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7/25/2019 Cfroi - Method
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What Return to expect depending on the companies industry?
Historical - Rate of return of number 1 in industry through time
- Industry return as a whole
5, 1, !, ", # years return
$urrent - Rate of Return
%orward
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&'erage performance of companies based on life
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H()* +aluation odel
('er the long term, rms. /$R streams re0ect managerial sill andcompetition2 *he sill le'el of management is re'ealed in the trac records
of rms2 While the le'el of $%R(Is is a ey indicator of management sill,'ariability of $%R(Is and the rate of asset growth are others2
$onsistent with the competiti'e life cycle, empirical results indicate thatcompetition tends to compress $%R(Is toward the a'erage2 *he directionand magnitude of change o'er four-year spans for rms grouped by$%R(I was3 41 top-6uintile-$%R(I rms faded downward the most7 4!second-6uintile rms faded downward7 4" middle-6uintile rms, those with$%R(Is near the a'erage, faded little7 4# fourth-6uintile rms faded
upward7 and 45 bottom-6uintile rms faded upward the most2 *he fadee8ects of $%R(I 'ariability and asset growth also were consistent with life-cycle reasoning2
Sustainable growth for any year is the asset growth that would result froma continuation of the existing capital structure, the existing di'idend-payout policy, and the $%R(I for the same year2 H()*.s growth-ratecalculation procedures resol'e end-of-year and beginning-of-year dataproblems2
Warranted-'alue calculations are traced step-by-step for an actualcompany2 In treating all companies similarly and ob9ecti'ely, and in beingconsistent with the complete $%R(I model, H()*.s life-cycle proceduresser'e as useful baselines for organi:ing data and thought, but they shouldnot be considered sacrosanct2 If users ha'e better information about R(Ison future pro9ects and asset growth for near-term than is implied by thebaseline procedures, it should be used2
*he ad'antages of a total system way of thining become clear inenumerating the di8erent e8ects of 'ariables in'ol'ed with 6uantifying theimpact of share repurchase2
%inally, hypotheses are suggested for empirical tests to in'estigate whyrms. 6uarterly earnings surprises a8ect stoc prices so di8erently2 *heyin'oe the ey $%R(I model components of 4a $%R(I le'el, 4b importanceof future in'estments to warranted 'alue, and 4c the maret.s assessmentof management.s sill2
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$%R(I an example
1 ;resent 'alue 4;+ of the in'estment3 <ross
! ;ayment 4;* or cash 0ow3 <ross cash 0ow
" ;ro9ect life 4/;=R3 <ross asset life estimate
#
<ross $ash %low #
Year 1
In0ation &d9usted gross In'estment !
11.2.1 Gross Investments
Depreciating assets *he rst step when calculating gross in'estment is to separate deprecia
Depreciating assets
1 =(> ad9usted gross plant 4ad9usted xed assetsaccumulated depreciati
! In0ation ad9ustment for gross plant
" $onstruction in progress
# $apitali:ed operating leases5 $apitali:ed research and de'elopment
@ In0ation ad9usted gross plant recaptured
A /on-depreciating assets 4net woring capital
B <ross In'estment
Example Theory
1&2 EOY Ad!sted Gross plant " In#ation ad!stment
A!stment gross plant
<ross ;lant 4ad9usted xed asset accumulated depreciation
- )and
- $onstruction in ;rogress 4$I;
In0ation ad9ustment
B *otal ad9usted <ross ;lant
%uture 'alue 4%+3 /on-depreciating assetsconstructionin-progress2 *he logic is that the
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Asset delayering $Example%
>ears -# -"
/ominal <rowth Rate of asset !!2#C !!2#C
&sset )ayers 4$&;=D "! "E!
