balance sheet assumptions
cash
◼what does the analyst report assume
about cash?
balance sheet assumptions
working capital
◼what does analyst model assume?
◼adjusted Other Current Liabilities to hit WC
assumptions (shown on FCF computations on
Cash Analysis sheet)
◼WC turnover ratio goes from +8 to –8.
Ending Other Current Liab
15.7% 17.1% 15.2% 13.6% 12.0% 10.6% 9.2% 8.0% 6.5% 5.2% 5.2%
balance sheet assumptions
PP&E
capX
◼forecast fixed depreciation at 25% and adjust
the PPE/Sales ratio to get capX on SCF
◼should you forecast CapX/Sales or PPE/Sales?
Ending Net PP&E/Sales 9.9% 9.0% 8.3% 7.5% 6.7% 6.0% 5.5% 5.0% 4.6% 4.3% 4.3%
balance sheet assumptions
leverage
◼nothing in analyst report about leverage
◼what is the present value implications of
future debt issued at its cost of capital?
50%
◼very little impact on valuation, unless….
valuation assumptions
◼set cost of equity capital to 22.6 so that WACC is
20%.
◼But check out ratios!
option value for AMZN
◼1/3 chance EBITDA/Sales is .20 higher
◼P = $ 41.03
◼1/3 chance that EBITDA/Sales is as forecast
◼P = $ 15.00
◼OR value = (41.03)/100 + (15.00)10/100 +
(0.00)89/100 = $1.91
AMZN –what happened
Actual Actual Actual
Fiscal Year End Date 12/31/2001 12/31/2002 12/31/2003
Sales growth forecast 24.0% 25.0% 25.0%
Sales Growth Actual 13.1% 26.0% 33.8%
Free Cash Flow to Investors (actual) 17,620 (212,891) 189,522
excluding cash liquidation