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Corporate Valuation: A Guide for Managers and Investors

Corporate Valuation: A Guide for Managers and Investors. Phillip R. Daves Michael C. Ehrhardt Ronald E. Shrieves University of Tennessee (c) 2004. Chapter 1: Why Corporate Valuation?. Financial decisions made every day Investors—buy and sell decisions

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Corporate Valuation: A Guide for Managers and Investors

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  1. Corporate Valuation: A Guide for Managers and Investors Phillip R. Daves Michael C. Ehrhardt Ronald E. Shrieves University of Tennessee (c) 2004 DES Chapter 1

  2. Chapter 1: Why Corporate Valuation? • Financial decisions made every day • Investors—buy and sell decisions • Managers—implement operating decisions • Financial staff—evaluate acquisitions Success or failure depends on whether value correctly identified DES Chapter 1

  3. Goals • Provide investors and managers with knowledge to value a company • Use free cash flow valuation • Use non-proprietary Excel model • Online data sources—plus Thomson ONE-Business School Edition DES Chapter 1

  4. How this model might be used • Investors: identify undervalued stocks • Investors: to asses fund manager performance • Managers: to make better business decisions • Managers & investors perform scenario analysis DES Chapter 1

  5. Plan of attack Finance requires circular approach: need to know finance to do financial analysis. Need to know how to do financial analysis to understand finance. Text: start simply and slowly then increases level of detail. DES Chapter 1

  6. Outline • Chapter 2—complete outline, apply to simple company, MPR • Chapters 3, 4—More advanced skills, more complicated company, ACME • Chapters 5-8—Still more advanced skills, more complicated company, Van Leer, Inc. • Chapters 9-13—Home Depot valuation DES Chapter 1

  7. Discounted Cash Flow (DCF) • DCF analysis: heart of valuation • Basic concepts • Present value • Discount rate– Weighted Average Cost of Capital (WACC) • Free cash flows (FCF) DES Chapter 1

  8. Present Value • Present value = $1/(1 + r) • If r = 9%, PV = $1/(1.09) = $0.917 • A dollar to be received in 1 year is worth 91.7 cents today if the discount rate is 9 percent. DES Chapter 1

  9. WACC and FCF • WACC: average rate of return all of company’s investors must earn • FCF: amount of cash flow available for distribution to all of firm’s investors (debtholders and shareholders) after making investments necessary to support growth plans. DES Chapter 1

  10. Become an accountant? • NO! But accounting understanding crucial. • So are Excel & research skills • Will use dozens of online sources of financial data, including Thomson ONE-Business School Edition. DES Chapter 1

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