In0ation !C !C
In0ation &d9ustement !@ !#In0ation ad9usted gross plant "#A #1@
In0ation ad9ustment factor
'apitali(ed operating leases
Ta)le 11. 'apitali(ing leases
/ominal bond rate 52C
=xpected In0ation Rate !25C
Real debt rate 4i !2##C 4/omFIn0atio
&sset )ife 4nper 1)ease expense 4pmt 1
$apitali:ed lease 4p' GA
* 'apitali(ed research and development
*able 1125 $apitali:ed RJ
>ear Infation rate
-# 1 !2AC-" 11 !2AC
-! 115 !2AC
-1 1!5 !2AC
1" !2AC
In0 ad9 5
+ In#ation ad!sted gross plant recapt!red
$ompany & buys
<ross plant 1
&ccumulated depr 5
,et -lant *
%air 'alue ad9ustment 4assume B net asset
RJ =xpenseper IFK
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/et ;lantF <ross plant ratio 5C
L/et plantMFL/;F<; ratioM B A di'ided by
)ess3 reported gross plant
=6ual3 gross plant recaptured
&d9usted post ac6uisition $ompany &
<ross plant as reported post ac6uisition
;lus3 <ross plant recaputered
=6ual7 &d9 <; recaptured
Ji'ided by net plant as reported post ac6uis
E/!al0 Ad ,-G- ratio
11.2.2 ,ondepreciating assets
/on-depriciating assets include woring capital and other non-depreciati
$onceptually, non-deprecating assets include3
/on-Jepriciating assets
$urrent assets less in'entory
- $urrent non-debt monetary liabilities
In0ation ad9usted in'etories
In0ation ad9usted land
(ther tangible assets
/on-depriciating, non-goodwill intagible assets
B /on-depriciating assets
11.2.3 -roect 4i5e
Gross plant project life
)ife B 4&d9usted gross plant <ross ;lant recaptured F Jepreciating
Capitalized leases
Kince $%R(I is e6ui'alent to the weighted a'erage return on all of a rm
life2 *here are three inputs into the pro9ect life calculation3 ad9usted grospro9ect life3
)eased assets genrally consist of a similar asset mix as capital assets2 If
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Capitalized leases
&sset
)ife Historic $ost
%ixes &ssets 1! 5
$apitali:ed leases "
$apitali:ed RJ # !
*otal 1
Harmonic ean
11.2. Gross cash #o6
/et income after tax
Jepreciation and amorti:ation
Interest expense
Rental expense
RJ expense
onetary holding gain 4loss %I%( prots
;ension expense 4%&KO A
inority interest
F- Kpecial items 4after tax
B In0ation-ad9usted gross cash 0ow
plant it should be used2
*he capitali:ed RJ pro9ect life is the same as the number of years RJ
opinion gi'en the company and industry
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in'estment 4<I in the company ad9usted for in0ation2 <ross in'estment can be thought
4<$% ad9usted for in0ation and non-cash expenses2 <$% is the cash 0ow generated fro
by the depreciation expense and total depreciating assets2
/on-Jepreciating &sset
# #
! " #
ing and non-depreciating assets2 *he basic ad9ustments are as follows3
on
l B <ross in'estment
11.
Ex
Gro
"#E#"
!"A@
"A"1E B
Fig
hich include woring capital 4current assets less current liabilities and other non-deprese non-depreciating assets are released at the end of the pro9ect, or rein'ested in anoth
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A!
<ro
-! -1 >R <; -
!!2#C !!2#C !!2#C -
# 5 A1E 2* B
!C !C !C
1E 1! ! In#5 5EE A1E !5! <; l
1.33 In0
Hist
Rea
In0
In#
'a
-1 Ren
;ro9Rea
'!r
'a
4!
pre
In0ation %actor In0 ad9 RJ *ele
1211! 111 5-y12" 11E # R
1255 1!1 " R
12!A 1! ! R
12 1" 1 R
@1 R
In0
In0
$ompany O Gro
In0
# 1! 1# <ro
" 5 <
1 9 @ In#
&s Reported postac6uisition $ompany &
*he *rue postac6uisition
balance sheet
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!5C 5C #"C +od
5C B 1# De
1! In0
2 $
$ $
1! I
! *ota
1#
ition A
*:
,o
ng items such as land2 $ur
$,et
)an
)an
In5
/et
I
I
(
;
" *ota
Gro
*ota
*ota
In#
11.
Gro&d9
<
&d9
Jep
Gro
*hr
Ns pro9ects, and essential part of the $%R(I calculation is the pro9ect
s plant pro9ect life, capili:ed lease pro9ect life, and capitali:ed RJ
the leased assets ha'e a di8erent now asset life than that of gross
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Thr
Tot
In0(pe
Weighting Harmonic mean
$ap
#1@2@@@@A 1 5 "!C "2E <!
