corporate valuation, 2002-6, p. 1 institut for regnskab, tom hansen applying valuation workshop...

Corporate Valuation, 2002-6, p. 1

Institut for Regnskab, Tom Hansen

Applying Valuation

Workshop• Dialogue and coaching • Exercise 20.5

Lectures• Feedback on mid-stage reports• The Negotiation day (16 November)• Applying valuation (chap 14, 16-18)

· Multi business companies· Cyclical companies· Foreign companies

•Next time (4 November)• Guest speaker - Bjarne Larsen from Sydbank (8.55-

10.35)• Workshop (10.45-11.30)



Feedback on mid-stage reports

The mid-stage reports signals that the work in each group is progressing fine.Feedback has been given to each group.

General comments:•remember in your final report to include a short section (after your concluding section) describing:

• learnings from the negotiation day• learnings from conducting a valuation

•describe in the introduction of your report, who has written the different sections of the report.•Remember to enclose your model on electronic media (floppy disk or CD) to your final report



Important dates

Draft report & price• Wednesday, Nov 13, evening

Negotiation on Saturday Nov 16th

Final report• incl. “negotiation process and outcome

description” + “learning reflections”• Monday, Nov 25, evening



Negotiation day - time schedule

09.00-9.45 1st. round A’s (B’s observing)9.45-10.30 1st. round B’s (A’s observing) app. 10.30 - 12.00 guest speaker PWC12.00-13.00 lunch & calculation (bistro open)13.00-13.45 2nd. round A’s (-B observe)13.45-14.30 2nd. round B’s (-A observe)14.30-15.00 break and presentation prep.15.00- 17.00 short negotiation presentation from each TEAM

A’s: Coloplast 1, Coloplast 2, B&O 1B’s: B&O 2, Wal-Mart, Micon, Vestas



CKM ch. 14 Multi business

•Multi business companies consist of several business units and a headquarter

•The valuation of multi business companies requires • valuation of each business unit• valuation of the headquarter benefits and costs




•Valuation of business units requires separate income statements and balance sheet for each business unit in order to make up historic and estimate future cash flows, ROIC, etc.•Each business unit has its own capital structure and cost of capital to be used in the valuation•Costs of business units use of headquarter services should be added to the business units costs (use market price).•Other internal trade between business units should be also be priced at market price.




•HQ costs and benefits•HQ costs are the costs not allocated to business units:

• executive salaries, support staff and related costs (accounting, legal, planning, etc)., corporate-level advertising and R&D.

•HQ benefits are:• Tax advantages (variable income in business units implies

immediately use of pre-tax deficit; by the use of transfer prices the multi business company has the possibility of letting profits being taxed in countries where tax is low).

• Debt in headquarter gives interest-tax shield to corporation.

• Operating synergies created by HQ• Information and communication advantages




•Beta-estimates for business units• Management comparison

· average industry beta 0,5-1,33 (exh.14.3)• Company comparison (remember to adjust beta for

differences in leverage, p. 309)• Multiple regression

•HQ discount rates • Tax shields from interest on debt (use cost of debt)• Immediately use of pre-tax deficit (use levered cost of

equity for company as a whole)• Optimizing transfer pricing (use unlevered cost of

equity for company as a whole)• HQ Costs (somewhere between risk free rate and

unlevered cost of equity).



CKM ch. 17 Foreign Subsidiaries

•Foreign subsidiaries

• Preferably stay in “local” currency forecasting cash flows in local currency and cash flows in foreign 3rd country currencies, and converting foreign 3rd country currencies cash flows using forward rates.

· Forward rates are calculated by using the interest-rate parity relationship (exhibit 17.8).

• Discounting using local cost of capital and convert to parent / home currency using spot rate.



CKM ch. 17 Foreign Subsidiaries

•Tax based on actual tax laws in the subsidiary (local) country but also on tax laws in the parent country

• There might be tax penalties (in the parent country), if the tax rate in the subsidiary country is low.

• There might be double taxation agreements (income tax conventions) between local and parent country that has to be taken into account.

• Optimize the value of parent and subsidiaries by reducing profits in high-tax countries (transfer pricing, royalties, etc.)



CKM ch.18 Outside US

• Watch out for different accounting rules in different countries. The major accounting differences across countries are:

· Provisions (exhibit 18.3)

· Pensions (exhibit 18.4)

· Goodwill (exhibit 18.5)

· Fixed asset revaluation (exhibit 18.6)

· Consolidation (exhibit 18.7)

• Corporate and personal tax integration ((partly) elimination of double taxation on corporate income and dividend) (exhibit 18.11)



CKM ch.18 Outside US

• Different countries has different stock indexes & beta’s and different risk premiums (exhibit 8.13)

• Small stock markets can be dominated by separate industries and/or companies, giving the local betas no sense

• The capital market becomes more and more international with the same risk premium



CKM ch.16 Cyclical Companies

Valuing cyclical companies

• Make 2 scenarios:

· “the normal cycle”-scenario using information about past cycles

· “new trend”-scenario based on the recent performance of the company

· Focus should be on the long-term trend line

· Assign probabilities (based on economical rationale) to the scenarios to calculate a weighted value



CKM ch.16 Cyclical Companies

Note:

• in the stock market the cyclical companies have more share price volatility than they should, if the DCF method worked 100%, because

• the consensus earnings forecast ignores the cycles somewhat/ there is uncertainty about the direction of the business cycle (exhibit 16.3)



Next time

Next time (4 November)• Guest speaker (8.55-10.35) - Bjarne Larsen from Sydbank

· Sydbank is the 4th largest commerical bank in Denmark• The topics of the lecture are:

· Sydbank’s use of corporate valuation in relation to IPO’s, MBO’s, stock incentive plans, etc.

· Corporate valuation in general· Corporate valuation methods· Relative valuation· Growth industries

• Workshop (10.45-11.30)· Dialogue and coaching · Exercise 14.4

corporate valuation, 2002-6, p. 1 institut for regnskab, tom hansen applying valuation workshop...

Documents