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24 Cards in this Set
- Front
- Back
Enterprise Discounted Cash Flow (DCF)
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Discounts free cash flow (FCF) at the weighted average cost of capital (WACC)
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Economic Profit Based Valuation
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Measures the value created by the company in a single period, explicitly highlights when a company creates value (WACC)
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Adjusted Present Value (APV)
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Separates value of operations into two components: value of operations as if company were all equity financed and the value of tax shields that arise from debt financing.
highlights changing capital structure FCF at unlevered cost of equity |
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Cash Flow to Equity
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Values equity directly by discounting cash flows to equity at the cost of equity. Capital structure is embedded within the cash flow, so it is ideal for valuing financial institutions
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Free Cash Flow (FCF)
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Cash available to all investors.
= NOPLAT - Net Increase in Invested Capital or = NOPLAT + Noncash Operating Expenses - Investments in Invested Capital or = Gross Cash Flow - Gross Investment |
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NOPLAT (Net Operating Profit Less Adjusted Taxes)
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Total after tax operating income generated by the company's invested capital; profit available to ALL investors (providers of debt, equity and other types of financing)
Revenues -Operating costs -Depreciation = Operating profit -Operating taxes = NOPLAT IN PRACTICE: EBITA - Operating Cash Taxes |
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Invested Capital
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investor capital required to fund operations
Operating Working Capital + Fixed Assets (e.g. net PP&E) + Intangible Assets (e.g. Goodwill) + Net Other Long-Term operating assets (e.g. net of LT operating liabilities) |
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Operating Working Capital
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Operating current assets - operating current liabilities
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Operating current assets
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All current assets necessary for the operation of the business
Examples: working cash balances, trade accounts receivable, inventory, and prepaid expenses |
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Operating current liabilities
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Liabilities related to ongoing operations of the firm.
Often related to suppliers, employees, customers, and government Examples: Accounts payable, accrued salaries, deferred revenue, income taxes payable (nonoperating liabilities are interest-bearing) |
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Net other operating assets
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Other long-term liabilities - Other long-term assets
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ROIC (Return on Invested Capital)
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NOPLAT / Invested Capital
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ROIC with goodwill
(and acquired intangibles) |
Measures a company's ability to create value after paying acquisition premiums
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ROIC without goodwill
(and acquired intangibles) |
Measures the competitiveness of the underlying business
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Non-operating Assets
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Assets not necessary for core operations, but can still generate income or provide a return on investment
Examples: excess cash and marketable securities, certain financing receivables, non-consolidated subsidiaries, excess pension assets (summing invested capital and nonoperating assets = total funds invested) |
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EBITA (Earnings before Interest, Taxes, and Amortization)
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Revenue - Operating expenses
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Why EBITA (and not EBITDA or EBIT) when calculating NOPLAT?
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Why not EBITDA?
Company capitalizes asset on the balance sheet and depreciates the asset over a lifetime. Since the asset loses economic value over time, depreciation must be included as an operating expense when determining NOPLAT. Why not EBIT? Investment in intangibles (i.e. brands) are expensed and not capitalized. When the intangible loses value and is replaced through further replacement, the reinvestment is expensed. |
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Gross Cash Flow
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Cash generated by the company's operations.
Represents cash available for investment and investor payout without the company having to sell non-operating assets or raise additional capital. NOPLAT and Noncash operating expenses |
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Noncash operating expenses
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To convert NOPLAT into cash flow, add back noncash expenses.
examples: depreciation and noncash employee compensation |
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Investments in invested capital (gross investment)
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Reinvested portion of their gross cash flow back into the business
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Operating working capital
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Operating cash, inventory, and other working capital
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Net capital expenditures
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Investments in PP&E, less the book value of any PP&E sold
Add increase in net PP&E to depreciation |
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Enterprise Value
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Present Value of FCF + Value of Nonoperating Assets
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ROIC (decomposed)
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Demonstrates the extent to which a company's ROIC is driven by ability to maximize profitability (operating margin: EBITA divided by revenues), optimize capital turnover (revenues over IC), or minimize operating taxes.
ROIC = (1-Operating Cash Tax Rate) x EBITA/Revenues x Revenues/Invested Capital |