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Slide 1: Financial Management... 100 Slides Cash Receivables Raw materials inventory Finished goods inventory Powered by www.drawpack.com. All rights reserved.
Slide 2: Key Words... Financial Market – Present Value – Perpetuity – Annuity – Compound Interest – Inflation – Bond Yield – Share Value – Free Cash Flow – IRR – Risk Valuation – Markowitz – SML – CAPM – Beta Risk – APT – Portfolio Theory – Economic Profit – Call Option – Straddle – Option Pricing Theory – Leverage Ratio – Liquidity – Du Pont – Private Equity – Volatility – Working Capital – Valuation – Value Drivers – Risk/Return – Diversification – Corporate Finance – Yield – NPV – Cash Transfer – Accounting
Slide 3: The Dual Functions of Financial Markets The financial markets The primary market cash The secondary market cash The firm newly issued securities Investors Investors outstanding securities Investors
Slide 4: Present Value Present Value Value today of a future cash flow. Discount Factor Present value of a $1 future payment. Discount Rate Interest rate used to compute present values of future cash flows. Present Value = PV PV = discount factor × C 1 DF = C1 1 + r1 1 (1+ r ) t PV = DF × C 1 =
Slide 5: Net Present Value NPV = PV - required investment C1 NPV = C 0 + 1+ r
Slide 6: Perpetuity Perpetuity - Financial concept in which a cash flow is theoretically received forever. cash flow Return = present va lue C r= PV PV of Cash Flow = cash flow discount rate = C1 PV r
Slide 7: Annuity Annuity - An asset that pays a fixed sum each year for a specified number of years. 1 1 PV of annuity = C ×  − t 1 r r ( + r ) 
Slide 8: Compound Interest 18 16 14 12 FV of $1 10 8 6 4 2 0 0 3 6 9 12 15 18 21 24 27 30 10% Simple 10% Compound Number of Years
Slide 9: Inflation Inflation - Rate at which prices as a whole are increasing. Nominal Interest Rate - Rate at which money invested grows. Real Interest Rate - Rate at which the purchasing power of an investment increases. 1 + real interest rate = 1+nominal interest rate 1+inflation rate
Slide 10: Bond Prices and Yields 1600 1400 1200 1000 Price 800 600 400 200 0 0 2 4 6 8 10 12 14 Yield 5 Year 9% Bond 1 Year 9% Bond
Slide 11: Valuing Common Stocks I Expected Return P-P Div 0 =r= 1+ 1 P P 0 0 Capitalization Rate Div 1 = P0 = r- g = r = Div 1 + g P0
Slide 12: Valuing Common Stocks II Return Measurements Dividend Yield = Div 1 P0 Return on Equity = ROE EPS ROE = Book Equity Per Share
Slide 13: Valuing Common Stocks III If we forecast no growth, and plan to hold out stock indefinitely, we will then value the stock as a PERPETUITY. Div1 Perpetuity = P0 = r Assumes all earnings are paid to shareholders. or EPS1 r
Slide 14: FCF and PV FCF1 FCF2 FCFH PVH PV = + + ... + + 1 2 H (1 + r ) (1 + r ) (1 + r ) (1 + r ) H PV (free cash flows) PV (horizon value)
Slide 15: NPV and Cash Transfers Cash Investment opportunity (real asset) Firm Shareholder Investment opportunities (financial assets) Invest Alternative: pay dividend to shareholders Shareholders invest for themselves
Slide 16: Internal Rate of Return 2500 2000 1500 NPV (,000s) 1000 500 0 10 -500 -1000 -1500 -2000 10 20 30 40 50 60 70 80 90 Discount rate (%) 0
Slide 17: Rate of Return 1926 - 1997 60 40 Percentage Return 20 0 -20 -40 -60 30 35 40 45 50 Common Stocks Long T-Bonds T-Bills 26 55 60 65 70 75 80 85 90 95 Year
Slide 18: Measuring Risk Portfolio standard deviation Unique risk Market risk 0 5 10 15 Number of Securities
Slide 19: Portfolio Risk I The variance of a two stock portfolio is the sum of these four boxes: Stock 1 Stock 1 Stock 2 Stock 2 xσ x 1x 2σ 12 = 2 1 2 1 x 1x 2σ 12 = x 1 x 2ρ 12σ 1σ 2 xσ 2 2 2 2 x 1x 2ρ 12σ 1σ 2
Slide 20: Portfolio Risk II Expected Portfolio Return = (x r ) + ( x r ) 11 22 Portfolio Variance = x 2 σ2 + x 2 σ2 + 2 ( x x ρ 1 1 2 2 1 2 12 1 σσ ) 2
Slide 21: Portfolio Risk III The shaded boxes contain variance terms; the remainder contain covariance terms. 1 2 3 STOCK 4 5 6 To calculate portfolio variance add up the boxes N 1 2 3 4 5 6 N STOCK
