Corporate Finance Valuation Models

8/10/2019 Corporate Finance Valuation Models

http://slidepdf.com/reader/full/corporate-finance-valuation-models 1/16



Corporate Finance Assignment

I hereby certify that I am the sole author of this report. All assistance I have

received from outside sources have been documented in the report, as well

as, listed after the conclusion under “References.” This report was created

exclusively by me specically for the inancial and !ana"ement Accountin"

module at The #a"ue $niversity of Applied %ciences.

Student: Otto MartinezStudent Number: 10062289

Cohort: MFMC FT14-15Module: Corporate Finance

Lecturer Name: Drs. C..! Co"en#ran$erReport submission date: 12%4%2014

Total number of pages of submitted work: 10

ni!ersit": T&e !ag'e (ni)ersit* o+ App"ie$ ,ciences

#e"words: a*#ac erio$ / 3nterna" ate o+ et'rn /3 et resenta"'e / an$ ro7ta#i"it* 3n$e /3.



Table of Contents1.0 T&eoretica" essentia"s o+ 3 an$ 3...........................................1

1.1 a*#ac erio$ /..............................................................................1

1.2 3nterna" ate o+ et'rn /3...................................................................1

1. et resent a"'e /..........................................................................1

1.4 ro7ta#i"it* 3n$e /3..............................................................................1

2.0 ,trengt&s an$ :eanesses o+ 3 an$ 3..................................2

2.1 a*#ac erio$ / ,trengt&s an$ :eanesses...................................2

2.2 3nterna" ate o+ et'rn /3 ,trengt&s an$ :eanesses.......................2

2. et resent a"'e / ,trengt&s an$ :eanesses..............................

2.4 ro7ta#i"it* 3n$e /3 ,trengt&s an$ :eanesses..................................

.0 , ;"ectronic ro<ects= a"'ation..............................................................4

.1 ro)i$e$ in+ormation...............................................................................4

.2 Cas& F"o> ,tatement..............................................................................5

.2.1 3nitia" Cas& O't?o>...........................................................................5

.2.2 3ncrementa" Cas& O't?o>s...............................................................6

.2. Termina" @ear 3ncrementa" Cas& O't?o>s.........................................

. , pro<ects appraisa".............................................................................

..1 ca"c'"ation..................................................................................8

..2 3 ca"c'"ation..................................................................................9

.. ca"c'"ation.................................................................................9

..4 3 ca"c'"ation.....................................................................................9

4.0 re+erre$ 3n)estment ro<ect...................................................................10

5.0 :ors Cite$..............................................................................................11

6.0 Disc"aimer................................................................................................12



List of Tables

Ta#"e 1 , pro<ects initia" in)estments an$ reB'ire$ *ear"* sa)ings..............4

Ta#"e 2 Depreciation C"asses...........................................................................4

Ta#"e , pro<ects A initia" cas& o't?o>................................................5

Ta#"e 4 , pro<ects A incrementa" cas& o't?o>s.....................................6

Ta#"e 5 , pro<ects A termina" *ear incrementa" cas& o't?o>s..............

Ta#"e 6 , pro<ects appraisa" #ase$ on 3 an$ 3........................



1.0 T&eoretica" essentia"s o+ 3 an$ 3

$%& Theoretical essentials of '(') *RR) N'+ and '*

$%$ 'a"back 'eriod ,'('-

A pro<ect=s pa*#ac perio$ is t&e n'm#er o+ *ears t&at it taes #e+ore t&e

c'm'"ati)e cas& ?o> eB'a"s t&e initia" in)estment /rea"e* M*ers an$ A""en

a*#ac p.105. T&e r'"e +or maing an in)estment is simp"e i+ t&e

pro<ect reco)ers its initia" in)estment >it&in t&e pre$etermine$ c'toE $ate it

s&o'"$ #e accepte$ e"se it s&o'"$ #e re<ecte$.

