Business Valuation

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Business Valuation

• Whats an apple tree worth?

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(No Transcript)
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Old Man and Apple Tree

• Consider the following valuations
• Salvage
• Current production
• Future production
• Market price
• Book value
• Balance Sheet

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Time value of money

• What is the value of 1?

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Time value of money

• Lets say I offer you either
• 500 today or 800 in three years.
• Which is better?

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Time value of money

• 800 in 3 years is better than 500 today
• (assuming a 10 rate for money)

Invest 500 10 Balance
Year 1 Year 2 Year 3 50.00 55.00 60.50 550.00 605.00 665.50
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Time value of money

• 500 today is better than 800 in 3 years
• (assuming a 20 rate for money)

Invest 500 20 Balance
Year 1 Year 2 Year 3 100.00 120.00 144.00 600.00 720.00 864.00
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Time value of money

• Mathematically
• 500 (1 .20)3 864

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Time value of money

• What if somebody offers you
• 864 in three years. Or 1000.
• What is it worth to you?

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Time value of money

• 864 (discounted at 20 rate) 500

Discount 864 End of year 20 Start of year (divide by 1.20)
Year 3 Year 2 Year 1 864 720 600 144 120 100 720 600 500
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Time value of money

• 1000 (discounted at 20 rate) 579

Discount 1000 End of year 20 Start of year (divide by 1.20)
Year 3 Year 2 Year 1 1000 833 694 167 139 115 833 694 579
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Time value of money

• Mathematically
• 1000 / (1 .20)3 578.70

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Old Man and Apple Tree

• Value of cash flows?
• (from Class Notes)

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Precision Tools

• Net income  390,000
• Depreciation 250,000
• Bonuses 120,000
• Net cash flow 760,000 
• Adjusted CF 500,000
• Discount rate 33
• Growth rate 8
• Capitalization rate 25
• (discount minus growth)
• Cap multiplier 4
• DCF 2,000,000

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Precision Tools

• Comparables Method
• Company X
• Price 4,000,000
• Adj Earnings 520,000
• Precision Tools
• Price ??
• Adj Earnings 760,000
• 4000 PT Price
• 520 760
• PT Price 5,850,000

• Use P/E ratio
• Company X
• Price 4,000,000
• Adj Earnings 520,000
• P/E 7.7
• Precision Tools
• Price P/E Earnings
• Adj Earnings 760,000
• 7.7760,000 5,850,000

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Price-earnings ratio

• Precision Tools
• Price 2,000,000
• Earnings 390,000
• P/E 5.13

• U.S. stock market
• (average stock)
• Price 36
• Earnings 1.80
• P/E 20
• Irrationally exuberant?

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Precision Tools