Valuation: Measuring and Managing the Value of Companies University Edition 5th Edition

Valuation: Measuring and Managing the Value of Companies, Fifth Edition Chapter 1 Solutions Why Value Value? 1. One benefit of a long-term perspective on value creation is that it leads to only engaging in activities that create value and not wasting effort on activities that do not. Also, it is possible to engage

Valuation Measuring and Managing the Value of Companies 5th Edition Chapter 10 Solutions Estimating Continuing Value Version 1.0 April 1, 2010 Chapter 10 Question 1 Continuing Today Year 1 Year 2 Year 3 Year 4 Year 5 value Continuing value Revenues 250.0 265.0 280.9 297.8 315.6 334.6 354.6 NOPLAT Operating costs (225.0) (238.5) (252.8) (268.0) (284.1) (301.1) (319.2) Growth Operating margin 25.0 26.5

Valuation Measuring and Managing the Value of Companies 5th Edition Chapter 11 Solutions Estimating the Cost of Capital Version 1.0 April 1, 2010 Chapter 11 Questions 1 & 2 Market Cost of Tax Aer-tax Weighted Source of capital value capital rate cost cost Debt 100 7.5% 30.0% 5.3% 0.9%Equity 500 10.5% 10.5% 8.8%600 9.6% Debt 100 7.5% 30.0% 5.3% 0.9%Equity 500 10.5%

Valuation Measuring and Managing the Value of Companies 5th Edition Chapter 12 Solutions Moving from Enterprise Value to Value per share Version 1.0 April 1, 2010 Chapter 12 Questions 1 & 2 Question 1 Question 2 Valuation Sale No sale Nonconsolidated subsidiary Contingent claim Value of operations 2,500.0 2,500.0 Nonconsolidated subsidiary 500 Contingent claim 100 Nonconsolidated subsidiary 100.0 79.0

Valuation Measuring and Managing the Value of Companies 5th Edition Chapter 13 Solutions Calculating and Interpreting Results Version 1.0 April 1, 2010 Chapter 13 Question 1 Percent of sales Current Forecast Current Forecast year year year year Revenues 120.0 100.0 Cost of sales (90.0) (75.0) 75% 75%Deprecation (12.0) (10.0) 10% 10%Operating profit 18.0 15.0 15% 15%Working capital 36.0 30.0 30% 30%Property

Valuation Measuring and Managing the Value of Companies 5th Edition Chapter 14 Solutions Using Multiples to Triangulate Results Version 1.0 April 1, 2010 Chapter 14 Questions 1 & 2 $ million Company 1 Company 2 Company 3 Share price ($) 25 16 30 Shares outstanding (millions) 5 8 15 Equity value 125 128 450 Short-term debt 25 15 30

Valuation: Measuring and Managing the Value of Companies, Fifth Edition Chapter 15 Solutions Market Value Tracks Return on Invested Capital and Growth 1. The 6.5 percent return is based on the following assumptions: (1) corporate profits continue to grow at 3 to 3.5 percent per year, and (2) the average price-to-earnings ratio is 15

Valuation: Measuring and Managing the Value of Companies, Fifth Edition Chapter 16 Solutions Markets Value Substance, Not Form 1. Companies attempt to manage earnings by timing the recognition of revenues and costs or by using gimmicks such as selling assets or introducing customer incentives. Researchers have found that the stock market is not

Valuation: Measuring and Managing the Value of Companies, Fifth Edition Chapter 17 Solutions Emotions and Mispricing in the Market 1. Three conditions can lead to market values failing to reflect fundamentals. The three conditions are (1) individuals behave irrationally, (2) a sufficient number of individuals behave in a systematically irrational way, and (3)

Valuation: Measuring and Managing the Value of Companies, Fifth Edition Chapter 18 Solutions Investors and Managers in Efficient Markets 1. Noise traders deserve attention from managers because their activity partly determines the size of the deviations around intrinsic value. Also, a very large number of noise traders and barriers to arbitrage (e.g., short-selling

Valuation: Measuring and Managing the Value of Companies, Fifth Edition Chapter 19 Solutions Corporate Portfolio Strategy 1. Different owners have different skills and goals. Thus, one owner may be able to innovate and to lead the company in a way to increase cash flows and growth. When a firm is bought out by another

Valuation: Measuring and Managing the Value of Companies, Fifth Edition Chapter 2 Solutions Fundamental Principles of Value Creation 1. Higher ROIC generally means higher free cash flow because it means the firm need not reinvest as much to maintain its growth and operating cash flow. The relationship between ROIC, growth, and cash flow