$%. *nternal Rate of Return ,*RR-

Accor$ing to rea"e* et a". 3 is t&e $isco'nt rate at >&ic& in)estment &as

zero net present )a"'eG /p.10. T&e rationa"e #e&in$ t&e 3 is t&at it

pro)i$es a sing"e n'm#er s'mmarizing t&e merits o+ a pro<ect an$ t&is

n'm#er $oes not $epen$ on t&e interest rate pre)ai"ing in t&e capita" maret

/!i""ier oss an$ :ester7e"$ T&e 3nterna" ate o+ et'rn p.155. Accor$ing

to !i""ier et a". a pro<ect s&o'"$ #e accepte$ i+ t&e 3 is &ig&er t&an t&e

$isco'nt rate an$ s&o'"$ #e re<ecte$ i+ t&e 3 is "ess t&an t&e $isco'nt rate

/p.156.

$%/ Net 'resent +alue ,N'+-

is $e7ne$ as A pro<ect=s contri#'tion to >ea"t& - present )a"'e min's

initia" in)estmentG /rea"e* M*ers an$ A""en p.92. t&ree attri#'tes are

t&at it 'ses cas& ?o>s it 'ses a"" t&e cas& ?o>s o+ t&e pro<ect an$ it

$isco'nts t&e cas& ?o>s proper"* #* taing into consi$eration t&e time )a"'e

o+ mone* /!i""ier oss an$ :ester7e"$ p.150. #asic in)estment r'"e is

s'mmarize$ as +o""o>ing accept a pro<ect i+ t&e is greater t&an zero.

e<ect a pro<ect i+ is "ess t&an zeroG /!i""ier oss an$ :ester7e"$ p.149.

$%0 'ro1tabilit" *nde2 ,'*-

3 is t&e ratio o+ present )a"'e cas& ?o>s s'#seB'ent to initia" in)estment

$i)i$e$ #* t&e amo'nt o+ initia" in)estment /!i""ier oss an$ :ester7e"$

p.165. T&is ratio te""s its 'ser >&ic& pro<ect >i"" oEer t&e &ig&est net present

)a"'e per $o""ar o+ initia" o't"a* /rea"e* M*ers an$ A""en p.115. T&e 3 is

app"ie$ in t&ree sit'ations. First >&en pro<ects are in$epen$ent an

age $ o+ $.




in$epen$ent pro<ect s&o'"$ #e accepte$ i+ 3 is "arger t&an 1 an$ re<ecte$ i+

3 is "o>er t&an 1. ,econ$ >&en pro<ects are m't'a""* ec"'si)e 3 nee$s to

#e correcte$ 'sing incrementa". 3 is a ratio an$ t&'s ignores $iEerences o+

sca"e +or m't'a""* ec"'si)e pro<ects. Hast"* >&en t&e 7rm $oes not &as

eno'g& capita" to +'n$ a"" positi)e pro<ects an$ nee$s to imp"ement

capita" rationing /!i""ier oss an$ :ester7e"$ p.166.

.%& Strengths and 3eaknesses of '(') *RR) N'+ and '*

.%$ 'a"back 'eriod ,'('- Strengths and 3eaknesses

'(' Strengths:

perio$ is t&e simp"est >a* o+ comm'nicating an i$ea o+ pro<ect

pro7ta#i"it*. A$$itiona""* is 'se$ #eca'se it is easier to +orecast s&ort

term cas& ?o>s t&an "ong term cas& ?o>s. Hast"* are 'se$ as a

meas're o+ "iB'i$it*.