Slide 22: Beta and Unique Risk Expected stock return beta +10% B i = σ im σ2 m - 10% -10% +10% Expected market return
Slide 23: Markowitz Portfolio Theory Price changes vs. Normal distribution 600 500 # of Days (frequency) 400 300 200 100 0 -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% Daily % Change
Slide 24: Efficient Frontier I Return Expected Return (%) B A Risk Standard deviation
Slide 25: Efficient Frontier II Expected Return (%) T g din ing n Le rrow Bo rf S Standard deviation
Slide 26: Efficient Frontier III Return Low Risk High Return Low Risk Low Return High Risk High Return High Risk Low Return Risk
Slide 27: Security Market Line I Return Market Return = rm . Efficient Portfolio Risk Risk Free Return = rf
Slide 28: Security Market Line II Return Market Return = rm . Efficient Portfolio 1.0 Risk Free Return = rf BETA
Slide 29: Security Market Line III Return SML rf 1.0 BETA SML Equation = rf + B ( rm - rf )
Slide 30: Capital Asset Pricing Model (CAPM) Expected return Security market line Market portfolio rate Rm = 13.5% Rf = 5% Treasury bill rate 0 1 Beta R = rf + B ( rm - rf )
Slide 31: Beta vs. Average Risk Premium Avg Risk Premium 30 1966-91 20 Investors 10 SML 0 1.0 Market Portfolio Portfolio Beta
Slide 32: Consumption Betas vs. Market Betas Stocks (and other risky assets) Standard CAPM Stocks (and other risky assets) Wealth is uncertain Market risk makes wealth uncertain. Consumption Wealth Consumption is uncertain CAPM Wealth = market portfolio Consumption
Slide 33: Arbitrage Pricing Theory Alternative to CAPM Expected Risk Premium = r - rf = Bfactor1(rfactor1 - rf) + Bf2(rf2 - rf) + … Return = a + bfactor1(rfactor1) + bf2(rf2) + …
Slide 34: Portfolio Risk Specific company return (%) Market return (%)
Slide 35: Capital Structure & COC Expected Returns and Betas prior to refinancing Expected return (%) 20 Requity= 15 Rassets= 12.2 Rdebt= 8 0 0 0.2 0.8 1.2 Bdebt Bassets Bequity
Slide 36: Risidual Income & EVA Residual Income or EVA = Net Dollar return after deducting the cost of capital. EVA = Residual Income = Income earned - Income required = Income earned - [Cost of Capital × Investment]
Slide 37: Economic Profit Economic Profit = capital invested multiplied by the spread between return on investment and the cost of capital. EP = Economic Profit = ( ROI − r ) × Capital Invested
Slide 38: Accounting Measurement ECONOMIC Cash flow + INCOME change in PV = Cash flow economic depreciation ACCOUNTING Cash flow + change in book value = Cash flow accounting depreciation RETURN Economic income PV at start of year Accounting income BV at start of year
Slide 39: M&M Proposition r rE rA rD Risk free debt Risky debt D E
Slide 40: WACC (traditional and M&M view) r rE rE =WACC rD D V r rE WACC rD rD WACC r rE D V D V
Slide 41: Financial Distress Maximum value of firm Costs of financial distress PV of interest tax shields Value of levered firm Value of unlevered firm Debt Optimal amount of debt
Slide 42: Call Option (long) Call option value given a $85 exercise price. Call option value $20 85 105 Share Price
Slide 43: Put Option (long) Put option value given a $85 exercise price. Put option value $5 80 85 Share Price
Slide 44: Call Option (short) Call option payoff (to seller) given a $85 exercise price. Call option $ payoff 85 Share Price
Slide 45: Put Option (short) Put option payoff (to seller) given a $85 exercise price. Put option $ payoff 85 Share Price
Slide 46: Protective Put Long stock and long put Long Stock Position Value Protective Put Long Put Share Price
Slide 47: Straddle Long call and long put - Strategy for profiting from high volatility Position Value Straddle Share Price
Slide 48: Black-Scholes Option Pricing Model ln (d1) = Ps S + (r + t v2 2 )t v N(d1)= 32 34 36 38 40
Slide 49: Binomial vs. Black Scholes Expanding the binomial model to allow more possible price changes 1 step (2 outcomes) 2 steps (3 outcomes) etc. etc. 4 steps (5 outcomes)
Slide 50: Straight Bond vs. Callable Bond Value of bond 100 75 Straight bond Bond Callable at 100 50 25 Value of straight bond 25 50 75 100 125 150
