Laura Martin:

Valuations

Doris Li (3220413)

Carmen Chan (3219451)

Nick Tatarchuk ()

Topic Areas: Introduction

Background Information

Multiple Analysis Regression model Assumptions

Discounted Cash Flow Assumption

Real Options Assumptions Stealth Tier

Conclusion Flowchart

Introduction

- Changes in the Cable Industry

- Laura Martin demonstrates the drivers of value in the Cable Industry

- Evaluation of the Multiple Analysis, DCF Analysis and the Real Options

Topic Areas: Introduction

Background Information

Multiple Analysis Regression model Assumptions

Discounted Cash Flow Assumption

Real Options Assumptions Stealth Tier

Conclusion Flowchart

Multiple Analysis

Multiple Valuation involve the following steps:

1. Define the multiple2. Describe the multiple3. Analyze the multiple4. Apply the Multiple

Multiple Analysis

Advantages:

- Simple and Cheap- Does not rely on forecasting- Relevant

• Disadvantages:

- EBITDA inflates earnings- Historical Data- Subjective

Multiple Assumptions

Exhibit 2 shows the summary of financial

data for selected comparable companies

Multiple Assumptions

R2 is the coefficient of determination which shows the strength in relationship between the two variables

Firms are similar in size, growth and return

Multiple Assumptions

- EBITDA is calculated at the same period

- EBITDA only focuses on earnings and excludes interest, tax, depreciation and amortization which could have significant impacts on a company

Regression Vs. Traditional Multiple Analysis

Traditional Multiple Analysis

Uses the average of companies multiples

Regression

Plots results on a graph and a line of best fit is drawn

Topic Areas: Introduction

Background Information

Multiple Analysis Regression model Assumptions

Discounted Cash Flow Assumption

Real Options Assumptions Stealth Tier

Conclusion Flowchart

DCF Analysis

DCF Analysis involve the following steps:

1. Forecasting the expected cash flows2. Estimating the discount rate (WACC)3. Calculating the value of the corporation

DCF Analysis

Advantages:

- Clear, consistent decision criteria for all projects

- Quantitative, decent level of precision

- Not as vulnerable to accounting conventions

- Time value of money

Disadvantages:

- Future rates = Unknown- Lacks in Accuracy –

Decision made now- Use of FCF - Unknown, intangible factors

are valued as zero

DCF Assumptions

Assumptions:

- WACC of 9.3%: unrealistic changes in market conditions and beta

- Terminal multiple value of 13: realistic conservative in comparison to Exhibit 6

- EBITDA: unrealistic Income statement shows fluctuating figures but forecasted EBITDA shows growing at constant rate

- Asset Intensity ignores ‘stealth tier’

Topic Areas: Introduction

Background Information

Multiple Analysis Regression model Assumptions

Discounted Cash Flow Assumption

Real Options Assumptions Stealth Tier

Conclusion Flowchart

Real Options

- 102 MHz, 17 Empty Channels - 100% Capital Spending but < 100% Return- Black Scholes Model (Refer to later slides)

- Flexibility in Real Options

Black and Scholes Model

- The Current Stock Price of $23.15 Yes

- The Strike Price Difficult to estimate

- The Volatility of 50% Yes

- The Option Period of 10 years Yes

- The Interest Rate of 5.25% No

Black and Scholes Model

Applicability

The ‘Stealth Tier’Call Option

The holder of a call option has the right to buy within a specific date at a specified price.

$1.22

$22.45

$23.67

Profit

Loss

Market Price of Asset

Cox’s Call Option

- Opportunity cost of 1.22

- Exercise/Strike Price of $22.45

The ‘Stealth Tier’

DCF

- Calculate an approximate value for the ‘stealth tier’

Multiples

- Compare multiples of companies who have incorporated the ‘stealth tier’

Topic Areas: Introduction

Background Information

Multiple Analysis Regression model Assumptions

Discounted Cash Flow Assumption

Real Options Assumptions Stealth Tier

Conclusion Flowchart

Conclusion

Real Options

DCF

Multiples

Valuations

Multiples

- Comparable to industries- Subjective

- Historical Data- Size, Growth Return

Conclusion

Real Options

DCF

Valuations

Conclusion

DCF

- Clear decision rule- Quantitative precision- Time value of money

- Future rates- Lack of Accuracy- Intangible factors

Conclusion

Conclusion

Real Options

Valuations

Real Options

- Overcomes problem of ‘Stealth Tier’- Focus on changes in Technology

Conclusion