Valuation Measuring and Managing the Value of Companies 5th Edition Chapter 20 Solutions Performance Management Chapter 20 Question 1 Commentary The value-driver approach establishes a set of short-term to long-term metrics, which is tailored to the industry and strategy. It should de#ne how the inputs and initial targets eventually influence the financial inputs ROIC, growth and the cost

Valuation: Measuring and Managing the Value of Companies, Fifth Edition Chapter 21 Solutions Mergers and Acquisitions 1. This result would be a case where the acquiring firm pays a premium higher than the value created from the acquisition. The shareholders of the acquired firm would gain the premium, but the shareholders of the

Valuation: Measuring and Managing the Value of Companies, Fifth Edition Chapter 22 Solutions Creating Value through Divestitures 1. The main issue with respect to the dilution or accretion question is whether the return earned on the divested unit was greater than or less than that earned on the use of the funds received

Valuation: Measuring and Managing the Value of Companies, Fifth Edition Chapter 23 Solutions Capital Structure 1. Optimal capital structure is that which maximizes the value of the firm. According to a widely used analysis, on a graph where the horizontal axis is leverage and the vertical axis is the value of the firm,

Valuation: Measuring and Managing the Value of Companies, Fifth Edition Chapter 24 Solutions Investor Communications 1. The purpose of investor communications is to align the share price and intrinsic value of the firm. However, managers usually see investor communications as a means to try to increase the market value of the firm. They

Valuation Measuring and Managing the Value of Companies 5th Edition Chapter 25 Solutions Taxes Version 1.0 April 1, 2010 Chapter 25 Question 1 Tax reconciliation table in $ millions Tax reconciliation table in percent $ million Year 1 Year 2 Year 3 Year 1 Year 2 Year 3 Statutory income tax rate 161.8 154.4 185.4 35.0 35.0 35.0 State and local

Valuation Measuring and Managing the Value of Companies 5th Edition Chapter 26 Solutions Nonoperating Expenses, One-Time Charges, Reserves, and Provisions Version 1.0 April 1, 2010 Chapter 26 Question 1 2009 2008 2007 Operating income 16,123 16,637 15,003Amortization 648 649 640EBITA 16,771 17,286 15,643 Operating income 16,123 16,637 15,003Amortization 648 649 640EBITA 16,771 17,286 15,643 Operating income 16,123 16,637 15,003 Amortization 648 649 640 EBITA

Valuation Measuring and Managing the Value of Companies 5th Edition Chapter 27 Solutions Leases, Pensions, and Other Obligations Version 1.0 April 1, 2010 Chapter 27 Questions 1 & 2 PV (leased assets) Correct Misestimation Rental expenses 25.0 25.0 Cost of debt 7.0% 7.0%Average life 7.0 10.0 PV (leased assets) 117.4 147.1 Rental expenses 25.0 25.0 Cost of debt 7.0% 7.0%Average life

Valuation Measuring and Managing the Value of Companies 5th Edition Chapter 28 Solutions Capitalized Expenses Version 1.0 April 1, 2010 Chapter 28 Question 1 $ million Forecast Year 1 Year 2 Year 3 Year 4 Year 5 Ratio Revenues 100.0 110.0 121.0 133.1 146.4 10%Operating costs (50.0) (55.0) (60.5) (66.6) (73.2) 50%R&D expense (15.0) (16.5) (18.2) (20.0) (22.0) 15%Operating profit

Valuation: Measuring and Managing the Value of Companies, Fifth Edition Chapter 29 Solutions Inflation 1. The general reasons are that the firm cannot pass on inflation in full to its customers, and the cost of capital increases more than the free cash flow. One way to look at the situation is by the direct

Valuation: Measuring and Managing the Value of Companies, Fifth Edition Chapter 3 Solutions The Expectations Treadmill 1. The total returns to shareholders figure is the return earned by shareholders from distributions and increases in share price. It is important because when managers focus onit, their interests and the interests of shareholders tend to

Valuation: Measuring and Managing the Value of Companies, Fifth Edition Chapter 30 Solutions Foreign Currency 1. The real risk-free rate will be the same in different countries. The nominal risk-free rate will differ based on expectations concerning inflation in each country. will differ based on expectations concerning inflation in each country. will differ

Valuation: Measuring and Managing the Value of Companies, Fifth Edition Chapter 32 Solutions Valuing Flexibility 1. Standard NPV analysis considers one possible set of cash flows. Contingent NPV incorporates possible cash flows changing either from exogenous factors or from the choices made by the managers. There are two basic types of contingent NPV:

Valuation: Measuring and Managing the Value of Companies, Fifth Edition Chapter 33 Solutions Valuation in Emerging Markets 1. Purchasing power parity (PPP) means that the goods and services will sell for the same price in different countries, because the exchange rate will adjust to make the prices the same. PPP holds in the

Valuation: Measuring and Managing the Value of Companies, Fifth Edition Chapter 34 Solutions Valuing High-Growth Companies 1. The DCF method is still preferred and the basic inputs are the same for a high-growth company as for an established company. In the mature markets, the analysis begins with historical performance and then forecasts forward.

