business valuation what’s an apple tree worth?
TRANSCRIPT
Business Valuation
What’s an apple tree worth?
“Old Man and Apple Tree”
Consider the following valuations:
• Salvage• Current production• Future production• Market price• Book value
Balance Sheet
Time value of money
What is the value of $1?
Time value of money
Let’s say I offer you either $500 today or $800 in three years.
Which is better?
Time value of money
$800 in 3 years is better than $500 today(assuming a 10% rate for money)
Invest $500 10% Balance
Year 1
Year 2
Year 3
$50.00
$55.00
$60.50
$550.00
$605.00
$665.50
Time value of money
$500 today is better than $800 in 3 years(assuming a 20% rate for money)
Invest $500 20% Balance
Year 1
Year 2
Year 3
$100.00
$120.00
$144.00
$600.00
$720.00
$864.00
Time value of money
Mathematically
$500 * (1+ .20)3 = $864
Time value of money
What if somebody offers you $864 in three years. Or $1000.
What is it worth to you?
Time value of money
$864 (discounted at 20% rate) = $500
Discount
$864
End of year 20% Start of year(divide by 1.20)
Year 3
Year 2
Year 1
$864
$720
$600
$144
$120
$100
$720
$600
$500
Time value of money
$1000 (discounted at 20% rate) = $579
Discount
$1000
End of year 20% Start of year(divide by 1.20)
Year 3
Year 2
Year 1
$1000
$833
$694
$167
$139
$115
$833
$694
$579
Time value of money
Mathematically
$1000 / (1+ .20)3 = $578.70
“Old Man and Apple Tree”
Value of cash flows?(from Class Notes)
Precision ToolsNet income $390,000Depreciation $250,000Bonuses $120,000Net cash flow $760,000 Adjusted CF $500,000
Discount rate 33%Growth rate 8%Capitalization rate 25% (discount minus growth)
Cap multiplier 4DCF $2,000,000
Precision ToolsComparables Method
Company X• Price = $4,000,000• Adj Earnings = $520,000
Precision Tools• Price = ??• Adj Earnings = $760,000
4000 PT Price 520 = 760
PT Price = $5,850,000
Use P/E ratio
Company X• Price = $4,000,000• Adj Earnings = $520,000• P/E = 7.7
Precision Tools• Price = P/E * Earnings• Adj Earnings = $760,000
7.7*$760,000 = $5,850,000
Price-earnings ratio
Precision Tools
Price = $2,000,000Earnings =
$390,000
P/E = 5.13
U.S. stock market(average stock)
Price = $36Earnings = $1.80
P/E = 20
Irrationally exuberant?
Precision Tools