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FCFFginzu.xlsFCFFginzu.xlsUsing the Valuation SpreadsheetUsing the Valuation Spreadsheet

Aswath Damodaran

A podcast

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OverviewOverview

Suited for: most non-financial service firms What the spreadsheet tries to do:

– Value the operating assets of the firm by disconting the cashflows to the firm at the cost of capital

– Augments this value with the value on non-operating assets such as cash and cross holdings

– Estimates the value of equity and equity per share

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A picture of the model…A picture of the model…

Cashflows from existing assetsCashflows before debt payments, but after taxes and reinvestment to maintain exising assets

Expected Growth during high growth periodGrowth from new investmentsGrowth created by making new investments; function of amount and quality of investments

Efficiency GrowthGrowth generated by using existing assets better

Length of the high growth periodSince value creating growth requires excess returns, this is a function of- Magnitude of competitive advantages- Sustainability of competitive advantages

Stable growth firm, with no or very limited excess returns

Cost of capital to apply to discounting cashflowsDetermined by- Operating risk of the company- Default risk of the company- Mix of debt and equity used in financing

Determinants of Firm ValueHow well do you manage your existing investments/assets?Are you investing optimally forfuture growth?Is there scope for more efficient utilization of exsting assets?

Are you building on your competitive advantages?Are you using the right amount and kind of debt for your firm?

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Inputs: Financial Statement numbersInputs: Financial Statement numbers

Master Input SheetDo you want to capitalize R&D expenses? No ! Yes or NoDo you want to convert operating leases to debt? Yes ! Yes or NoDo you want to normalize operating income? No

InputsFrom Current FinancialsCurrent EBIT = $3,455.00 ! If negative, go back and choose to normalize earnings.Current Interest Expense = $0.00Current Capital Spending $3,100.00Current Depreciation & Amort'n = $486.00Tax Rate on Income = 35.00% Previous year-endCurrent Revenues = $12,154.00 8488Current Non-cash Working Capital = ($404.00)Chg. Working Capital = ($700.00) Previous year-endBook Value of Debt = $0.00 0Book Value of Equity = $11,722.00 7191

Cash & Marketable Securities = $2,016.00Value of Non-operating Assets = $7,032.00

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Capitalizing R&DCapitalizing R&D

R & D ConverterThis spreadsheet converts R&D expenses from operating to capital expenses. It makes the appropriate adjustments to operating income, netincome, the book value of assets and the book value of equity.

InputsOver how many years do you want to amortize R&D expenses 5Enter the current year's R&D expense = $1,594.00Enter R& D expenses for past years: the number of years that you will need to enter will be determined by the amortization periodDo not input numbers in the first column (Year). It will get automatically updated based on the input above.

Year R& D Expenses-1 1026.00 ! Year -1 is the year prior to the current year-2 698.00 ! Year -2 is the two years prior to the current year-3 399.00-4 211.00-5 89.0000000

OutputYear R&D Expense Unamortized portion Amortization this year

Current 1594.00 1.00 1594.00-1 1026.00 0.80 820.80 $205.20-2 698.00 0.60 418.80 $139.60-3 399.00 0.40 159.60 $79.80-4 211.00 0.20 42.20 $42.20-5 89.00 0.00 0.00 $17.800 0.00 0.00 0.00 $0.000 0.00 0.00 0.00 $0.000 0.00 0.00 0.00 $0.000 0.00 0.00 0.00 $0.00

0 0.00 0.00 0.00 $0.00

Value of Research Asset = $3,035.40 $484.60

Amortization of asset for current year = $484.60

Adjustment to Operating Income = $1,109.40 ! A positive number indicates an increase in operating income (add to reported EBIT)

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Capitalizing Leases…Capitalizing Leases…

Operating Lease ConverterInputsOperating lease expense in current year = $121.00Operating Lease Commitments (From footnote to financials)

Year Commitment ! Year 1 is next year, ….1 156.00$ 2 143.00$ 3 122.00$ 4 109.00$ 5 97.00$

6 and beyond 448.00$

OutputPre-tax Cost of Debt = 5.75% ! If you do not have a cost of debt, use the ratings estimator

From the current financial statements, enter the followingReported Operating Income (EBIT) = $3,455.00 ! This is the EBIT reported in the current income statementReported Debt = $0.00 ! This is the interest-bearing debt reported on the balance sheet

Number of years embedded in yr 6 estimate = 4 ! I use the average lease expense over the first five yearsto estimate the number of years of expenses in yr 6

Converting Operating Leases into debtYear Commitment Present Value

1 156.00$ $147.522 143.00$ $127.873 122.00$ $103.164 109.00$ $87.165 97.00$ $73.34

6 and beyond 112.00$ $295.14 ! Commitment beyond year 6 converted into an annuity for ten yearsDebt Value of leases = 834.19$

Restated FinancialsDepreciation on Operating Lease Asset = $92.69 ! I use straight line depreciationAdjustment to Operating Earnings = $47.97 ! PV of operating leases * Pre-tax cost of debtAdjustment to Total Debt outstanding = 834.19$

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Normalizing Earnings..Normalizing Earnings..

