forecasting - penilaian bisnis

8/13/2019 Forecasting - Penilaian Bisnis

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Financial Statement Analysis

Industry Analysis and CompetitiveStrategy

Accounting Analysis

Financial Analysis

Prospective Analysis

ForecastingValuation


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Forecasting: Summary

Forecasting involves all prior steps in the framework

Comprehensive, iterative approach Start with sales, determine operating costs

Are balance sheet changes required?

How will they be financed? Use I/S and B/S to forecast SCF

Forecast of SCF may lead to changes in asset levels(depreciation should be reexamined), and debt levels(interest expense and income should be reexamined)

Always a good idea to conduct ratio and sensitivityanalyses on the forecasted numbers


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Prospective Analysis - Valuation

Estimate the value of the firm. Why?

Security analysis: buy or sell?

Merger and Acquisition: how much topay?

Initial Public Offering (IPO)

Sale of a business

Strategic planning: how firm value willaffected?


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Valuation ModelsDiscounted models Based on cash flows:

Dividends

Free cash flow

Based on accounting:Abnormal earnings

Price Multiples Models Price to earnings

Price to book

Price to sales


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Discounted Model

Classical Dividend Capitalization Model Value of a firms equity equals the present value

of its expected future dividends

No growth: DIV/r

Constant growth: Div/(r-g)

Value of a firm equals cash flows to theproviders of capital Shareholders

Discounted by cost of equity capital

Leads to value of equity

Shareholders and creditors Discounted by weighted average cost of capital (WACC)

Leads to value of firm: debt plus equity


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Equity Alone or Whole Firm?

Analysts are interested in equity value

Equity Alone

Assets value

Equity value = Assets valueValue of debt

Theoretically, both approached shouldgive the same equity value

Not really


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Discounted Dividends Model

Equity Value = Present value ofexpected future dividends

Three factors to determine:

Expected dividends

Terminal value or liquidating dividends

Could assume equilibrium

Discount rate


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Discounted Dividends Model

No growth: Equity value = dividend/re

With growth:

Equity value = dividend/(reg)Note: Liquidating dividend DIVn= DIVn-1x (1+g)/(r-g)

n

n

3

3

2

210

)e

r(1

DIV...

)e

r(1

DIV

)e

r(1

DIV

)e

r(1

DIVueEquity val


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Discounted Cash Flows Model: Major Steps

Forecast free cash flows available todebt and equity holders for 5 to 10years

Forecast free cash flows for theterminal year

Discount the free cash flows using theWACC


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Free Cash Flows - ReviewThe amount of cash that the owners of abusiness (shareholders) can consume withoutreducing the value of the business

Free cash flows can be used to pay Creditors: interest or principal (reducing debt)

Shareholders: dividends, shares buyback

The more free cash flows a company has, the

higher its firm value


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Free Cash FlowsWhole Firm (Unleveraged Free Cash Flows):

If from F/S

EBIT = SalesCOGSSG&A

- Tax on EBIT (= tax as reported + tax savings on int. +/-deferred tax assets/liabilities

+ Depreciation+/- Investment in working capital

- Capital expenditure

- Required cash balance

Equity Alone (Leveraged Free Cash Flows): The above;

- Net interest

+/- Cash Flows For Changes in S-T or L-T Borrowing

- Capital expenditures

- Required cash balance


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Free Cash Flows: Gap, 1991EBIT = Sales $2,519 - COGS 1,499SG&A 576

Depreciation 70

= $374

Tax on EBIT = Tax $140.9 + Tax savings on interest

3.5*38% + DTA 9 (Note C)= $151

EBILAT = $374151 = $224 (rounding error)

OCF before investment in working capital = EBILAT $224 +depreciation 70 = $294

OCF before capital expenditure = OCF b/f investment inworking capital $294 + net changes in CL and non-cash CA 2 = $295 (rounding error)

Free cash flow = OCF b/f capital expenditure $295ICF 246= $49


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Select A Forecast HorizonShort (e.g. 3 to 5 years) More accurate prediction on cash flows

Rely heavily on the terminal value

Not proper for fast growing companiesLong (e.g. 10 to 15 years) Less dependent on the terminal value

Less accurate prediction on cash flows

Equilibrium?No growth in future cash flows or growth at astable rate


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Terminal Value

Forecast horizon: 1992 to 2002

Terminal year: 2003

Terminal value

= (Value at t-1 * (1+r)) (r-g) That is, assume perpetuity

E.g. terminal value = Free cash flow for 2002$530 x (1+3%) (14%-3%) = $4,693

These need to be discounted back to the timeof the valuation


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Terminal Value: Based onMultiple

