Introduction to Financial Management FIN 102 – 9 th Week of Class

Introduction to Financial Introduction to Financial ManagementManagement

FIN 102 – 9FIN 102 – 9thth Week of Class Week of Class

Professor Andrew L. H. ParkesProfessor Andrew L. H. Parkes““A practical and hands on course on the valuation A practical and hands on course on the valuation

and financial management of corporations”and financial management of corporations”

卜安吉卜安吉

Funds and Cash FlowFunds and Cash FlowChapter 7a: Funds Analysis and

Planning

Financial Management Fall 2007Financial Management Fall 2007

ShanghaiShanghai

Intro. to Financial Managment - 10th Intro. to Financial Managment - 10th Week of ClassWeek of Class

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Reconciliation FY 2003Reconciliation FY 2003 Total Cash In from Operations $ 10,595 MTotal Cash In from Operations $ 10,595 M

Total Cash Out from Investments 4,526 MTotal Cash Out from Investments 4,526 M

Total Cash Out from Financing 3,586 M*) Total Cash Out from Financing 3,586 M*)

Net Cash Position increase Net Cash Position increase $ 2,483 M$ 2,483 M

Cash position at the end of FY 2002: $ 2, 894 MCash position at the end of FY 2002: $ 2, 894 M Cash increase in FY 2003: Cash increase in FY 2003: 2, 843 M2, 843 M Cash position at the end of FY 2003: $ 5.377 M (see Cash position at the end of FY 2003: $ 5.377 M (see

balance sheet)balance sheet)

Incl. exchange rate changes $ 277 MIncl. exchange rate changes $ 277 M


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Cash Flow ProjectionsCash Flow Projections

Remember the most important parts Remember the most important parts of Cash Flow:of Cash Flow:

NOPATNOPAT DepreciationDepreciation Change in Working CapitalChange in Working Capital CCAPEXAPEX


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The value of the companyThe value of the company Remember V= FCF/WACC%Remember V= FCF/WACC%

The value of a company depends on the The value of a company depends on the endless streams of FCFendless streams of FCF

These cash flows need to be estimated These cash flows need to be estimated based on today’s FCF and FCF’s in the based on today’s FCF and FCF’s in the pastpast

You have to calculate the Present Value You have to calculate the Present Value (remember Ch.3) of all these FCF’s(remember Ch.3) of all these FCF’s

Your discount factor is the WACC% (the Your discount factor is the WACC% (the cost of capital) cost of capital)


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Let’s evaluate for J&J (Million Let’s evaluate for J&J (Million $US)$US)

FCF:FCF: FY 2002FY 2002 FY 2003FY 2003 FY2004(eFY2004(e))

FY2005(eFY2005(e))

NOPATNOPAT 65976597 71977197 90909090 98659865

DepreciatiDepreciationon

16621662 18691869 20502050 21802180

Change in Change in WCWC

801801 15401540 -1730-1730 -2280-2280

CAPEXCAPEX -2197-2197 -4526-4526 -2488-2488 -2737-2737

FCFFCF 68636863 60806080 69226922 70287028


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Putting it together…(V = FCF/WACC)Putting it together…(V = FCF/WACC)

FCFFCF 68636863 6080 6080 6922(FY2004) 6922(FY2004) 7028(FY2005)7028(FY2005)

Implied growth FCF after FY 2005: about 2%Implied growth FCF after FY 2005: about 2%

What about WACC%:What about WACC%:

KKee= R= Rff+ + ββ(R(Rmm-R-Rff)= 4 %+ 0.65*(3,5%)= 6.3%)= 4 %+ 0.65*(3,5%)= 6.3% KKdd= LT interest/LT Debt=5.87%= LT interest/LT Debt=5.87% Tax rate= tax/earnings before tax= 30.2% (FY 2003)Tax rate= tax/earnings before tax= 30.2% (FY 2003)

LT Debt= $ 2,955 MLT Debt= $ 2,955 M Shareholders Equity=Shareholders Equity= $ 26,869 M $ 26,869 M

WACC = D/(D+E)*KWACC = D/(D+E)*Kdd*(1-t)+ E/(D+E)*K*(1-t)+ E/(D+E)*Kee= =

2,955/(2,955+26,869)*5.87%*(1-0.302)+26,869/2,955/(2,955+26,869)*5.87%*(1-0.302)+26,869/(2,955+26,869)*6.3%= (2,955+26,869)*6.3%=

6.1%6.1%


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So…the company value of J&J So…the company value of J&J is:is:

PV= PV= FCF (2004)/(1+Wacc%)+ FCF(2005)/(1+Wacc%)^2+….FCF (2004)/(1+Wacc%)+ FCF(2005)/(1+Wacc%)^2+….

+FCF(n)/(1+Wacc%)^n+FCF(n)/(1+Wacc%)^n

(where n=number of years and FCF’s)(where n=number of years and FCF’s) Fill in for J&J:Fill in for J&J: V= V= 6922/(1.061)+ 7028/(1.061)^2+ 7169/(1.061)^3+…+ 6922/(1.061)+ 7028/(1.061)^2+ 7169/(1.061)^3+…+

7028*(1.02)^(n-2)/(1.061)^n=7028*(1.02)^(n-2)/(1.061)^n= V= 6922/(1.061)+ 7028/(1.061)^2+ 7028/(.061-.02)-V= 6922/(1.061)+ 7028/(1.061)^2+ 7028/(.061-.02)-

7028/1.061-7028/(1.061)^2=7028/1.061-7028/(1.061)^2= V=6524+6243+171414-6624-6243= $ 171,314 MV=6524+6243+171414-6624-6243= $ 171,314 M LT Debt is: $ 2955 M So the Equity Value is: $ 171,314M-LT Debt is: $ 2955 M So the Equity Value is: $ 171,314M-

$2955M= $ 168,359M$2955M= $ 168,359M The number of shares outstanding is: 2.968.107.066The number of shares outstanding is: 2.968.107.066 So the Equity Value per share is: $ 168359M/ So the Equity Value per share is: $ 168359M/

2968107066=$ 56.722968107066=$ 56.72 The Stock Market Price is: $ 57.10 (closing 28 sep 2004)The Stock Market Price is: $ 57.10 (closing 28 sep 2004)


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Market Price J&JMarket Price J&J


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Homework Assignment: Homework Assignment: ValuationValuation

Review the J&J example of valuationReview the J&J example of valuation

Estimate the future cash flows of your Estimate the future cash flows of your company (use Valueline docs.)company (use Valueline docs.)

Estimate the future growth % of FCF Estimate the future growth % of FCF based on past and present performancebased on past and present performance

Estimate WACCEstimate WACC

Estimate Company ValueEstimate Company Value Calculate the intrinsic value per shareCalculate the intrinsic value per share

Compare the market price…Compare the market price…

Download the share performance of your Download the share performance of your company’s share (see example J&J)company’s share (see example J&J)


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End of the Section – Chapter 7bEnd of the Section – Chapter 7b

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Introduction to Financial Management FIN 102 – 9 th Week of Class