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    Valuation Concepts and Methods

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    Cessna Nicole Mojica
    This document discusses valuation concepts and methods, specifically going concern asset-based valuation and discounted cash flow analysis. It provides examples of how to calculate free cash flows, terminal value, net cash flows to the firm and equity, and use discounted cash flow analysis to determine the value of a company based on projected cash flows. It illustrates the calculations using examples from Bagets Corporation and TYL Inc., providing financial projections and walking through the valuation.

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    Valuation Concepts and Methods

    Uploaded by

    Cessna Nicole Mojica
    80 views5 pages
    This document discusses valuation concepts and methods, specifically going concern asset-based valuation and discounted cash flow analysis. It provides examples of how to calculate free cash flows, terminal value, net cash flows to the firm and equity, and use discounted cash flow analysis to determine the value of a company based on projected cash flows. It illustrates the calculations using examples from Bagets Corporation and TYL Inc., providing financial projections and walking through the valuation.

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    This document discusses valuation concepts and methods, specifically going concern asset-based valuation and discounted cash flow analysis. It provides examples of how to calculate free cash flows, terminal value, net cash flows to the firm and equity, and use discounted cash flow analysis to determine the value of a company based on projected cash flows. It illustrates the calculations using examples from Bagets Corporation and TYL Inc., providing financial projections and walking through the valuation.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    80 views5 pages

    Valuation Concepts and Methods

    Uploaded by

    Cessna Nicole Mojica
    This document discusses valuation concepts and methods, specifically going concern asset-based valuation and discounted cash flow analysis. It provides examples of how to calculate free cash flows, terminal value, net cash flows to the firm and equity, and use discounted cash flow analysis to determine the value of a company based on projected cash flows. It illustrates the calculations using examples from Bagets Corporation and TYL Inc., providing financial projections and walking through the valuation.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
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    Valuation Concepts and Methods

    Lesson 2 – GOING CONCERN ASSET BASED VALUATION

    Green field investments - those investments that started from scratch.



    Brown field investments – those opportunities that are either partially or fully
    operational. These are investments that are already in the going concern state, as
    most businesses are in the optimistic perspective that they will grow in the future.

    Going Concern Business Opportunities (GCBOs)


    These are the businesses that has a long term into infinite operational period. The
    risk indicators of GCBOs are identified easily as it provides reference for the
    performance of similar nature of business or from historical performances.

    Sound Enterprise-wide Risk Management allows the company to:


    
1. Increase the opportunities;

    2. Facilitates the management and identification of the risk factors that affect the
    business;
    3. Identify or create cost-efficient opportunities;

    4. Manages the performance variability;

    5. Improve management and distribution of resources across the enterprise;

    6. Make the business more resilient to abrupt changes.

    Discounted Cash Flows Analysis


    This can be done by determining the Net Present Value of the Net Cash Flows of
    the investment opportunity. Net Cash Flows are the amounts of cash available
    for distribution to
    both debt and equity claim from the business or asset. This is calculated from the
    net cash generated from operations and for investment over time. Therefore, free
    cash flows can be computed as:
    Free Cash Flows = Revenue – Operating Expenditures – Taxes – Capital
    Expenditures

    Two Levels of Net Cash Flows



    1. Net Cash Flows to the Firm – represents the amount of cash made available
    to both debt and equity claims against the company.
    2. Net Cash Flows to Equity – represents the amount of cash flows made
    available to the equity stockholders after deducting the net debt or the
    outstanding liabilities to the creditors less available cash balance of the company.
    Terminal Value – represents the value of the company in perpetuity or in a going
    concern environment. This can be computed as:

    To illustrate, suppose that a company assumes net cash flows as follows:

    g = 1.10 – 1
    g = 0.10
    TV = 7.32/0.10
    TV = 73.20

    DCF Analysis is most applicable to use when the following are available:
    1. Validated operational and financial information
2. Reasonable appropriated cost
    of capital or required rate of return
    3. New quantifiable information

    Supposed Bagets Corporation projected to generate the following for the next
    five years, in million pesos:

    *Operating Expenses exclude depreciation and amortization

    The capital expenditures that was purchased and invested in the company
    amounted to Php100Million. The terminal value was assumed to be computed
    using 10% growth rate. It was noted further that there is an outstanding loan of
    Php50 Million. If you are going to purchase 50% of Bagets Corporation, assuming
    a 7% required return, how much would you be willing to pay?
    Based on the foregoing information, the value of Bagets Corporation equity is
    Php50 Million. If the amount at stake is only 50% then the amount to be paid is
    Php25 Million.

    Activities/Assessments:
    TYL Inc. has projected that their performance for the next five years will result to
    the following:

    A property was purchased for Php150 Million. The terminal value was assumed
    based on the growth rate of the cash flows. The outstanding loans is Php16.62
    Million. The required rate of return for this business is 12%. Given the information
    above, answer the following:
    1. How much is the Terminal Value?
    2. How much is the Discounted Net Cash Flows to the Firm?
    3. How much is the Net Cash Flow to the Equity?
    4. Assuming there are no outstanding loans, how much is the Discounted Net
    Cash Flows to the Equity?
    5. Assuming that the required rate of return is 10%, how much is the Discounted
    Net Cash Flows to the Equity?

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