DES Chapter 9 1

DES Chapter 9

The Starting Point for Corporate Valuation: Historical Financial

Statements

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Overview of Valuation Process - Home Depot

Input historical financial statements into the file: Home Depot (for Ch 9-11, WACC, default inputs).xls. (This file will be called Home Depot.xls for short.)Provide projections for key performance drivers. Obtain preliminary intrinsic value estimate. Refine projections and perform sensitivity analysis to determine impact of plausible alternative performance scenarios.

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Steps to Estimate Value Using the Corporate Valuation SpreadsheetThe valuation spreadsheet has seven interrelated worksheets, each of which performs an essential function:

(1) Proj & Val(2) Inputs(3) WACC(4) Hist Analys(5) Condensed(6) Comprehensive(7) Actual

(next slide)

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Steps to Estimate Value (Continued)

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Steps to Estimate Value (Continued)Step 1: Find the actual historical financial

statements for a company, and insert them into the Actual worksheet. (Chapt 9)

Step 2: Put the actual financial statements into a standardized format using the Comprehensive worksheet. The comprehensive format has just about all the entries needed to capture variations in the formats of most companies’ financial statements. (Chapter 9 and appendix)

(continued)

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Steps to Estimate Value (Continued)Step 3: The spreadsheet will condense the

standardized format into statements on the Condensed sheet. These sheets have enough detail to accurately value a firm but do not have so much detail that the analysis becomes overly complicated. (Chapter 10 and appendix)

Step 4: The Hist Analys worksheet begins the analysis by calculating the historical free cash flows and key ratios. (Chapter 10)

(continued)

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Steps to Estimate Value (Continued)

Step 5: The WACC worksheet is structured to lead you through the calculation of the firm’s cost of capital. (Chapter 11)

Step 6: Project the financial statements by choosing key inputs, such as the growth rate in sales, the ratio of costs/sales, interest rates, etc., on the Inputs worksheet. (Chapter 12 and appendix)

(continued)

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Steps to Estimate Value (Continued)

Step 7: The Proj & Val worksheet takes your chosen inputs for the key ratios and projects the financial statements, calculates free cash flows and performs a valuation analysis. (Chapter 13)

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The “Actual” Worksheet

Get historical data for a company. The best sources are Thomson ONE - Business School Edition, or Thomson Research (formerly Global Access Disclosure) . Income Statements Balance Sheets Statement of Cash Flows

Paste the data into the “Actual” worksheet This has already been done for Home Depot.xls.

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The “Comprehensive” SheetA fact - details of financial statement formats vary from one company to another, and even from one year to the next for the same company.

The problem - to “standardize” financial information across firms and years so it can be used in analysis.

The solution - “mapping” the financial data into a common format that contains only the essential level of detail necessary for valuing a company.

(continued)

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The “Comprehensive” Sheet (continued)

The Comprehensive sheet is long and has many items, but this enables it to “capture” Actual data in virtually any format (see next slide).

Even though the Comprehensive sheet is long, it is in a standardized format.

(continued)

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The “Comprehensive” Sheet (continued)

To link “Actual” to “Comprehensive,” we “map” the data from the Actual Worksheet into the Comprehensive Worksheet.

Find an entry on the “Comprehensive” sheet that matches an “Actual” entry. Enter a formula on the “Comprehensive” sheet that

refers to the appropriate “Actual” cell. But we’ve already done this for you!

(continued)

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The “Comprehensive” Sheet (continued)

Consider the “NON-OPERATING INC” item in cell B70 of Home Depot’s “Actual” income statement:

(continued)

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The “Comprehensive” Sheet (continued)

The item is “mapped” into cell B31 of the “Comprehensive” worksheet by entering the formula “=Actual!B70” in that cell (next slide):

(continued)

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formula “=Actual!B70”

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The “Comprehensive” Sheet (continued)

Data from either Thomson ONE - Business School Edition, or Thomson Research has up to 10 years of annual data in a standardized format.The mapping in the valuation spreadsheet is already developed for this format. Should you use data from another source, you will adjust the formulas accordingly.

Detailed guidelines for this task are provided in Exhibits 9-4 through 9-7 and elsewhere.