Normalizing EarningsApproach used to normalize earnings = 3

If historical average,Average Earnings before interest and taxes = 3500

If historical average ROC,Historical average pre-tax return on capital = 22%

If sector marginPre-tax Operating Margin for Sector = 14.72% ! Look at industry average

Normalized Earnings before interest and taxes = $1,788.67

Worksheet for normalization (Last 5 years of data)-5 -4 -3 -2 -1 Total

Revenues 2032 2376 2779 3155 3248 13590EBIT 186 454 529 448 383 2000Operating Margin 9.15% 19.11% 19.04% 14.20% 11.79% 14.72%

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Market InputsMarket Inputs

Market Data for your firmIs your stock currently traded? YesIf yes, enter the following:Current Stock Price = $64.88Number of shares outstanding = 6,890.00Market Value of Debt = $0.00If no, enter the followingWould you like to use the book value debt ratio? NoIf no, enter the debt ratio to use in valuation 35%

General Market DataLong Term Riskfree rate= 4.25%Risk premium for equity = 4.91%

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Ratings and Options (if any)Ratings and Options (if any)

RatingsDo you want to estimate the firm's synthetic rating = NoIf yes, choose the type of firm 2If not, what is the current rating of the firm? BBBEnter the cost of debt associated with the rating = 5.75%

OptionsDo you have equity options (management options, warrants) outstanding? YesIf yes, enter the number of options 439.00Average strike price $22.52Average maturity 6.8Standard Deviation in stock price 40%Do you want to use the stock price to value the option or your estimated value? P

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A high growth period?A high growth period?

Valuation InputsHigh Growth PeriodLength of high growth period = 12Beta to use for high growth period for your firm= 1.43Do you want to keep the debt ratio computed from your inputs? YesIf yes, the debt ratio that will be used to compute the cost of capital is 0.18%If no, enter the debt ratio that you would like to use in the high growth period 7.00%Do you want to keep the existing ratio of working capital to revenue? NoIf yes, the working capital as a percent of revenues will be -3.32%If no, enter the ratio of working capital to revenues to use in analysis 12%Do you want to compute your growth rate from fundamentals? YesIf no, enter the expected growth rate in operating income for high growth period 15%If yes, the inputs to the fundamental growth calculation (based upon your inputs) areReturn on Capital = 28.37%Reinvestment Rate = 110.70%Do you want to change these inputs? NoReturn on Capital = 16.00%Reinvestment Rate = 80.00%

Do you want me to gradually adjust your high growth inputs in the second half? Yes

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Stable growth inputsStable growth inputs

Stable Growth PeriodGrowth rate during stable growth period = 4.00%Beta to use in stable growth period = 1.00Risk premium for equity in stable growth period = 4.91%Debt Ratio to use in stable growth period = 0.18%Pre-tax cost of debt in stable growth period = 5.25%Tax Rate to use in stable growth period = 35.00%To compute the reinvestment rate in stable growth, you have two optionsDo you want to compute reinvestment needs in stable growth based on fundamentals? YesIf yes, enter the return on capital that the firm will have in stable growth 12.00%If no, enter capital expenditure as % of depreciation in stable growth 120%

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Valuation Summary and Diagnostics..Valuation Summary and Diagnostics..

Length of High Growth Period = 12 Forever

Growth Rate = 31.41% 4.00%

Debt Ratio used in Cost of Capital Calculation= 0.18% 0.18%

Beta used for stock = 1.43 1.00

Riskfree rate = 4.25% 4.25%

Risk Premium = 4.91% 4.91%

Cost of Debt = 5.75% 5.25%

Tax Rate = 35.00% 35.00%

Return on Capital = 28.37% 12.00%

Reinvestment Rate = 110.70% 33.33%

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Reading the OutputReading the Output

Present Value of FCFF in high growth phase = $14,465.99

Present Value of Terminal Value of Firm = $109,386.19

Value of operating assets of the firm = $123,852.18

Value of Cash, Marketable Securities & Non-operating assets = $9,048.00

Value of Firm = $132,900.18

Market Value of outstanding debt = $834.19

Market Value of Equity = $132,065.99

Value of Equity in Options = $13,853.02

Value of Equity in Common Stock = $118,212.96

Market Value of Equity/share = $17.16