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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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The example in Exhibit 19.3 illustrates the need for both nominal and real forecasts. This company does not grow in real terms and the annual inflation rate is 20 percent. The nominal EBITDA grows with inflation and the unadjusted real-cash flows are flat. In the nominal case, the depreciation grows much slower than the EBITDA so that depreciation shelters less and less of the growth of nominal EBITDA from taxes. The working capital requirements in the nominal case, however, continue to grow with inflation, which erodes the cash-flow value. This effect is not reflected in the real cash flows if looked at from changes in the balance sheet. To be accurate, the real cash flows need to reflect the actual tax shields and the working capital requirements. These can only be estimated from the nominal accounts and then translated, as in the third example, where the translations from the nominal accounts are highlighted. If a simple real
Exhibit 19.2 Comparing Real vs. Nominal DCF Valuation
Exhibit 19.3 Inflation Effects on Financial Statements
Nominal Unadjusted forecasted real Real translated from nominal1
Year 1 Year 2 Year! Year 4 Year 5 Year 1 Year 2 Year 3 YeaM Year 5 Yearl Year 2 Year 3 Year 4 YearS
Revenues 1.000 1,200 1.440 1.728 1,901 1.000 1.000 1,000 1.000 1,000 1.000 1.000 1.000 1.000 1000
1811 DA 300 360 432 51S 570 300 300 300 300 300 300 300 300 300 300'
Depreciation (80) (80) (83) m (99} (80) m (80) (80) (80) (80) m (80} (80) (80)
EBIT 220 280 34$ m 471 220 220 220 220 220 220 220 220 220 220
Taxes at 5OH (110) {HO (174) (214) (2*5) (110) (110) (110) (110) (110) (110) (117) <121} (124) (124)
NOPUF 110 140 174 214 235 110 110 110 110 110 110 103 99 96 96
Real NOPLAT 110 117 121 124 124 110 110 110 110 110 110 103 99 96 96
Net working capital 200 240 288 346 m 200 200 200 200 200 200 200 200 200 200
Reg net PPE ?100 400 416 448 497 400 400 400 400 400 400 400 400 400 400-
Depredation (80) (80) (83) (90) {99} m (80) m (80) m (80) (803 (80] (80) (80}
Capital expenditures 80 96 115 138 152 80 80 80 80 80 80 80 80 80 80
End net PPE 100 416 148 497 >19 400 400 400 400 400 400 400 400 400 400'
NOPtAT 140 174 214 215 110 110 110 110 1:03 99 96 96
Plus: depreciation 80 83 90 99 80 80 80 80 80 80 80 80-
Less: capital expenditures (%j (115) (138) (152) (80) m) (80) m m (80} (80) (80)
Less: change in working capital (40) (48) (58) (55) - (33) (33} (33) 08)
free cash How 84 54 108 148 110 110 110 110 70 66. 63 Tfl
Real cash llow 70 66 63 78 110 110 110 110 70 66 63 78;
Average inflation rate/index 20% 20% 20% 10% 1.00 120 1.44 173 1.90 1.00 120 1.44 173 190
Networking capital/revenues 20% 2 0% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
PPE/revenues 4 m 31% 2$% 29% 40% Am 40% 40% 40% 40% 40% 40% 40% 40%
ROIC ib% 21% 24% 25% 25% 18% 18% 18% 18% 18% 18% 17% 17% 16% 16%
I Ihr <tungf in»nfiiiiR<4|>iul (ur Ihwe icwjltsis irdnsUrri Irom itw nominal flows. imj4 ihr rftil haLmr? sheet. these inw-umenls in wurtntg <jpil.il could jKo bo Ihuogtit ol as real lossesbt'< just* ct thecllixlsul iiilUlion on wo< king idyil.il
V______________________________________________________________________________________________________________._________________________________________________________________________________________________________________/
Page 377
valuation were calculated without these nominal account adjustments, the value would be overstated.
On the other hand, if only nominal cash flows were estimated, the PP&E/Revenue ratio and the ROIC would be inaccurate indicators of the economics of the business, since capital in a high-inflation environment grows slower than profits. You can observe this in the declining PP&E/Revenue ratio in the nominal case, even though new inflation-adjusted investments are being made. An understanding of the actual capital needs of a business in real terms is fundamental to providing a realistic forecast of capital spending.
Steps for Constructing Forecast and Valuation in Real and Nominal Terms A step-by-step approach for developing a forecast in both real and nominal terms is:
1. Convert historical nominal balance sheets and income statements into real terms (usually the current year's currency value) so that you can calculate appropriate financial ratios and develop an understanding of the true economics of the business.
2. Forecast the operating performance in real terms. This should include revenues, cash expenses, working capital, property, plant and equipment, and depreciation.
3. Convert the operating performance into nominal terms. For most items this simply means multiplying the item by the inflation index for the year. Net property, plant, and equipment, depreciation, and inventories should not be adjusted; they are the same in real and nominal financial statements.
4. Forecast interest expense and other nonoperating income statement items in nominal terms (based on the prior year's balance sheet).
5. Calculate income taxes based on the nominal income statement. (This requires some knowledge of the local tax laws.)
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