Slide 51: Exchange Rate Relationship 1 + rforeign 1 + r$ equals equals 1 + i foreign 1 + i$ equals f foreign S foreign /$ /$ equals E(sforeign / $) S foreign / $
Slide 52: Leverage Ratios I Long term debt ratio = long term debt long term debt + equity Debt equity ratio = long term debt + value of leases equity
Slide 53: Leverage Ratios II total liabilities total assets Total debt ratio = Times interest earned = EBIT interest payments Cash coverage ratio = EBIT + depreciation interest payments
Slide 54: Liquidity Ratios I Net working capital to total assets ratio = net working capital total assets Current ratio = current assets current liabilities
Slide 55: Liquidity Ratios II cash + marketable securities + receivables current liabilities Quick ratio = Cash ratio = cash + marketable securities current liabilities Interval measure = cash + marketable securities + receivables average daily expenditures from operations
Slide 56: Efficiency Ratios I Asset turnover ratio = sales average total assets sales NWC turnover = average net working capital
Slide 57: Efficiency Ratios II cost of goods sold average inventory Inventory turnover ratio = Days' sales in inventory = average inventory cost of goods sold / 365 Average collection period = average receivables average daily sales
Slide 58: Profitability Ratios I EBIT - tax sales Net profit margin = Return on assets = EBIT - tax average total assets Return on equity = earnings available for common stock average equity
Slide 59: Profitability Ratios II dividends earnings Payout ratio = Plowback ratio = = earnings - dividends earnings 1 - payout ratio Growth in equity from plowback = earnings - dividends earnings
Slide 60: Market Value Ratios I stock price earnings per share PE Ratio = Forecasted PE ratio = 0 = aveEPS 1 P Div 1 EPS 1 x 1 r-g Dividend yield = dividend per share stock price
Slide 61: Market Value Ratios II 1 r-g Div Price per share = P 0 = Market to book ratio = stock price book value per share Tobins Q = market value of assets estimated replcement cost
Slide 62: Du Pont System I ROA = sales assets x EBIT sales taxes asset turnover profit margin
Slide 63: Du Pont System II ROE = assets equity x sales assets x EBIT - taxes sales x EBIT - taxes - interest EBIT - taxes leverage asset ratio turnover profit margin debt burden
Slide 64: Firm‘s Cumulative Capital Requirement Dollars A B C Cumulative capital requirement Year 1 Strategy A: Strategy B: Strategy C: Year 2 Time A permanent cash surplus Short-term lender for part of year and borrower for remainder A permanent short-term borrower
Slide 65: Working Capital Simple Cycle of operations Cash Receivables Raw materials inventory Finished goods inventory
Slide 66: Inventories & Cash Balances I Total costs Carrying costs Total order costs Optimal order size Order size
Slide 67: Inventories & Cash Balances II Cash balance ($000) 25 12.5 Average inventory 0 1 2 3 4 5 Weeks Value of bills sold = Q = 2 x annual cash disbursement x cost per sale interest rate
Slide 68: Private Equity Partnership Investment Phase General Partner put up 1% of capital Mgmt fees Limited partners put in 99% of capital Payout Phase General Partner get carried interest in 20% of profits Partnership Partnership Limited partners get investment back, then 80% of profits Company 1 Investment in diversified portfolio of companies Company 2 Sale or IPO of companies Company N
Slide 69: Increase in the Cash Flows from Assets Debtholders They have fixed claims on these cash flows Assets Cash flows form assets Shareholders They have residual claims on these cash flows so that the larger the cash flows, the more value created
Slide 70: A Simplified View of the Financial Accounting Process The firm Financial transactions The rest of the world Financial accounting process The balance sheet Records assets and liabilities at the date of the balance sheet. Their difference is the book value of equity at that date. The income statement Records revenues and expenses over a period of time. Their difference, which represents an increase or a decrease in the book value of equity, is the profit or loss for the period.