'(' 3eaknesses:

can res'"t in mis"ea$ing ans>ers #eca'se it ignores a"" cas& ?o>s a+tert&e c'toE $ate /rea"e* M*ers an$ A""en p.106. eca'se o+ t&is s&ort term

orientation )a"'a#"e "ong-term pro<ects mig&t #e ignore$ /!i""ier oss an$

:ester7e"$ p.151. F'rt&ermore $oes not consi$er timing o+ cas& ?o>s

/Time a"'e o+ Mone* an$ t&'s gi)es eB'a" >eig&t to a"" cas& ?o>s #e+ore

t&e c'toE $ate /!i""ier oss an$ :ester7e"$ p.151. Fina""* t&ere is an

ar#itrar* stan$ar$ +or t&e pa*#ac perio$. Capita" marets &e"p estimate t&e

$isco'nt rate 'se$ in t&e met&o$. !o>e)er t&ere is no g'i$e +or

c&oosing t&e pa*#ac c't-oE $ate so t&e c&oice is some>&at s'#<ecti)e

/!i""ier oss an$ :ester7e"$ p.152.

.%. *nternal Rate of Return ,*RR- Strengths and 3eaknesses

*RR Strengths:

age . o+ $.




3 acco'nts +or Time a"'e o+ Mone* consi$ers a"" cas& ?o>s an$ is "ess

s'#<ecti)e.

*RR 3eaknesses:

T&e 7rst >eaness o+ 3 is >&en comparing an in)esting or 7nancing

$ecision. :&en in)esting a &ig& rate o+ ret'rn is $esire$. Contrasting"* >&en

recei)ing 7nancing a "o> rate o+ ret'rn is $esire$. 3n s'c& cases an 3 "ess

t&e opport'nit* o+ cost o+ capita" is reB'ire$ /rea"e* M*ers an$ A""en

p.109. A secon$ >eaness o+ t&e 3 is t&at >&en t&ere are c&anges in t&e

signs o+ cas& ?o>s t&ere >i"" #e m'"tip"e rates o+ ret'rn. 3n some cases t&ere

mig&t #e no interna" rate o+ ret'rn /rea"e* M*ers an$ A""en p.110. T&ir$

3 ignores $iEerences o+ sca"e o+ cas& ?o>s in m't'a""* ec"'si)e pro<ects

#eca'se it=s a ratio. Hast"* t&e 3 $oes not acco'nt +or more t&an one

opport'nit* cost o+ capita" /rea"e* M*ers an$ A""en p.11.

.%/ Net 'resent +alue ,N'+- Strengths and 3eaknesses

N'+ Strengths:

is #ase$ on cas& ?o>s. A$$itiona""* it inc"'$es a"" t&e cas& ?o>s o+ t&e

pro<ect an$ $isco'nts t&e cas& ?o>s proper"* #eca'se it consi$ers t&e time)a"'e o+ mone* >&en &an$"ing cas& ?o>s /!i""ier oss an$ :ester7e"$

p.150.

N'+ 3eaknesses:

One o+ t&e >eanesses o+ is its sensiti)it* to $isco'nt rates. Ca"c'"ating

t&e percentage n'm#er to an in)estment to represent a ris premi'm is not

an eact science. T&ere+ore t&e "e)e" o+ s'#<ecti)it* in t&e $isco'nt rate

/&o>e)er sma"" as it mig&t #e represents a $isa$)antage to t&e

met&o$o"og*. A secon$ $isa$)antage o+ t&e is t&at it ec"'$es rea"

options t&at ma* eist >it&in t&e pro<ect. To i""'strate a compan* t&at is

c'rrent"* "osing mone* ma* epan$ great"* in a +e> *ears= time &o>e)er

$oes not gi)e t&e option to inc"'$e t&e )a"'e o+ rea" options.

age / o+ $.




.%0 'ro1tabilit" *nde2 ,'*- Strengths and 3eaknesses

'* Strengths:

T&e strengt&s o+ t&e 3 are simi"ar to t&e since it is #ase$ on $isco'nte$

present )a"'e cas& ?o>s min's initia" cas& o't?o> $i)i$e$ #* t&e initia" cas&o't?o> /or $i)i$e$ #* t&e initia" cas& o't?o> I one. A$$itiona""* >&en

+'n$s are "imite$ 3 &e"ps pic t&e pro<ects t&at oEer t&e &ig&est net present

)a"'e per $o""ar o+ initia" o't"a* /rea"e* M*ers an$ A""en p.115.

