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Introduction to Financial Management FIN 102 – 9 th Week of Class

Introduction to Financial Management FIN 102 – 9 th Week of Class. Professor Andrew L. H. Parkes “A practical and hands on course on the valuation and financial management of corporations”. 卜安吉. Funds and Cash Flow. Chapter 7a: Funds Analysis and Planning Financial Management Fall 2007

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Introduction to Financial Management FIN 102 – 9 th Week of Class

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  1. Introduction to Financial ManagementFIN 102 – 9th Week of Class Professor Andrew L. H. Parkes “A practical and hands on course on the valuation and financial management of corporations” 卜安吉

  2. Funds and Cash Flow Chapter 7a: Funds Analysis and Planning Financial Management Fall 2007 Shanghai

  3. Reconciliation FY 2003 • Total Cash In from Operations $ 10,595 M • Total Cash Out from Investments 4,526 M • Total Cash Out from Financing 3,586 M*) • Net Cash Position increase $ 2,483 M • Cash position at the end of FY 2002: $ 2, 894 M • Cash increase in FY 2003: 2, 843 M • Cash position at the end of FY 2003: $ 5.377 M (see balance sheet) • Incl. exchange rate changes $ 277 M Intro. to Financial Managment - 10th Week of Class

  4. Cash Flow Projections • Remember the most important parts of Cash Flow: • NOPAT • Depreciation • Change in Working Capital • CAPEX Intro. to Financial Managment - 10th Week of Class

  5. The value of the company • Remember V= FCF/WACC% • The value of a company depends on the endless streams of FCF • These cash flows need to be estimated based on today’s FCF and FCF’s in the past • You have to calculate the Present Value (remember Ch.3) of all these FCF’s • Your discount factor is the WACC% (the cost of capital) Intro. to Financial Managment - 10th Week of Class

  6. Let’s evaluate for J&J (Million $US) Intro. to Financial Managment - 10th Week of Class

  7. Putting it together…(V = FCF/WACC) • FCF 6863 6080 6922(FY2004) 7028(FY2005) • Implied growth FCF after FY 2005: about 2% • What about WACC%: • Ke= Rf+ β(Rm-Rf)= 4 %+ 0.65*(3,5%)= 6.3% • Kd= LT interest/LT Debt=5.87% • Tax rate= tax/earnings before tax= 30.2% (FY 2003) • LT Debt= $ 2,955 M • Shareholders Equity= $ 26,869 M • WACC = D/(D+E)*Kd*(1-t)+ E/(D+E)*Ke= • 2,955/(2,955+26,869)*5.87%*(1-0.302)+26,869/(2,955+26,869)*6.3%= 6.1% Intro. to Financial Managment - 10th Week of Class

  8. So…the company value of J&J is: • PV= FCF (2004)/(1+Wacc%)+ FCF(2005)/(1+Wacc%)^2+….+FCF(n)/(1+Wacc%)^n • (where n=number of years and FCF’s) • Fill in for J&J: • V= 6922/(1.061)+ 7028/(1.061)^2+ 7169/(1.061)^3+…+ 7028*(1.02)^(n-2)/(1.061)^n= • V= 6922/(1.061)+ 7028/(1.061)^2+ 7028/(.061-.02)-7028/1.061-7028/(1.061)^2= • V=6524+6243+171414-6624-6243= $ 171,314 M • LT Debt is: $ 2955 M So the Equity Value is: $ 171,314M-$2955M= $ 168,359M • The number of shares outstanding is: 2.968.107.066 • So the Equity Value per share is: $ 168359M/ 2968107066=$ 56.72 • The Stock Market Price is: $ 57.10 (closing 28 sep 2004) Intro. to Financial Managment - 10th Week of Class

  9. Market Price J&J Intro. to Financial Managment - 10th Week of Class

  10. Homework Assignment: Valuation • Review the J&J example of valuation • Estimate the future cash flows of your company (use Valueline docs.) • Estimate the future growth % of FCF based on past and present performance • Estimate WACC • Estimate Company Value • Calculate the intrinsic value per share • Compare the market price… • Download the share performance of your company’s share (see example J&J) Intro. to Financial Managment - 10th Week of Class

  11. End of the Section – Chapter 7b GO TO THE TOP! Mt. Machu Pichu! Intro. to Financial Managment - 10th Week of Class

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