"A5 125 #5 !EC !2" Ole
5 " @ "EC 125 Ass
1!E12@@@A 155 A2A
9.9
11.
>o
$ur
$
,et
x C>o
=I=
in'
D C
%I%
D C
=I=
Gro/et
J
I
R
%I
;
is capitali:ed2 *he capitali:ation period should re0ect the analyst.s
ImpliedJepcreciati
on
&sset lifecycle
&sset lifecycle
in'estment
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&
F-
Tot
11
Gro
In0
In0
In0
In0
;ro9
'=
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f as the gross amount in'ested in the company2
the gross in'estment2
$%R(I @2"@C
2.1 Gross Investments
mple 7oda5one
ss -lant
)and and Ouildings
achinery and e6uipment
$onstruction in progress
*angible and intangible asset imparement 4%&KO 1!1
*otal <ross plant
re 11.3
iating assets such as land andr pro9ect2
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tment gross plant
s ;lant 4ad9usted xed asset accumulated depreciation
)and
$onstruction in ;rogress 4$I;
*otal ad9usted <ross ;lant
tion Ad!stment 5or gross plant ife 4<;FJepr exp, "-year median
tion ad9ustment factor
orical <rowth Rate
l Historical $ost
tion ad9ustment
tion ad!sted gross plant
itali(ed leases
t =xpenses 4pmt
ect life 4n-roundedl debt rate 4per a corp bond rate
rent gross leased property
itali(ed 8&D Amo!nt In#ation =ac
5, /ote 5 and
ious years
com RJ life years 5
ar in0ation ad9ustment factor 12#1E! =xpense !1 A! 1211
=xpense !! 11 12
=xpense !" 1@# 125
=xpense !# 1A1 12"
=xpense !5 !1E 12
tion &d9usted $apitali:ed RJ A"@
tion C !2AC
ss plant recapt!red
tion &d9ustment factor
s plant recaptured
; recaputered in0ation ad9ustment
tion ad!steed gross plant recapt!re
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afone Jepreciating &ssets
reciating Asset
tion &d9usted gross plant
onstruction-in-progress
apitali:ed leasesapilali:ed RJ =xpense
0ation ad9usted gross plant recaptured
l In0ation ad9usted depreciating assets
Depreciating Asset
ent assets less in'entory
urrent non-debt liabilities monetary assets
In0ation ad9ustment factor
tion ad!sted land
monetary assets
'entory
0ation ad9usted land
ther tangible assets
epaid ;ension
ad9ustmentl In0ation ad9usted non depreciating assets
ss Investment
l in0ation ad9usted non-depreciating assets
l in0ation ad9usted depreciating assets
tion ad!sted gross investment
2.3 -roect 4i5e
ss plant proect li5e gross plant
ross plant recaptured
gross plant for asset life
reaciation expense
ss -lant -roect li5e ;
e year median <; pro9ect life
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eeyear median G- proect li5e
l proect li5e
tion ad9usted gross plant <; recapturedrating leases
itali:ed RJ
o5 depricating assets
ded asset life using implied depreciation
et 4i5e !sed 5or '=8OI calc!lation $ro!nded%
2. Gross cash #o6
etary ?olding gain $loss%
ent assets less in'entories - O(>
urrent non-debt liabilities - O(>
>onetary assets $lia)ilities% @OY
change in <J; de0atoretary holding gain $loss%
prots
ntory boo 'alue - O(>
of in'entory using %I%(
in'entory
change in ;;I
prots
ss 'ahs =lo6 income after tax
preciation and amorti:ation
terest expense
J expense
ntal expense
onetary holding gain 4loss
%( prots
nsion expense 4%&KO A
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inority interest
ssociate and P+ income
Kpecial items 4after tax
l in#ation ad!sted gross cash #o6
3 '=8OI 'alc!altion 5or 7ODA=O,E
ss 'ash =lo6
tion ad9usted depreciating assets
tion ad9usted non-depreciating assets 4%+
tion ad9usted gross in'estment 4;+
tion ad9usted gross cash 0ow 4pmt
ect life 4nper
OI calc!lation BExcel =!nction ; rate$
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etrics
Amo!nt <o!rce
1"!@ /ote 1!
