FIN 449 - Valuation

1. FIN 449 - Valuation Spring 2013 Instructor: Daniel A. Rogers, PhD

2. CORPORATE FINANCE AND VALUATION • This is not a course in investment valuation…why do we care about valuation in corporate finance? • Several reasons: • M&A (large dollar investments): relevant to both buyer and seller. • Private companies: don’t know price. • Reinforce/learn a lot of important principles of finance and economics in the process of valuation.

3. Why should I “really” care about working hard in this class (beyond getting a good grade)? • I suspect that few (if any) of you will go into a career in which you spend a lot of time valuing companies! • However, I hope that some of you will at least investigate the possibility (and that this course will stoke your enthusiasm). • Valuation of public companies reflects investor sentiment about the relative level of “success” of business models. • What “drives” valuation? • As an employee, you should care about the answer to the prior question…your career may depend on whether you know how to answer it. • If you work for a private company, you are likely an “owner” of the business (ESOP or profit sharing stock ownership plan)

4. FIN 449 COURSE OVERVIEW • Recall how to value cash flows • Forecasting financial statements • Free cash flow – a (better?) alternative to dividends • Making growth assumptions in forecasting • Calculation of a company’s cost of capital • Industry analysis • Relative valuation • Presentations • Course wrap-up

5. VALUING CASH FLOWS • Discount expected future cash flows at an appropriate rate of interest. • In valuing a company’s equity, what cash flows should we forecast AND how do we estimate an appropriate cost of capital?

6. “TRADITIONAL” VALUATION • Ordinary dividends on common stock = only cash flow to shareholders. • Ability to pay dividends depends on earnings. • Introduce forecast horizons and terminal value. • Role of constant growth model • Value of share of stock = PV of dividends expected during forecast horizon + PV of terminal price at end of forecast horizon.

7. FORECASTING FINANCIAL STATEMENTS • Income statements • Provides a forecast for future income • Balance sheets • Provides a forecast for future investment spending (and debt requirements) • Financial ratios & the economic meaning of financial statement accounts • Financial ratios can provide us with clues as to what may be “expected” in the future. • Economic meaning of accounts helps with constructing forecast

8. FREE CASH FLOW to EQUITY (FCFE) • During the last 20 - 30 years, dividend payments by publicly traded firms have become a much less important portion of shareholder total returns. • At the same time, stock repurchases have increased dramatically. • Both represent cash flow to shareholders. Unfortunately, while dividends are highly predictable, repurchases are not. • Forecasting FCFE may provide a “smoothed” picture of future dividends and repurchases, therefore provide a better numerator in the valuation equation.

9. ASSUMPTION-MAKING • Anybody can construct a forecast! The trick is in preparing forecasts that have defendable assumptions. • We will discuss the practice of using historical growth rates in making future growth assumptions. • We will discuss the informational content of analyst forecasts. • We will discuss the fundamental predictors of growth and how we can incorporate these into forecasting. • We will discuss strategies for forecasting line items in financial statements.

10. INDUSTRY ANALYSIS • Valuing a company without understanding the industry environment in which it operates is like going out for fresh air on a smoggy day…POINTLESS! • We will discuss a general framework for understanding industry environments. • This knowledge should translate into added insights in the forecasting process.

11. COST OF CAPITAL • We will focus on practical issues and complications that arise in estimating cost of equity and cost of debt. • Review “normal” and alternative means of calculating “beta” (stock’s risk). • Discuss “market risk premium” in detail. • Estimation of cost of debt from public data. • Discussion of realism of cost of equity estimate.

12. RELATIVE VALUATION • Valuation pros often talk in terms of multiples…P/E, M/B, etc. • As a finance major, you should know what they are talking about. • Furthermore, you should know that we can tie these types of multiples back to fundamentals of discounted cash flow valuation.

13. EXAM!?!?#@!&#?! • Sorry, I have to make make sure you’re learning something!

14. PREP FOR PRESENTATIONS • Prior to our first group presentations, I will have a forum for questions regarding material and analysis/presentation format.

15. PRESENTATIONS • 8th and 9th weeks of class • 2 or 3 groups per class session • Should communicate crucial content of analysis in preliminary fashion • Forum for feedback (from all, not just instructor!) • Prepare approximately 30-minute presentation (the additional time is filled with questions, comments, etc.)

16. COURSE WRAP-UP • Some final comments on valuation • Advice from a life-long finance major (me) • Questions regarding final analyses • Guest speaker: ???????

17. Company Project • Due date of final paper is Tuesday,6/11 (no later than Noon). • Many critical dates throughout quarter • PLEASE familiarize yourself with project assignment document!