Adjusted Present Value : The Value Of Knowing Your Value

Valuations depend on forecasts. The reliability of the forecasts will then depend heavily on complete analysis of the industry, in addition to the evolving changes in the economy. It also requires understanding of the business and financial characteristic of the industry.

Free Cash Flow = Sales Revenues – Operating Costs and Taxes – Required Investments in Operating Capital. Weighted Average Cost of Capital (WACC) is affected by market interest rates, market risk aversion, cost of debt, cost of equity, firm’s debt/equity mix, and firm’s business risk. Therefore, free cash flows and the weighted average cost of capital interact to determine a firm’s value by the following equation:

10. What is the correct capital structure and weighted average cost of capital for discounting the investment’s free cash flow. Assume a 35% tax rate. A correct response requires that you define capital structure and Weighted Average Cost of Capital (WACC) with a formula. When defining a term with a formula be sure that all the variables are also defined.

Several internal factors can influence the valuation of a company, however, in the subsequent are some factors that will assist management in protecting its shareholders. The first reason is the desire to generate profits for the company, as a profitable firm will attract investors. Secondly, the need to improve the management of a company can lead to valuation as the information can be used to spur growth. Valuation will assist in understanding some of the factors affecting the value of the company such as client relationships, financials, image, technology employees, and marketing. Proper management is implemented after identifying the issues affecting the organization’s value. Thirdly, communicating to the public accurate and current information is essential in attracting investors and maintaining transparency, which builds the company image.

It is important to know the proper technique and method of valuing a company because different people may have different ways of assessing the value; it is also important in understanding the bank’s method of appraising and valuing a company or business

in our calculations, as this company exhibited dramatic value differences to others in the sample, (likely to skew our results and prove misleading). Using the average of the revised sample field for each ratio, we inserted Torrington’s values where appropriate to generate an entity value. The findings generated two values for Torrington, 606 million and 398 million. Taking the average of these two numbers, Torrington exhibited a relative value of 502.41 million. Because of the lack of related information given in the case, and the often large differences in measures amongst competitors, different capital structures, internal management strategies, there remained many unknowns in our model. We decided it would be best to use this valuation to reaffirm our assumptions in our DCF valuation. (Please see exhibits)

The mixture of debt-equity mix is important so as to maximize the stock price of the Costco. However, it will be significant to consider the Weighted Average Cost of Capital (WACC) as well so that it can evaluate the company targeted capital structure. Cost of capital (OC) may be used by the companies as for long term decision making, so industries that faced to take the important of Cost of capital seriously may not make the right choice by choosing the right project(Gitman’s, ).

1. Determine the Weighted Average Cost of Capital (WACC) based on using retained earnings in the capital structure.

The topic of valuation of early-stage companies, patents, and technologies have been a topic of study since the late 1980’s. Since the work published by Amit et al (1990) a body of management science literature was published around the value relevance of non-financial information that quantifies the human capital of the founding team. Amit et al posit that

Most of the corporations calculate WACC for giving investors an estimate on profitability and for being able to weight future projects. We are presented with Boeing current bonds, which constitute the long term debt portion of capital, and with Boeing’s assets which constitute the equity portion of capital. No other weighted entities (such as preferred shares) are considered. The debt/equity ratio would help with the calculation of weights. Boeing would need to earn at least 15.443% return on its investments (including the 7E7 project) in order to maintain the actual share price.

There are many valuation methods that could be used to evaluate this company. Finding a method that valuates the stand-alone value is difficult. The stand-alone value should be dependent upon the firm’s own assets and projected future income. We decided to evaluate this company based upon two methods: The Discounted Cash Flow Method and the Comparable Companies Method.

The Shareholder Value Analysis (SVA) was created in 1986 by Dr. Alfred Rappaport and LEK/Alcar Consulting Group. Dr. Rappaport presented the idea of Shareholder Value Analysis (SVA) in his book “Creating Shareholder Value” in 1986. It is based on the Discounted Cash Flow Model. It has gained publicity and it’s now an established performance measurement tool. However, it is not as widely used as the Economic Value Added method (EVA). The basis of Shareholder Value Analysis (SVA) is probably almost the same as Economic Value Added (EVA) (www.5paisa.com/scho/ch09.html,www.lek.com)

Using the WACC method, we first derived UST’s return on assets (rA). Since we are given the firm’s market capitalization, debt and cash, we calculated the current Enterprive Value of UST. We were then able to derive the return on asset as a function of UST’s market value. Specifically, we followed the below steps:

Assessment of the value of BAE Systems based on the application of suitable cash flow based valuation techniques

Many of the techniques used to value private companies are not that different from public companies. The simplest method to valuing a private company is to use comparable company analysis and estimate discounted cash flow. Comparable company analysis uses actual transaction multiples and premiums paid in comparable transactions to value target private company. This approach observes transactions with similar attributes such as, industry