Note: could apply a multiple to the terminalyear free cash flow to arrive at the remainingfree cash flow

Because, multiple is the reciprocal of the discountrate

Key is to apply a multiple that makes sense inlight of competitive equilibrium assumption

generally a multiple of 7 to 10 will work higher multiples implicitly imply growth

opportunities


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Discounting the Expected Free Cash Flow

Weve estimated free cash flows for theforecasted years and the present value

(at the end of the terminal year) of thefuture free cash flows

Discount them back to today

use (1 + WACC)-n

to estimate flowsoccurring at end of year


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Estimating Costs of Capital

Debt current market rates for companys debt

net of tax

Equity

Capital Asset Pricing Model (CAPM)

rf: interest rate on risk-free securities 90-day treasury bill: 5.8%; 1-year treasury bill: 6%

Market beta: the correlation between individual stock returns

and market returns rM: return on market portfolio

rMrFis the risk premium, about 7.6% in the long-run;but some argue that it is dropping in recent years

Could adjust for size; the larger, the less riskier

rE rf[E(rM) rf]


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Cost of Capital - Gap

From the bottom of page 12-24 Beta is 1.3; risk-free rate is 6.3%

Long-term risk premium is 7.6%

current market value is $55 per share x142,139,577,000 shares = $7,817,676 Largest firm size decile (Table 12-10 on page 12-

15)

Deserve a size adjustment, e.g. 0.9%

Cost of capital = 6.3% + 1.3x7.6% - 0.9% =15.28%


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Determining WACC

WACC VD

VDVE rD(1T)

VE

VDVE rE

Cost of capital is cost of equity and cost of debt,weighted by the relative market value

Market value of debt: from notes; if not, book value

Market value of equity:

price per share x outstanding sharesQuestion: How could we know the market value ofequity??? We are trying to find it!! Solution: use target or the ideal debt-to-equity combination


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Gaps WACC

Debt Interest rate 8.9%

Net of tax = 8.9% x (1-38% tax rate) = 5.5%

Equity rE= 15%

Assume 19% debt and 81% equity

WACC = 0.19 x 5.5% + .81 x 15% = 13%


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GAP: Market Value

1/31/92: $53.25

During 1992: high $59; low $20

Our estimate:About $17 based on DCF

Why the big difference? positive news since year end?

higher growth rates

longer time until competitive equilibrium andgrowth slow down

overvalued?


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Sensitivity Analysis

Try

Higher growth rate

Lower cost of capital Longer forecast horizon

To figure out what does the market

have in mind 20% constant growth rate?


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Subsequent Development

Earnings growth at The Gap cooleddown during 1992

New entrants mimicking The Gap look Some products of Gap did not work

Price of Gap fell throughout the firsthalf of 1992, dropping to around $30

Let us try the accounting-basedvaluation model


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Why Accounting-Based Valuation?

In the long run, net income equalsleveraged cash flows

Accounting accruals do not matterResearch show that accrual-basedearnings reflect changes in economic

values more accurately than do cashflows


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Accounting-Based Valuation Model

Clean Surplus: All transactions affecting SEexcept capital transactions flow throughincome statement

BV1= BV0+ NIDIV

Or, DIV = NI + BV0BV1

Dividend Discount Model:

No growth, Constant cost of equity, 2-periodmodel


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Discounted Abnormal Earnings (DAE) Model

2

2

2

1e20e10

2

2

2

1e2110e10

21e1e210e0e1

212101

)e

r(1

BV

)e

r(1

BVr-NI

)e

r(1

BVr-NIBV

)er(1

BV

)er(1

BVr-NI

)e

r(1

BV

)e

r(1

BV

)e

r(1

BVr-NIBV

2)

er(1

BV-)BVr(1BVr-NI

)e

r(1

BV-)BVr(1BVr-NI

2)

e

r(1

BV-BVNI

)e

r(1

BV-BVNI

2)

er(1

2DIV

)e

r(1

1DIVueEquity val


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DAE ModelIf t , then equity value is

Normal Earnings = rex BVt-1

Abnormal Earnings = NIt- rex BVt-1

Note: Think about ROE and ROE decomposition

Therefore, equity value is:

...)

er(1

BVr-NI

)e

r(1

BVr-NI

)e

r(1

BVr-NIBV

3

2e3

2

1e20e10

BookValue of Equity at timetE t[Abnormal Earnings foryear]

(1 costof equity) t1


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DAE Model

Equity value is current book value plussum of discounted future abnormalearnings

If a firm can earn only a normalreturn on book value, then equity valueis its current book value

The firm is worth more/less if its NI orreturn on BV is above/below normal


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Estimating Terminal Value

The terminal value problem we encounteredwith DCF is here, too!

