsimonious Forecasts of Enterprise Operations

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MOD 7 Valuation using REI

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  1. MOD 7 Valuation using REI YIWEN LIN

  2. Agenda Derivation of the Residual Income Valuation Model Effects of Accounting Choices on the Residual Enterprise Income Model Adverse influences on sales growth in the long-run Use of Parsimonious Forecasts of Enterprise Operations Use of Continuing Values in the Residual Enterprise Income Model Choice of WACC Intrinsic Value Calculation using Residual Enterprise Income Model

  3. Assumption: • Use of FCF Equation: • Anchoring on NEA: Deviation of REI Model

  4. No change in enterprise value • Central role of the self-correcting nature of accounting. • E.g. changing the choice of depreciation method has no effect on the value of the project. Excess depreciation leads to a lower NEA, and increases current period operating expense. However, future period EPAT will be higher by exactly the same amount. • Note: When change in accounting methods affected the value calculated, this model CANNOT be used. Effects on Accounting Choices on REI

  5. Adverse influences on sales growth in the long-run Ontario, Canada and urban areas: little operating experience Failure to build local awareness due to differing demographics and consumer tastes There can be no assurance they will be successful in operating bakery-cafes profitably in new markets or further penetrating existing markets The industry is highly competitive on a cost basis strategy and strive to have higher margins Globalization in this industry is low and Panera is not focused on expanding internationally U.S. economy recover and emerge from a recessional period. Management said they received commitment to open 176 franchise-operated bakery-cafes within the next 5 years. Therefore, Panera’s growth rate will reach a mature level by 2018, close to U.S. GDP growth rate of 3%.

  6. Use of Parsimonious Forecasts of Enterprise Operations from Mod 5

  7. Use of Continuing Values in the Residual Enterprise Income Model • Continuing value: (V4 – NEA4)  Expected difference between intrinsic value and book value of the enterprise operations at the horizon

  8. Choice of WACC from Mod 6

  9. Intrinsic Value Calculation using REI

  10. Intrinsic Value Calculation using DCF

  11. Compare DCF and REI Model Based on the calculation, two values should be the SAME DCF Enterprise value: $5,616,134,000 REI Enterprise value: $5,616,134,000 Market cap: $5,019,801,000 Free cash flow is equal to the enterprise profit after taxes (EPAT) adjusted for the change in net enterprise assets (NEA).

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