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Assets in Place
- -Tangible assests like land, buildings, machines and inventory. Also intangible assets like: patents, customer lists, reputation and general know-how
- -Usually are expected to grow
- -Generate FCF
- -PV of future FCF, discounted at WACC is equal to Vop
Opportunities to expand that arise from the firm's current operating knowledge, experience, and other resources.
Two types of Corporate Assets
Operating & Non-operating
Assets-in-Place & Growth Options
- -Marketable Securities
- -Ownership of non-controlling intrest in another company
- -Value of non-operating assets usually is very low & close to figure reported on B/S
Free Cash Flow (FCF)
Cash from operations that is actually available for distribution to investors, including stockholders, bondholders, and P/S holders.
Value of Operatons
PV of FCF that the firm is expected to generate out into the future.
- -Typical of young, high-growth comapnies.
- -Means the company will have to obtain new funds from investors
- -No dividends paid out
Claims on Corporate Value
- -Debtholders have first claim
- -P/S have the next claim
- -Any remaining value belongs to stockholders
Data for Value of Operations
- -FCFo, WACC, g
- -Marketable Securities, Debt, & P/S
- -Book Value of Equity
Terminal/Horizon Value/Continuing Value
- -Value of operations at the end of the explicit forecast period.
- -PV of all FCF beyon the forecast period, discounted back at the end of the forecast period at WACC
-Systematic use of the corporate valuation model to evaluate a company's potential decisions.
- -Objective of VBM is to increase Market Value Added
Market Value Added
- Four Drivers
- -Sales growth
- -Operating Profitability (NOPAT/Sales)
- -Capital Requirements (CR=OP/Sales) -WACC
Ways to improve MVA
- -Reduce WACC
- -Operating Profitability increases
- -Captial Requirements (CR) decreases
Expected Return On Invested Captial (EROIC)
NOPAT expected next period divided by the amount of capital that is currently invested
Manner in which shareholders' objectivies are implemented, and it is reflected in a companies policies and actions
- Two Primary mechanisms
- 1) The threat of removal of a poorly performing CEO
- 2) The type of plan used to compensate executives and mangemers
Noncash perks like: lavish offices, memberships at country clubs, corporate jets, foreign junkets...
Some are cost effective but others are wasteful and simply reduce profits. Such fat is almost always cut after a hostile takeover
Targeted Share Repurchases/Greenmail
When a company buys back stock from a potential acquire at a price higher than the market price.