Procedure determine abnormal earnings in post terminal year

discount them in perpetuity: AET(r-g)

ris cost of equity capital

gis expected growth rate

Or,


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Estimating Terminal Value

At the terminal year, the terminal valuerepresents an estimate of the differencebetween the market value and the bookvalue of equity in that year We could use the projected market-to-

book multiple and the forecasted BV

instead Need a normal multiple

Average market-to-book ratios in U.S.: 1.6


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Terminal Value and DAE

In DCF we noted that a large part ofequity value lies in the terminal value

If we forecast AE to where only normalreturns are earned, terminal value willbe zeroAll future AE will be zero

The PV of the normal earnings isembedded in current book value andgrowth in BV over the forecast horizon


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Role of Accounting MethodChoice

The DAE valuation is based on accountingnumbers, not cash flows

Does accounting method affect valuation? Note that accounting choices affect bothearnings

and book value

Consider two examples:

Conservative accounting Aggressive accounting


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Conservative Accounting

Assume all R&D is written off (recordedas an expense) as incurred (the

alternative is to capitalize and amortize,e.g. next year)

Assume $1,000 is written off in year 1,ROE is 10%

What happens to future abnormalearnings?


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Conservative Accounting

Year 1: earnings and thus

abnormal earnings are$1,000 lower

Ending BV is $1,000

lower

Year 2: abnormal earnings is

$100 higher due to loweropening BV

Abnormal earnings is$1,000 higher due tolower expense

Present Value

-$909 (Year 1)

+$909 (Year 2)

Net Impact: $0


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Aggressive Accounting

Year 1: earnings and thus

abnormal earnings are$1,000 higher

Ending BV is $1,000

higher

Year 2: abnormal earnings is

$100 lower due to higheropening BV

Abnormal earnings is$1,000 lower due tolower expense

Present Value

+$909 (Year 1)

-$909 (Year 2)

Net Impact: $0


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So, Is Accounting Irrelevant?

Accounting choices may influence theanalysts perception of the firm and thus theforecasts of abnormal earnings Functional Fixation phenomenon

Management may be revealing newinformation about the results of past actionsor expected results of future actions write-offs and capitalization

Accounting choice affects the fraction ofvalue reflected over short horizons versusterminal value


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PHB, page 11-8

The abnormal earnings approach, then, recognizes thatcurrent book value and earnings over the forecast horizonalready reflect many of the cash flows expected to arrive

after the forecast horizon. The DCF approach unravelsall of the accruals, spreads the resulting cash flows overlonger horizons, and then reconstructs its own accruals inthe form of discounted expectations of future cash flows.The essential difference between the two approaches is that

abnormal earnings valuation recognizes that the accrualprocess may already have performed a portion of thevaluation task, whereas the DCF approach ultimately movesback to the primitive cash flows underlying the accruals.


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DCF vs. DAE

Note that they are actually based on thesame underlying discounted dividend model

In principle the two methods should arrive atthe same value, but They focus on different issues

E.g. using DAE will force analysts to focus on I/S, B/S,ROE; this may cause the analyst to arrive at differentforecasts

Amount of analysis structure is much more forDAE

Importance of terminal value analysis is more forDCF

relation to price multiples


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Valuation Based on Multiples

Why bother? easy and quick

reality check

private companieswith no marketvalues

Examples

Price to earnings

Price to Sales

Price to Book Price to Cash Flow


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Price to Book Ratio

If we divide the DAE formula by BV0:

Vtis estimated value of equity at time t

bVtis book value at time t

reis cost of equity capital gt+nis growth in BV in year t+n, e.g., (BV2-BV1)/BV1

...)r(1

)g(1*)g(1*)r(ROE

)r(1

)g(1*)r(ROE

)r(1

)r(ROE1

BV

V

3e

21e3

2e

1e2

e

e1

0

t


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Price-to-Book Ratio: Interpretation

We can interpret price-to-book value ratio as afunction of

Future abnormal earnings

how much greater or smaller than normal will ROE be? note that we can decompose the ROE as in Financial

Analysis

Growth in BV

how fast will the investment base (BV) grow?

will ROE continue to be other than normal as BV grows?

