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Module 8 – Abnormal Enterprise Income Growth Junichi Hara

Module 8 – Abnormal Enterprise Income Growth Junichi Hara. Where we are…. Learned three models: Free cash flow (FCF) method Residual income (RI) method Abnormal ent erprise income growth (AEIG) method. Conclusion. Value created when actual returns exceeds expected return

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Module 8 – Abnormal Enterprise Income Growth Junichi Hara

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  1. Module 8 – Abnormal Enterprise Income GrowthJunichi Hara

  2. Where we are… • Learned three models: • Free cash flow (FCF) method • Residual income (RI) method • Abnormal enterprise income growth (AEIG) method

  3. Conclusion • Value created when actual returns exceeds expected return • AEIG method least reliant on continuing value

  4. Agenda • Walkthrough • Comparison

  5. 1. Walkthrough

  6. AEIG Method: Three parts

  7. Part 1: Next Year’s EPAT AnchorAssumes firm earns same EPAT forever

  8. Part 1: Next Year’s EPAT

  9. Part 1: Next Year’s EPAT

  10. Part 2: agr Within Horizon agr = abnormal enterprise income growth Source of additional value Portion of future earnings exceeding expected return

  11. Part 2: agr Within Horizon Cum-FCF Income Normal Income

  12. Part 2: agr Within Horizon ForecastedIncome Expected Income

  13. Part 2: agr Within Horizon FCF earns expected rate of return Doesn’t provide additional value

  14. Part 2: agr Within Horizon Value created when firm earnsreturn higher than rEnt

  15. Parallel to Residual Income Value created when firm earnsreturn higher than rEnt

  16. Part 2: agr Within Horizon

  17. Part 2: agr Within Horizon

  18. Part 3: agrBeyond Horizon Continuing Value Is it realistic to assume perpetual agr > 0?

  19. Part 3: agrBeyond Horizon

  20. Part 3: agrBeyond Horizon

  21. 2. Comparison

  22. Equal results • Three methods learned: • Free cash flow (FCF) method • Residual income (RI) method • Abnormal ent. inc. growth (AEIG) method • All three models get the same results

  23. Assumptions • Sales g%: 2.34% • EPM: 4.05% • EATO: 3.45 • WACC 7.34%

  24. DCF Method

  25. Residual Income Method

  26. AEIG Method

  27. Result • Price as of March 14: $74.28 • Need to adjust forecasts

  28. So what’s the difference? • Source of value

  29. Breakdown of Value Estimate Abnormal Enterprise Income Growth Model least reliant on continuing value

  30. Conclusion • Value created when actual returns exceeds expected return • AEIG method least reliant on continuing value

  31. Questions?

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