""@1A /ote 1!
/ote 1!
$alculated
"#E#"
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Amo!nt <o!rce
"#E#" /ote 1!
/ote 1!
/ote 1!
"#E#"
Amo!nt <o!rce years
12@ In0ation calculation In0ation %a
1E2@C $alculated >eaar
"#E#" ;er abo'e 5
!"A@ $alculated
3931C
1
Amo!nt <o!rce
1""A /ote 5
2 $alculated 15"25!C =xternal data
E1"
!
or In#ation ad!sted
8&D
11E
1A"
1A@
!1E
A@A
Amo!nt <o!rce
12@ pr2 <ross plant
"!11 $alculated
!12" $alculated
"#!E
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Amo!nt <o!rce
"A"1E $alculated
/ote 1!
E1" /ote 5A@A /ote 5
"#!E $alculated
*+C
Amo!nt <o!rce
E!@ OFK, /ote 15
-1###5 OFK, /ote 1A-51AA
/ote 1!
12@ per gross plant
-51AA
#" OFK
OFK
!E@ /ote 15
-E /ote "!
#!A5 $alculated1@15
Amo!nt <o!rce
1@15 $alculated
5@E $alculated
*2313
Amo!nt <o!rce"#E#" $alculated
"!11 $alculated
"15# $alculated
#5! /ote 1!
2#
!" 2@
!#
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!5 2#
.
4i5e
#A# 2# #51E1" 2# 1E"
A@A 5 15"
5@E @E
2"1
.3
Amo!nt <o!rce
11"11 OFK, /ote 15
-1!EA! OFK, /ote 1A
-1@@1
!2!C =xternal data"A
Amo!nt <o!rce
#5 OFK
1C OFK
#5 $alculated
-!25C =xternal Jata
-11
Amo!nt <o!rce-A5# IFK
1E5E /otes 5, 1"
EE5 /ote A
!1E /ote 5
1""A /ote 5
"A $alculated
-11 $alculated
1A /ote "!
Asset7al!e
ImpliedDepriciation
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@! IFK
-!!15 IFK /otes ", 1
-!E"21 /ote # and IFK
129*
Amo!nt
5@E
1@15
5!"1"
1!A#5
2"
1.+:
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tor table
In0ation rate In0ation factor
12C 521C
"2C 152EC
52C !A2@C
12C 125C
"2C "#2#C
52C @!2EC
12C 1@21C"2C 552C
52C 1A2EC
12C !!2C
"2C 2@C
52C 1@52"C
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Consolidated Balance Sheet As at 31 March 2005
£m £m
Fixed assets 83,464 93,622
Intangible assets 18,398 18,083
Tangible assets 20,250 22,275
Investments
Investments in associate !nerta"ings 19,398 21,226
#ther Investments 852 1,0$9
122,112 133,980
Current assets
%toc"s 430 $58
&ebtors' amo!nts (alling !e a(ter more than one )ear 2,096 1,380
&ebtors' amo!nts (alling !e *ithin one )ear 5,602 5,521
Investments 816 $,381
+ash at ban" an in han 2,850 1,$09
11,94 13,1$9
!14,83" 15,026-
#et current lia$ilities !3,043" 1,877-
%otal assets less current lia$ilities 119,069 132,103
!12,382" 12,975-
&ro'isions (or lia$ilities and char)es !4,552" $,197-
102,135 11$,931
+a.ital an reserves
+alle !. share ca.ital 4,286 $,280
%hare .remi!m acco!nt 52,284 52,15$
Merger reserve 98,92 98,927
#*n shares hel !5,121" 1,136-
#ther reserve 629 713
/ro(it an loss acco!nt !51,688" $3,01$-
%otal e*uit+ shareholders (unds 99,31 111,92$
!it) minorit) interests 1,965 2,132
one!it) minorit) interests 853 875
102,135 11$,931
31 -arch2005
31 March200$
Creditors. amo!nts (alling !e *ithin one )ear
Creditors. amo!nts (alling !e a(ter more than one )ear