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Valuation Measuring and managing the value ofpanies - Koller T.

Koller T., Murrin J. Valuation Measuring and managing the value ofpanies - Wiley & sons , 2000. - 508 p.
ISBN 0-471-36190-9
Download (direct link): valuationmeasuringandmanaging2000.pdf
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Second, keep in mind that valuation is as much art as science and is inherently imprecise. Valuation is highly sensitive to small changes in assumptions about the future. Take a look at the sensitivity of a typical company with a forward-looking P/E ratio of 20. Changing the cost of capital for this company by 0.5 percentage points will change the value by about 12 percent to 14 percent. Changing the growth rate for the next 15 years by 1 percent per year will change the value by about 7 percent. For high-growth companies, the sensitivity is even greater. The sensitivity is also highest when interest rates are low, as they were at the end of the 1990s.
In light of this sensitivity it should be no surprise that the value of a typical company will fluctuate by 15 percent or more during any three-month period. Exhibit 13.2 shows the distribution of the quarterly share price volatility for 2,117 companies during the 10 years ended June 20, 1999
Exhibit 13.2 Quarterly Volatility of U.S. Companies
Page 294
(where volatility is defined as one-half the distance between the quarterly high and low divided by the average price for the quarter).
We typically aim for a valuation range of plus or minus 15 percent, which is similar to the range used by investment bankers. Even professionals who do valuations for a living aren't always accurate. In other words, keep your aspirations for precision in check.
Heineken Case
We will now complete and analyze the Heineken valuation. First, we will calculate the equity value of Heineken for the Business as Usual scenario. Exhibits 13.3 and 13.4 show the calculation of the value of Heineken's operations using the DCF and economic profit approaches, respectively. The value of Heineken's operations in both methods is NLG 33 billion.
Note that there is a mid-year adjustment factor equal to one-half of a year's value discounted at Heineken's WACC. This is to adjust for the fact that we conservatively discounted the free cash flows and economic profits as if they were entirely realized at the end of each year, when, in fact, cash flows occur (cycles
Exhibit 13.3 Heineken—DCF Valuation
r "n
Business as usual case
Free cash flow after goodwill Discount factor (NLG million) Present value of FCF (NLG million)
1999 44 6 0.937 41S
2000 754 0.878 6,62
2001 800 0.822 653
2002 526 0.770 405
2003 910 0.722 657
2004 1,079 0.676 730
2005 1,134 0.633 713
2006 1,190 0.593 706
2007 1,247 0.556 694
2008 1,307 0.521 681
2009 1,359 0.488 663
2010 1,413 0.457 646
2011 1,470 0.428 629
2012 1.528 0.401 613
2013 1,590 0.376 598
Continuing value 59,629 0.376 22,416
Operating value 31,893
Mid-year adjustment factor 1.033
Operating value (discounted to current month) 32,950
V________________________________________________________________________________J
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Exhibit 13.4 Heineken—Economic Profit Valuation
Business as usual case
Economic profit before goodwill (NLG million) Discount factor Present value of economic profit (NLG million)
1999 721 0.937 675
2000 745 0.873 654
2001 777 0.822 639
2002 831 0.770 640
2003 854 0.722 616
2004 890 0.676 602
2005 928 0.633 533
2006 966 0.593 573
2007 1,005 0.556 559
2008 1,045 0.521 544
2009 1,087 0.488 530
2010 1,130 0.457 517
2011 1,175 0.428 503
2012 1,111 0.401 490
2013 1,271 0.376 473
Continuing value 47,547 0.376 17,874
Present value of economic profit 26,483
Inv capital (beg. of forecast excluding goodwill) 6,113
Less: PV of investments in goodwill (703)
Operating value 31,893
Mid-year adjustment factor 1.033
Operating value (discounted to current month) 32,950
notwithstanding) evenly throughout the year. We take a six-month factor because we are valuing the company as of January 1, 1999; if we had chosen another month we would have to offset the discount factor by one-half year, plus the number of months.
Under the Business as Usual scenario, Heineken's equity value is NLG 33.5 billion, or NLG 107 per share, as shown in Exhibit 13.5. To calculate the market equity value, we add the market value of nonoperating assets such as excess cash, marketable securities, and investments in unconsolidated subsidiaries to the value of operations to obtain the enterprise value. We then subtract debt, minority interest, and other non-equity sources of financing to obtain the equity value.
The value of Heineken's operations is about four times that of its beginning invested capital (including goodwill). Our results seem consistent with the Business as Usual scenario, given that returns on invested capital are about twice that of its WACC.
We also valued the other two scenarios for Heineken. The results are summarized in Exhibit 13.6. In the Price War scenario, we made two adjustments to the assumptions. We assumed that revenue growth would be 0 percent nominally, or negative 1 percent to 2 percent in real terms, because of changes in price mix. We
Page 296
Exhibit 13.5 Heineken—Value of Equity
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