Using Financial Statement Models for Valuation

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Using Financial Statement Models for Valuation

• MGT 4850
• Spring 2008
• University of Lethbridge

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Corporate Valuation

• Building Pro forma model
• Calculating the relevant free cash flows
• Calculating the cost of capital for the free cash
  flows
• Determining the terminal value of the firm
• Properly discounting the free cash flows
• Sensitivity analysis

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Farmers Bagels Inc.

• Balance sheets and Income Statements for 1995 and
  1996 (p.90)
• Ratio analysis (p. 91)
• Sales predictions (2001)? terminal value

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Model Assumptions

• Drop the distinction between product sales and
  other income
• Cost of goods sold -40
• Selling, general and administrative expenses
  (-1/y)
• Income tax rate 41.5
• Cash cushion-declining proportion of sales
• Accounts receivable 22 of sales

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Model Assumptions II

• Inventory 5 of sales
• Property and equipment at cost 70 in 96 to 40
  in 2001.
• Straight line deprec. at 10 of prop. Cost
• Accounts payable and accrued expenses 1/y till
  20
• Income tax payable 25
• Other curr. liabilities 1 of sales
• No dividends, no new equity (debt is the plug).

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MODEL
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INCOME STATEMENT
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Balance Sheet
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Negative Debt

• If total value of minimum cash balance plus all
  other assets is greater than current liabilities
  the company needs debt.
• Cash ratioSalesAcc. Rec. Inventory
  Prepaid exp. Net property and equipm. Curr.
  Liab. Com. Stock Ret. Earn. lt 0
• then debt is set at 0
• p.94 pro forma model

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Deriving the FCF (p.90)

• Positive profit, negative cashflows

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Projected FCF

• 1999 first positive cash flow (p.97)

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Proposition one
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Agency costs
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As
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WACC

• WACC E/(ED)re D/(ED) rD(1-Tc )
• CAPM based averages for the industry

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Industry Average WACC 20.43 and terminal value
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Sensitivity Analysis

• Value as a function of WACC (row) and terminal
  growth rate (column)

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Sensitivity Analysis

• Share price is calculated as a unction of two
  variables

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Terminal Value Proxies