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Principles of Finance Videos 166 videos

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Principles of Finance: Unit 4, Other Valuation Formats 2 Views


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Description:

Hope you're in the mood for some other valuation formats, 'cause that's what we're throwing at you in this video. Enterprise value, multiple method, etc.

Language:
English Language

Transcript

00:00

Principles of finance ah la shmoop other evaluation formats All

00:05

right well what do you do if you have no

00:07

earnings argue worth nothing Not that i'm broke or anything

00:11

Just asking you know for a friend Like what if

00:15

you were building out a next generation tele communications platform

00:19

which had ten times better connectivity and one hundred times

00:22

the speed Maybe you have eight billion dollars of revenue

00:24

this year and fifteen billion dollars of costs half of

00:29

which is not a cash cost It's just appreciation over

00:32

the wires you put in the ground So let's make

00:35

up some numbers here and say you have a billion

00:37

dollars in cash losses Are you worth zero No not

00:41

by a long shot Instead to calculate what you're worth

00:45

lazy wall streeters quote impute a profit margin unquote and

00:49

then take a multiple of that margin That is the

00:52

deposit well hook a fall I think this company is

00:56

a thirty percent operating margin business It will always have

01:00

leverage like the cable and phone businesses and at maturity

01:04

it'll have twenty percent net profit margins well at a

01:08

twenty percent margin on projected revenues three years from now

01:11

Of twenty billion dollars Well that means the company would

01:14

then have four billion dollars in earnings at that point

01:19

was still very high growth rates of twenty five percent

01:21

revenue growth Well it might trade it twenty five times

01:23

that earnings number ignoring dead and or cash on the

01:26

balance sheet for now So at twenty five times the

01:30

earnings of four billion dollars will not get you one

01:33

hundred billion dollars valuation Well the company today is not

01:37

worth that much money There is risk ahead and time

01:40

So again being lazy wall streeters we just cut the

01:43

number in half and say yeah it's worth fifty billion

01:46

today And if i doubled my money in three years

01:49

with this stock well that'd be a pretty good score

01:51

yet you khun by the company today for a market

01:54

calf of forty billion dollars that's its market capitalization So

01:58

at forty billion dollars today with a tie target of

02:00

one hundred fifty billion three years from now Isn't that

02:02

a strong by and when you present the investment opportunity

02:06

to your partner's you'll describe it in part as a

02:08

quote multiple of sales unquote story at five times sales

02:13

Of eight billion dollars this year we'll often multiple of

02:16

sales stories which then turn into earnings stories Do very

02:20

well if and only if they execute on the revenue

02:23

growth and the margin structure they said they would if

02:26

you configure out how to predict these transitions Well that's

02:30

the buy side of wall street and enormous wealth waits

02:33

for you moving on evey enterprise value versus even dog

02:38

earnings before interest taxes depreciation amortization Got it There's a

02:42

smack down here it's a common evaluation metric in companies

02:45

with a whole lot of debt and who are depreciating

02:48

a whole lot of capital expenditures Well often these companies

02:51

don't have real gap earnings So another method has to

02:55

be worked out to evaluate the company's self worth you

02:58

know other than ours of freudian therapy All right first

03:01

recall what enterprises and no not the spaceship nor the

03:05

car rental company Let's Start with something super simple of

03:08

your home You just bought it for a million dollars

03:11

putting two hundred grand down and taking out a mortgage

03:13

for eight hundred thousand dollars Good for you Well the

03:16

equity or equity capitalization or equity value you have in

03:20

your home at this point is two hundred grand and

03:22

the homes enterprise value is a million dollars for cos

03:27

it works kind of the same way Let's say human

03:29

catapults inc has even of forty million box and one

03:33

hundred sixty million dollars of debt Well its growth rate

03:35

and industry trends suggest that it should trade it about

03:38

end times Even so ten times even i would give

03:40