Valuation: Measuring and Managing the Value of Companies, Fifth Edition Chapter 35 Solutions Valuing Cyclical Companies 1. The volatility of DCF is much lower than that of the profits. This difference arises because the DCF is a sum of values, which may be potentially infinite, and it will vary only slightly as one

Valuation: Measuring and Managing the Value of Companies, Fifth Edition Chapter 36 Solutions Valuing Banks 1. The reason for using the equity cash flow method for valuing a bank is that the valuation of operations is not separate from interest revenue and expense. Interest revenue and expense are major components of a banks

Valuation: Measuring and Managing the Value of Companies, Fifth Edition Chapter 4 Solutions Return on Invested Capital 1. Since expanding the market or increasing consumption by current customers tend to be the primary sources of increased value, it is more important for a company to find the right markets in which to participate.

Valuation Measuring and Managing the Value of Companies 5th Edition Chapter 6 Solutions Frameworks for Valuation Version 1.0 April 1, 2010 Chapter 6 Question 1 Income Statement Reorganized balance sheet Today Year 1 Today Year 1 Revenues 800.0 840.0 Operating working capital 70.1 73.6 Operating costs (640.0) (672.0) Property and equipment 438.4 460.3 Depreciation (40.0) (42.0) Invested capital 508.5 533.9 Operating

Valuation Measuring and Managing the Value of Companies 5th Edition Chapter 7 Solutions Reorganizing the Financial Statements Version 1.0 April 1, 2010 Chapter 7 Ques!ons 1-3 Ratio Company A Company B Company C Return on assets 14.3% 13.0% 11.4% Return on equity 15.8% 14.3% 21.8% Return on invested capital 15.8% 15.8% 15.8% Question 1 Return on invested capital best measures opera!ng performance. All three

Valuation Measuring and Managing the Value of Companies 5th Edition Chapter 8 Solutions Analyzing Performance and Competitive Position Version 1.0 April 1, 2010 Chapter 8 Questions 13 JetCo Gulf Question 1 Revenues 600.0 800.0 The ROIC of Gulf Aviation is 12.5 percent versus only 9.4 percent for JetCo. Since both companies have a cost of capital of 8 percent, Gulf

Valuation Measuring and Managing the Value of Companies 5th Edition Chapter 9 Solutions Forecasting Performance Version 1.0 April 1, 2010 Chapter 9 Question 1 Procter & Gamble Annual report, 2009 Note 3 Supplemental financial information Selected components of current and noncurrent liabilities were as follows: Accrued and other liabilitiescurrent Marketing and promotion 2,378.0 2,760.0 Compensation expenses 1,464.0 1,527.0 Based on a Web search: Accrued Gille.e exit

Henkel Integrative Case: Part III Competitive Benchmarking Introduction Understanding a companys past is essential to forecasting its future. For that reason, a critical component of valuation is the robust analysis of historical performance. Always start with the key drivers of value: return on invested capital (ROIC) and revenue growth. Examine trends in the

Henkel Integrative Case: Part IV Cost of Capital Introduction To value a company using enterprise discounted cash flow (DCF), we discount free cash flow by the weighted average cost of capital (WACC). The weighted average cost of capital represents the opportunity cost that investors face for investing their funds in one particular business

Henkel Integrative Case: Part II Reorganizing the Financials Introduction To prepare the financial statements for analysis of economic performance, you need to reorganize the items on the balance sheet, income statement, and statement of cash flows into three categories of components: operating, nonoperating, and sources of financing. This will entail searching through the

Henkel Integrative Case: Part V Enterprise Value Introduction In this assignment, we value Henkel AG on an as-is basis using the discounted cash flow (DCF) method. An as-is valuation assumes that forecast ratios remain at their current levels. An as-is valuation allows you to focus on building the model instead of forecasting. It

Henkel Integrative Case: Part I Who Is Henkel? Company Introduction Founded in 1876, Henkel AG & Co. KgaA is a 13.6 billion German-based consumer products company. The company is comprised of three primary businesses. The Laundry and Home Care segment (maker of Persil, Purex, Pril) is active in the marketing, selling, and distribution