Slide 71: Sources of Risk That Increase Profit Volatility • Economic conditions • Political & social environment + 10% + 31% + 26% SALES - 10% Less variable Earnings and before interest fixed and taxes expenses - 26% Less fixed interest expenses and variable tax expenses Earnings after taxes • Market structure • Firm‘s competitive position - 31% ECONOMIC RISK OPERATIONAL RISK FINANCIAL RISK BUSINESS RISK
Slide 72: The Link Between the Balance Sheets and the Income Statement Balance Sheet December 31, 2001 Liabilities $100 Owner‘s equity $70 Revenues $480 Income Statement Year 2002 Balance Sheet December 31, 2002 Assets $170 Assets $190 Expenses $469.8 Liabilities $113 Owner‘s equity $77 Net Profit $10.2 Retained earnings $7 Dividends $3.2
Slide 73: The Managerial Balance Sheet Versus the Standard Balance Sheet The Managerial Balance Sheet Invested capital or net assets Cash Working capital requirement (WCR) Operating assets less Operating liabilities The Standard Balance Sheet Total assets Cash Operating assets Accounts receivable plus Inventories plus Prepaid expenses Capital employed Liabilities and owner‘s equity Short-term debt Operating liabilities Accounts payable plus Accrued expenses Short-term debt Long-term financing Long-term debt plus Owner‘s equity Long-term financing Net fixed assets Long-term debt plus Owner‘s equity Net fixed assets
Slide 74: The Firm‘s Operating Cycle and Its Impact on the Firm‘s Balance Sheet Payments for nonoperating activities Cash Impact on the balance sheet: • Accounts receivable • Finished goods inventory Impact on the balance sheet: Sales Procurement • Accounts payable • Raw material inventory Production Impact on the balance sheet: • Raw materials inventory • Work in progress inventory • Finished goods inventory
Slide 75: Sources of Cash Inflow and Cash Outflow Sources of cash inflow Operating activities • Sale of goods and services Investing activities • Sale of fixed assets • Sale of long-term financial assets • Collection of interest and dividend income • Collection of loans mad $2 Financial activities • Issuance of stocks and bonds • Long-term borrowings • Short-term borrowings $472 $13 CASH $460.8 $18.2 $12 Sources of cash outflow Operating activities • Purchase of supplies • Selling, general, and administrative expenses • Tax expense Investing activities • Capital expenditures and acquisitions • Long-term financial investments Financial activities • Repurchase of stocks and bonds • Repayment of long-term debt • Repayment of short-term debt • Interest payment • Dividend payment Net cash flow from operating activities $11.2 New cash flow from investing activities ($10) New cash flow from financing activities ($5.2)
Slide 76: The Drivers of Return on Equity Return on equity Earnings after tax ROE = Owner‘s equity Return on invested capital ROIC = Earnings before interest and tax Invested capital Financial leverage multiplier Tax effects Operating profit margin Earnings before interest and tax Sales Capital turnover Sales Invested capital Financial structure ratio Invested capital Owner‘s equity Financial cost ratio Tax effect ratio Earnings before tax Earnings after tax Earnings before interest and tax Earnings before tax Sales Operating costs Invested capital Cash Working Capital requirement Fixed assets Owner‘s equity Cost of debt Tax rate
Slide 77: The Financial System Intermediation via institutional investors S U P P L I E R S OF F U N D S Insurance policies Retirement plans Shares in funds CASH PRIVATE PLACEMENT Insurance companies, pension funds, Investment funds & venture capitalists CASH CASH SHARES CASH BONDS Money Market Instruments CASH SHARES CASH BONDS CASH Commercial paper CASH SHARES CASH BONDS CASH Commercial paper The equity market (Trading in shares of common stocks) The corporate market (Trading in corporate bonds) The money market (Trading in money market instruments) Bank certificates of deposit (CD) F I R M S CASH BANK DEPOSITS CASH Intermediation via banks and other lending institutions DEBT OWED TO BANKS CASH