us four hundred million dollars of gross or enterprise notional

03:44

value for the company And when the humans actually smacking

03:48

toe walls at fifty knots well the naming run really

03:51

fits But there was one hundred sixty million dollars of

03:54

debt in this company as well which has to be

03:56

subtracted from the gross or enterprise value Well if we

04:00

subtract one hundred sixty million for four hundred million to

04:02

get two hundred forty million of equity value well then

04:05

that's the market value probably And we'd say that this

04:08

firm is lev urd or leveraged for toe one debt

04:13

Teo even done We then ask ourselves how does this

04:15

compare to human slingshots ink and to the humoring inc

04:20

As weapons of miss destruction slingshots traded a lower multiple

04:24

Because well misfires air costly But human arang trades at

04:28

a premium of twelve times ebitda because of the nature

04:31

of its physics in the form of reusable humans when

04:34

the shot is a miss well this would be the

04:36

comparable company multiple And in this case human catapults trade

04:40

expectedly at the midpoint of the range of comparable companies

04:44

All right moving on The last valuation metric is discounted

04:48

cash flow analysis which is the heavy valuation machinery The

04:52

wall street pros generally used a zey truth test This

04:56

is such a big and gnarly area that well we

04:59

had to go borrow money to go higher hollywood talent

05:01

to make it work So in this flick you just

05:04

get the appetite wetter As we've said nine thousand three

05:07

hundred seventy two times already a dollar today is worth

05:10

more than a dollar tomorrow This is the heart and

05:13

soul of discounted cash flow analysis So let's take a

05:17

look Company acts will produce net after everything cash of

05:20

one hundred million box in your one two hundred million

05:22

in year two to fifteen year three five hundred million

05:25

year four eight hundred million year five All right this

05:27

would be called shockingly a five year discounted cash flow

05:31

analysis Clever your next step is to figure out the

05:34

discount rates well the risk free rate is usually whatever

05:38

us government bond paper trades for in the analogous time

05:41

period and that is you find a ten year t

05:43

bill that's like halfway through its lifespan and figure out

05:46

what that rates paying in let's say three percent these

05:48

days So that's the risk free rate Well the risk

05:51

premium is the extra hurdle rate of interest you'll charge

05:55

in risk to the deal Instead of producing millions you

05:59

know one hundred million two hundred and fifty million bubble

06:01

block they produce actually one hundred million one hundred million

06:04

hundred million fifty million got it so the company might

06:07

stink but it also might do a ton better than

06:09

projections The projections should generally be in the you know

06:13

fifty fifty over under zone e most likely case So

06:17

let's say the premium on this set of cash flows

06:20

is eight percent to produce a total of eleven percent

06:24

right Three percent risk free plus eight percent that we're

06:26

going to tack on for risk here You then just

06:28

set up the equation such that the first five years

06:31

show cash produced And then at the end of those

06:34

five years the company is sold or goes public or

06:36

gets liquid in whatever form and let's say it sells

06:40

for eight billion dollars at the end Teo google the

06:42

tricky part in this set lies in the power it

06:45

oration of the equation It would look something like this

06:48

You do not need to do the math Just look

06:51

at it it's Not important Not at this stage All

06:53

you have to do is think Yes we ask a

06:55

lot Note that the denominator of one point one one

06:59

is iterated aton more in the out Years versus year

07:03

one and one point one one two the fifth powers

07:06

about one point seven So think about that conceptually in

07:09

year five you're dividing those huge numbers by a pretty

07:13

big number The notional eight hundred million dollars in profits

07:16

at that point on a discounted basis is eight hundred

07:19

guided by one point seven and we're about four hundred

07:21

seventy million Almost half that is its present value is

07:25

just a bit more than half its terminal value and

07:28

we'll cover so much discounted cash flow in another video

07:31

It'll make you sick So if this is all over 00:07:33.274 --> [endTime] confusing now just wait The madness has just begun

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