'* 3eaknesses:

3 >eanesses are simi"ar to t&ose o+ t&e . Moreo)er 3 is a ratio an$

t&'s ignores $iEerences o+ sca"e +or m't'a""* ec"'si)e pro<ects /rea"e*

M*ers an$ A""en p.116. ConseB'ent"* 3 on"* pro)i$es re"ati)e pro7ta#i"it*

an$ can potentia""* "ea$ to raning pro#"ems.

/%& 'S' 4lectronic 'ro5ects6 +aluation

/%$ 'ro!ided information

/Co"en#ran$er

age 0 o+ $.

Table $ 'S' pro5ects initial in!estments re7uired and "earl" sa!ings

Table . 8epreciation Classes




/Co"en#ran$er

Ta ate 4J eB'ire$ ate o+ et'rn 14J et :oring Capita" 0

/%. Cash Flow Statement

For a $etai"e$ ep"anation o+ res'"ts an$ ana"*sis please double click on the

excel icon below

10062289KMartinezK

CorporateKFinanceK

/%.%$ *nitial Cash 9utow

Table / 'S' pro5ects A ; ( initial cash outow

/10062289KMartinezKCorporateKFinanceKa"'ationKMo$e"s

age < o+ $.




Notes:

Cost o+ ne>G assets are gi)en

o capita"ize$ epen$it'res gi)en o >oring capita" o sa"e o+ o"$ asset/s o ta sa)ings $'e to sa"e o"$ assets

/%.%. *ncremental Cash 9utows


age = o+ $.

Table 0 'S' pro5ects A ; ( incremental cash outows




Notes:

et 3ncr. /$ecr. in operating re)en'e "ess /p"'s an* net incr. /$ecr. in

operating epenses ec"'$ing $epr. are gi)en /perio$ sa)ings et 3ncr. /$ecr. in ta $epreciation

• Asset et a"'e +or perio$ L Depreciation rate +or perio$ et c&ange in income #e+ore taes

• erio$ sa)ings Depreciation et incr. /$ecr. in taes

• 3ncome #e+ore taes L ta rate et c&ange in income a+ter taes

• 3ncome #e+ore taes - taes et incr. /$ecr. in ta $epr. C&arges

• Ta $epreciation ro<ect 3ncrementa" net cas& ?o> +or perio$

• 3ncome a+ter taes I Depreciation

/%.%/ Terminal >ear *ncremental Cash 9utows


Notes:

3ncrementa" net cas& ?o> +or t&e termina" perio$ comes +rom Ta#"e 4, pro<ects A incrementa" cas& o't?o>sG perio$ /termina"

perio$ incrementa" net cas& ?o>. o ,a")age a"'e o Ta sa)ings $'e to asset sa"e or $isposa" o+ ne> assets o c&anges in net >oring capita"

age ? o+ $.

Table < 'S' pro5ects A ; ( terminal "ear




/%/ 'S' pro5ects appraisal


/%/%$ '(' calculation

a*#ac +orm'"a /#ase$ on "ect'res

First it is necessar* to ca"c'"ate c'm'"ati)e cas& ?o>s

age @ o+ $.

Table = 'S' pro5ects appraisal based on '(')




T&en app"* +orm'"a.

/%/%. *RR calculation

3 >as ca"c'"ate$ 'sing 3G +orm'"a in ece".

/%/%/ N'+ calculation +orm'"a #ase$ on "ect'res

>as ca"c'"ate$ 'sing G +orm'"a in ece" 3nitia" cas& o't?o> /3CO

/%/%0 '* calculation

3 +orm'"a #ase$ on "ect'res

3 >as ca"c'"ate$ #* a$$ing one to t&e pre)io's"* ca"c'"ate$ $i)i$e$ #*

t&e 3CO.

age o+ $.