Slide 78: Alternative Equity Valuation Models Market multiples model Firm‘s earnings, cash flows, or book value multiplied by the Corresponding market multiple Dividend valuation model Future expected dividends Equity value equals Present value of debt less the Levered asset value discounted at the Cost of equity Discounted cash flow model Adjusted present value model Cash flows from assets Unlevered asset value discounted at the Unlevered cost of equity Tax savings Present value of tax savings discounted at the Cost of debt Firm‘s earnings, cash flows, or book value discounted at the Corresponding market multiple
Slide 79: The Drivers of Value Creation EBIT Operating margin = Sales Sales Capital turnover = Invested capital Tax effect = (1 – Taxe rate) Aftertax cost of debt Estimated cost of equity Percent of debt financing EBIT Invested capital (pretax ROIC) Expected after tax ROIC Return spread (ROIC – WACC) Weighted average cost of capital WACC Market Value Added (MVA) If the present value of the future stream of expected return spreads is positive, MVA is positive and the higher the growth, the more value created. If the present value of the future stream of expected return spreads is negative, MVA is negative and the higher the growth, the more value destroyed. Percent of equity financing Economic, political, and social environments Market structure Competitive advantages and core competencies EBIT = Earnings before interest and taxes (operating profit before tax); Invested capital = Cash + Working capital requirement + net fixed assets; WACC = (%Debt)(After tax cost of debt) + (%Equity)(Cost of equity). Sustainability of growth
Slide 80: Capital-Budgeting Simulation Step 1: Develop probability distributions for key factors. Step 2: Randomly select values from these distributions. Probability Market size Selling price Fixed costs Value range Market growth rate Share of market Investment required Residual value of investment Useful life of facilities Operating costs Step 3: Combine these factors and determine a net present value. Step 4: Continue to repeat this process until a clear portrait of the results is obtained. Probability Net present value Step 5: Evaluate the resultant probability distribution.
Slide 81: Cash Flow Diagram Supplies and materials purchased using trade credit Suppliers Payment for fixed asset purchases Saleable product (inventory) Credit sales (accounts receivable) Payments for credit purchases Cash dividends Payment for wages and salaries Payment for heat and power Bad debts Cash Cash sales Collections from credit sales Proceeds from sale or issuance of stock Proceeds from sale or issuance of notes and bonds Interest and principal Payment of taxes Stockholders Creditors Government
Slide 82: Aggressive Financing Strategy: Permanent Reliance on Short-Term Financing Permanent dependence on short-term financing Temporary (short-term) financing DOLLAR AMOUNT Permanent current assets Current assets Permanent plus spontaneous financing Fixed assets TIME
Slide 83: Cash and Marketable Securities Management Irregular cash inflows Bond sales Other debt contracts Preferred stock sales Common stock sales In Irregular outflows Dividends Interest Principal on debt Share repurchase Taxes Out Cash balance Purchase Purchase Sale Marketable securities Labor and material Fixed assets Depreciation Inventory Credit sales Receivables Sale Cash sales Collections
Slide 84: Three Ways to Transfer Financial Capital in the Economy (1) Direct transfer of funds (2) Indirect transfer using the investment banker (3) Indirect transfer using the financial intermediary The business firm (a savings deficit unit) The business firm (a savings deficit unit) Securities Funds The business firm (a savings deficit unit) Firm‘s securities Funds Firm‘s securities (stocks, bonds) Funds (dollars of savings) Marketable securities Marketable securities Intermediary‘s securities Securities Funds Funds Savers (savings surplus units) Savers (savings surplus units) Savers (savings surplus units)
