chapter 3 valuation n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Chapter 3 Valuation PowerPoint Presentation
Download Presentation
Chapter 3 Valuation

Loading in 2 Seconds...

play fullscreen
1 / 13

Chapter 3 Valuation - PowerPoint PPT Presentation


  • 51 Views
  • Uploaded on

Chapter 3 Valuation. Order Order Sale Payment Sent Cash Placed Received Received Accounts Collection

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Chapter 3 Valuation' - latika


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
chapter 3 valuation
Chapter 3Valuation
  • Order Order Sale Payment Sent Cash
  • Placed Received Received
  • Accounts Collection
  • < Inventory > < Receivable > < Float >
  • Time ==>
          • Accounts Disbursement
  • < Payable > < Float >
  • Invoice Received Payment Sent Cash Disbursed
objectives
Objectives
  • Use cash flow timeline and discounting techniques to value future cash flows.
  • Explain importance for using time value of money in short-term decisions.
  • Apply the NPV technique to select value-enhancing proposals.
  • Explain how short-term decisions fit with EVA.
  • Apply NPV to value changes in the cash conversion period.
  • Recognize difficulties in selecting appropriate discount rate.
two financial decision making approaches
Two Financial Decision-Making Approaches
  • Financial statement approach
  • Valuation approach
financial statement approach
Financial Statement Approach
  • Approach
    • compute incremental revenue and expense effects of proposal
    • calculate anticipated profit effect
  • Calculation steps
    • estimate unit sales and multiply by profit margin
    • estimate capital costs of additional required investments such as receivables, inventory, etc.
    • estimate additional bad-debt loss if new credit terms
    • calculate overall profit effect
  • Decision criteria
    • if anticipated profit is >=0, proposal would contribute profit
    • if anticipated profit is <0, proposal would not contribute profit
valuation approach
Valuation Approach
  • Approach
    • accounts for timing of cash flows
    • accounts for present values
    • results in making value enhancing decisions
  • Four steps
    • determine relevant cash flows
    • determine timing of cash flows
    • determine appropriate discount rate
    • discount cash flows
  • Decision criteria
    • if NPV >= 0 invest
    • if NPV < 0 do not invest
economic value added
Economic Value Added
  • Incorporates elements from both financial statement approach and valuation approach
  • EVA = Operating profit - (Cost of capital)(Capital employed)
  • Advantage: provides better company-wide understanding of importance of improved working capital management
  • Caution: can be misused if user does not take a long-term view
npv calculations
NPV Calculations
  • Simple interest
    • 1PV = FV x ------------------- k (1 + (------) x n) 365
  • Compound interest
    • 1 PV = FV x -------------- k (1+ -------)n 365
basic valuation model

........

Basic Valuation Model

note: i = k/365

CFo CF1 CF2 CF3 CFn

CF1 CF2 CF3 CFn

NPV = CFo + ------------- + ------------- + ------------ + .... + ------------

(1 + i x 1) (1 + i x 2) (1 + i x3) (1 + i x n)

valuation using npv
Valuation Using NPV
  • Solving DigiView’s financial dilemma
valuing changes in the cash conversion period
Valuing Changes in the Cash Conversion Period
  • - Purchase Sale NPVCCP = --------------- + ---------------- (1 + i ) DPO (1 + i) DIH + DSO
  • NPV CCP-Aggregate = NPVCCP x Daily Sales / i
  • - Purchase Sale NPVCCP = [ -------------- - --------------- ] ln(1 + i) (1+i)OC-CCPP (1+i)CCPO+DPO
corporate cash holdings and value
Corporate Cash Holdings and Value
  • Late 80’s to mid 90’s: keep cash holdings low
    • long-term cost of funds > return on cash
    • cash holdings viewed as negative debt
  • Late 90’s to current: bond rating agencies penalizing for too little liquidity
  • Current trend: reduce working capital requirements but increased cash holdings
  • Pinkowitz and Williams (2002): investors mark up stock value $1.26 per $1 of cash holdings
choosing the discount rate
Choosing the Discount Rate
  • Three unique problems
    • funds are rarely raised specifically to fund short-term type projects
    • short-time horizon implies short-term not long-term rate
    • risk should be accounted for, but may be ambiguous.
  • One-shot projects
    • if net borrower, use short-term borrowing rate
    • if net investor, use short-term investment rate
  • Multi-year projects
    • maybe appropriate to use cost of capital
  • Formulation
    • kadj = krf + kavg + k
summary
Summary
  • Short-term financial decisions can impact firm value by:
    • altering operating cash flows
    • changing the length of the cash conversion cycle
    • changing company risk posture
    • impacting net interest income
    • and by changing accuracy and timeliness of critical information.
  • Both financial statement approach and valuation offer insight in working-capital management decisions.
  • Choosing appropriate discount rate is an issue when trying to assess valuation impact.