Transcript Document
Strategic Capital Group Workshop #4: Bond Valuation Agenda Operational Review Present Value and the Time-Value of Money Finding a Terminal Value Valuing a Company and its Cash Flows Final Thoughts An Introduction to Present Value Would you rather have $100 today or $110 dollars a year from now? We have a choice… Today $100 1-Year from Now $110 5% InterestWhat if there was a way to figure out how much money in the future is worth in Rate today’s terms… Future Value = Present Value(1+Interest Rate)^(Number of Years) FV= PV*(1+i)^n FV= 100*(1+.05)^(1) FV= $105 How about now? Today $100 5-Years from Now $105 FV=PV*(1+i)^n FV=100*(1+.0067)^(5) FV=$103.39 Going back to the future We can also do the opposite of calculating future value. We can discount a future value back to the present value to make direct comparisons: FV (1 + i) ^ n = PV * (1 + i) ^ n (1 + i) ^ n FV (1 + i) ^ n We also refer to this as the “discount rate” = PV The previous example: Today $100 5-Years from Now $105 FV PV = (1 + i) ^ n 105 PV = (1 + .0067) ^ 5 PV = $101.55 So… A dollar today is worth more than a dollar in the future because we can invest the dollar today and get interest by the time the future comes around. We refer to this as the time-value of money. But… When will a stranger ever offer me the choice of having $100 now or $105 later? What use do I have for this stuff? We use present value to calculate terminal value and cash flow value of a company in order to form a DCF, and can use it to calculate internal rate of return. Terminal Value • Holding a company forever vs making and exiting an investment • Methods to value both of them • Exit Multiple Method Finding a multiple • Use current multiple for the company, industry average, or predict your own • Try to be accurate, this is pretty important Remember TEV • Since you are valuing the whole company, use a TEV multiple • What can we put TEV over again? Finding a Discount Rate • This is where it starts to get hard • What do you think the firms discount rate should be? • Cost of its alternatives WACC • Weighted Average Cost of Capital • Current Cap Structure • Cost of Debt • Tax effect Cost of Equity Formula for WACC Finally discounting it all • Take all the cash flows and discount them • Make your Terminal Value a final year cash flow • Discount it all back and you get the total value of the firm Finishing Up • From firm value, how do we get to our share price? • Remember what Enterprise Value is And that’s it • The last two sessions covered upper division finance • Don’t worry if you don’t understand, just ask for help • To practice finance, always actually build the model Further Exercises • What are your inputs? – What if you’re wrong? • What about Companies in general, what is a good company? • What about stuff outside of equity?