0%& 'referred *n!estment 'ro5ectase$ on , pro<ects appraisa" 3 >o'"$ c&oose project B #ase$ on t&e

+o""o>ing )a"'ation mo$e" res'"ts

*nternal Rate of Return:

3nterna" rate o+ ret'rn is &ig&er t&an t&e $isco'nt rate

Net 'resent +alue:

et resent a"'e is greater t&an zero

'ro1tabilit" *nde2:

ro<ect 3 is "arger t&an 1

&'ro(ect ) has a paybac* period that is sli"htly lon"er than pro(ect A. #owever, due to the

many wea*nesses of the ')' and that no cuto+ period was provided my decision remained

in favor of pro(ect ).

age $& o+ $.




<%& 3orks Cited

NAn ;as* ro#"em in Capita" ationing.N rea"e* ic&ar$ ,te>art M*ers an$

Fran"in A""en. 'rinciples of orporate inance Tenth -dition. e> @or

Mcra> !i"" 2011. 115. DF oo.

N3nterna" /or Disco'nte$-Cas&-F"o> ate o+ et'rn.N rea"e* ic&ar$

,te>art M*ers an$ Fran"in A""en. 'rinciples of orporate inance Tenth

-dition. e> @or Mcra> !i"" 2011. 10. DF oo.

Na*#ac.N rea"e* ic&ar$ ,te>art M*ers an$ Fran"in A""en. 'rinciples of

orporate inance Tenth -dition. e> @or Mcra> !i"" 2011. 105.

DF oo.

P. 'rinciples of orporate inance Tenth -dition. e> @or Mcra> !i""

2011. DF oo.

Co"en#ran$er C..!. NCorporate Finance Assignment.N orporate inance

Assi"nment . T&e !ag'e T&e !ag'e (ni)ersit* o+ App"ie$ ,ciences 15

o)em#er 2014. DF Doc'ment.

N6.1 :&* (se et resent a"'e.N !i""ier Da)i$ et a". orporate inance

-uropean -dition. ers&ire Mcra> !i"" 2010. 148-150. oo.

NT&e 3nterna" ate o+ et'rn.N !i""ier Da)i$ et a". orporate inance

-uropean -dition. ers&ire Mcra> !i"" 2010. 155-158. oo.

NT&e a*#ac erio$ Met&o$.N !i""ier Da)i$ et a". orporate inance

-uropean -dition. ers&ire Mcra> !i"" 2010. 150 - 151. oo.

age $$ o+ $.




NT&e ro7ta#i"it* 3n$e.N !i""ier Da)i$ et a". orporate inance -uropean

-dition. ers&ire Mcra> !i"" 2010. 165-16. oo.

,agast'me Otto :i"+re$o Martinez.

N10062289KMartinezKCorporateKFinanceKa"'ationKMo$e"s.N//011234!artine54orporate4inance46aluation4!odels . T&e !ag'e

Otto :i"+re$o Martinez ,agast'me 14 o)em#er 2014. ;ce" Fi"e.

=%& 8isclaimer

A"" ig&ts eser)e$. o part o+ t&is p'#"ication ma* #e repro$'ce$ store$ ina retrie)a" s*stem or transmitte$ in an* +orm #* an* means e"ectronicmec&anica" p&otocop*ing recor$ing or ot&er>ise >it&o't t&e priorpermission o+ t&e p'#"is&er Otto Martinez.

T&e +acts o+ t&is report are #e"ie)e$ to #e correct at t&e time o+ p'#"ication

#'t cannot #e g'arantee$. "ease note t&at t&e 7n$ings conc"'sions an$

recommen$ations t&at Otto Martinez $e"i)ers >i"" #e #ase$ on in+ormation

gat&ere$ in goo$ +ait& +rom #ot& primar* an$ secon$ar* so'rces >&ose

acc'rac* &e is not a">a*s in a position to g'arantee. As s'c& Otto Martinez

can accept no "ia#i"it* >&ate)er +or actions taen #ase$ on an* in+ormation

t&at ma* s'#seB'ent"* pro)e to #e incorrect.

age $. o+ $.

Corporate Finance Valuation Models

Documents

Transcript of Corporate Finance Valuation Models