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Assets in Place
- -Tangible assests like land, buildings, machines and inventory. Also intangible assets like: patents, customer lists, reputation and general know-how
- -Usually are expected to grow
- -Generate FCF
- -PV of future FCF, discounted at WACC is equal to Vop
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Growth Options
Opportunities to expand that arise from the firm's current operating knowledge, experience, and other resources.
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Two types of Corporate Assets
Operating & Non-operating
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Operating Assets
Assets-in-Place & Growth Options
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Non-Operating Assets
- -Marketable Securities
- -Ownership of non-controlling intrest in another company
- -Value of non-operating assets usually is very low & close to figure reported on B/S
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Free Cash Flow (FCF)
Cash from operations that is actually available for distribution to investors, including stockholders, bondholders, and P/S holders.
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Value of Operatons
PV of FCF that the firm is expected to generate out into the future.
Vop= FCFt/(1+WACC)^t
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Negative FCF
- -Typical of young, high-growth comapnies.
- -Means the company will have to obtain new funds from investors
- -No dividends paid out
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Claims on Corporate Value
- -Debtholders have first claim
- -P/S have the next claim
- -Any remaining value belongs to stockholders
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Data for Value of Operations
- -FCFo, WACC, g
- -Marketable Securities, Debt, & P/S
- -Book Value of Equity
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Terminal/Horizon Value/Continuing Value
- -Value of operations at the end of the explicit forecast period.
- -PV of all FCF beyon the forecast period, discounted back at the end of the forecast period at WACC
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Value-Based Management
-Systematic use of the corporate valuation model to evaluate a company's potential decisions.
- -Objective of VBM is to increase Market Value Added
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Market Value Added
- Four Drivers
- -Sales growth
- -Operating Profitability (NOPAT/Sales)
- -Capital Requirements (CR=OP/Sales) -WACC
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Ways to improve MVA
- -Reduce WACC
- -Operating Profitability increases
- -Captial Requirements (CR) decreases
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Expected Return On Invested Captial (EROIC)
NOPAT expected next period divided by the amount of capital that is currently invested
EROIC=NOPATt+1/Capitalt
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Corporate Governance
Manner in which shareholders' objectivies are implemented, and it is reflected in a companies policies and actions
- Two Primary mechanisms
- 1) The threat of removal of a poorly performing CEO
- 2) The type of plan used to compensate executives and mangemers
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Nonpecuniary Benefits
Noncash perks like: lavish offices, memberships at country clubs, corporate jets, foreign junkets...
Some are cost effective but others are wasteful and simply reduce profits. Such fat is almost always cut after a hostile takeover
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Targeted Share Repurchases/Greenmail
When a company buys back stock from a potential acquire at a price higher than the market price.
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