# Valuation Measuring and managing the value ofpanies - Koller T.

ISBN 0-471-36190-9

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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

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(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

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Exhibit 13.5 Heineken—Value of Equity

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