Cost of equity capital


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Price-to-Earnings Ratio

ROEBook

Price

Earnings

Bookx

Book

Price

Earnings

Price

Therefore;

P/E is affected by the factors that affect P/G:abnormal earnings; risk; growth

But, P/E is also affected by the current ROEP/E is more volatile than P/B

If ROE is zero or negative, P/E is not defined


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Price-to-Earnings Ratio

If Price = Book Value

P/E is the reciprocal of cost of equity

capital 6 to 10 is normal rangecurrent market is

way above

Technology sector: negative earnings


46/63

Combining PE and PB

P/E

P/B

Rising Stars

Falling StarsDogs

Recovering

but not goingto be a star


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Selecting Comparable Firms

Who are the competitors Dow Jones Interactive

J.C. Penny, Lands End, Nordstrom, The

LimitedSelection criteria Similar operating and financial

characteristics Same industry

Question: multi-business companies?

B i A l i d V l ti


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Business Analysis and Valuation- Applications

Equity Securities Analysis

Credit Analysis and Distress Prediction

Mergers and Acquisitions


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S it A l i d M k t


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Security Analysis and MarketEfficiency

Efficient Markets Hypothesis Security prices reflect all publicly available

information fully and immediately upon itsrelease

All securities are priced right

Return are associated with risk that cannot

be diversified awayIf market is efficient, who then willengage in equity security analysis?

A M k t R ll Effi i t?


51/63

Are Markets Really Efficient?- U.S. Securities Market

Long-run evidence

information is indeed impounded into stock price

Short-run evidence Not all information is reflected in security prices

fully and immediately

Post earnings announcement drift

Analysts over-react to negative earningsNot all securities are followed bysophisticated analysts


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Methods of Equity Security Analysis

Fundamental AnalysisAttempt to evaluate stock price based on

financial statements analysis

e.g., Graham & Dodds

Technical AnalysisAttempt to predict stock price movements

ChartingCombine the above two


53/63

Popular Schools of Thought

Value Investing

Growth Investing

Momentum Investing


54/63

Value Investing

Look for stocks that appear cheapcompared to earnings, assets, or some

other fundamental yardstickCapitalizes on the phenomenon of

overreaction


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Ben Grahams Guidelines

Is the P/E less than half thereciprocal of the yield on aAAA corporate bond?

Is the P/E less than 40% of

the average P/E over thepast five years?

Is the dividend yield morethan 2/3 the AAA corporatebond?

Is the price less than 2/3book value?

Is the price less than 2/3 netcurrent assets?

Is the debt-equity ratio lessthan 1?

Are current assets more thantwice current liabilities?

Is total debt less than twicenet current assets?

Is the 10-year average EPSgrowth greater than 7%

Were there no more thantwo years out of the past tenwith earnings declinesgreater than 5%?


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Growth Investing

Look for stock with rapidly growing sales andearnings, especially if the rate is increasing stock price should catch up sooner or later

Typically, these stocks are volatile How likely will the stock dive?

will the stock take off if the economy slows (andother stocks slow down)making the stock look

relatively attractiveWatch out for accounting schemes used forwindow-dressing


57/63

Momentum Investing

WSJ 3/31/97

Momentum and other aggressive stock fundsinvest in the high-flying stocks of companies with

soaring earnings, in some cases without regard tohow expensive those stocks are. Their goal is toride those stocks into the stratosphere, but quicklyunload them at the first hint of a business

slowdown. Lately, these funds haven't been ableto get out of those stocks fast enough, as priceshave tumbled.


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The General Process

Comprehensive security analysis involves Selection of candidates for analysis

screening, dumb luck, product use, class assignment, job

Inferring markets expectations

What does price imply? What does consensus earningsimply? Reverse engineering of price to determine marketexpectation

Examine with self-analysis Refine expectation. Look for other signals and

information sources

Buy? Hold? Sell?


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By the Numbers

Lets review the method used by WesleyMcCain and Jeffrey Sanders

What are the main points of this article?Who really move the market?

What is the method?

How do what they doid tie into thebusiness analysis framework we havedeveloped?


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Credit Analysis

Evaluate the likelihood a firm will not beable to pay its debts (risk of

bankruptcy) Lenders need to know

Borrowers need to know as well


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Suppliers of Credit

Commercial Banks

Savings and Loans

Public Selling price is heavily affected cost of

capital, which in term is affected by credit

rating E.g. Standard and Poors


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Credit Analysis Process

Nature and purpose of the loan

Types of loan: secured?

Receivable

Inventory

Machinery and equipment

Real estate

Borrowers financial status Focus is more on the sufficiency of cash flows

(present and future)


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Predict Bankruptcy

Altman Z-Score

Z = 0.717 x (Working capital/TA) +

0.847 x (RE/TA) +

3.11 x (EBIT/TA) +

0.420 x (SE/TL) +

0.998 x (Sales/TA)

Z < 1.20: High bankruptcy riskZ > 2.90: Low bankruptcy risk

1.20 < Z < 2.90: Gray area

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