Slide 85: Key Metrics Required for Different Company Situations High Need for long-term view • High probability of significant change of - Technology - Regulation - Competition • Long life of investments • Complexity of business portfolio Growth of net income Multiyear DCF of economic profit Operating value drivers Net income, return on sales Low Low ROIC-WACC, economic profit (one year) High Capital intensity (need for balance sheet focus) • Working capital • Property, plant, and equipment
Slide 86: Various Levels of Value Driver Identification LEVEL 1 LEVEL 2 LEVEL 3 Examples Margin Margin Invested capital ROIC Margin Invested capital Invested capital • Customer mix • Sales force productivity (expense: revenue) • Fixed cost/ allocations • Capacity management • Operational yield Examples • Percent accounts revolving • Dollars per visit • Unit revenues • Billable hours to total payroll hours • Percent capacity utilized • Cost per delivery • Accounts receivable terms & timing • Accounts payable terms & timing Generic Business-unit specific Operating value drivers
Slide 87: Customer Servicing – Human Expense Flowchart Call volume Personal cost Number of people Cost per person Number of stations per SDC Service Delivery Center expense Total CShuman expense Overhead expense Number of SDCs Station cost Equipment cost per station Equipment, maintenance experse per station Other equipment expense Salary expense Supervisory cost Utilities Number of supervisors Building operating expense Building maintanance expense Other Percent occupancy Average work time per call Hourly rate Benefits % time on board % time in training % time on breaks % time on vacation % time paid Absence/other Annual salary Benefits Span of control Number of employees Cost per SDC Headquaters expense Regional center expenses Area staff center expense Allocated G&A Overhead cost Number of employees Equipment Materials Other
Slide 88: Six Conditions for Excellent Value-Based Management Performance Driven 5 4 Low cost 3 2 1 Value-based Highest level Good Medium Sup par Lowest Strong self-reinforcement process Managed bottom up as well as top down Two-way communications
Slide 89: Simple Entity Valuation of a SingleBusiness Company Operating free cash flow130 70 90 100 140 150 160 Debt value Cash flow to debtholders 69 20 36 43 74 80 85 Operating value Equity value Cash flow to equity owners 54 57 61 66 70 75 50
Slide 90: Entity Valuation of a Multibusiness Company 1,750 Excess marketable securities Unit D 150 200 250 Corporate overhead Market value: 300 • Of debt • Of preferred stock Unit C 300 100 Unit B 400 1,500 1,100 Unit A 700 Total value before subtracting corporate overhead Total company value Common equity value
Slide 91: Steps in Valuation (1) Analyze historical performance (2) Forecast performance (3) Estimate cost of capital (4) Estimate continuing value (5) Calculate and interpret results • Calculate NOPLAT and invested capital • Calculate value drivers • Develop an integrated historical perspective • Analyze financial health • Understand strategic position • Develop performance scenarios • Forecast individual line items • Check overall forecast for reasonableness • Develop target market value weights • Estimate cost of noequity financing • Estimate cost of equity financing • Select appropriate technique • Select forecast horizon • Estimate the parameters • Discount continuing value to present • Calculate and test results • Interpret results within decision context
Slide 92: Business System Analysis Product Design and Development Issues • Product attributes • Quality • Time to market • Proprietary technology Procurement Manufacturing Marketing Sales and Distribution • Sales effectiveness • Costs • Channels • Transportation • Access to sources • Costs • Outsourcing • Costs • Cycle time • Quality • Pricing • Advertising/ promotion • Packaging • Brands
Slide 93: Structure-Conduct-Performance Model Industry Producers External Shocks STRUCTURE Feedback CONDUCT PERFORMANCE Feedback Cooperation vs. Rivalry
Slide 94: Rates of Return Implied by Alternative Continuing-Value Formulas Average ROIC CV = NOPLAT WACC - g Aggressive formula Convergence formula NOPLAT WACC CV = WACC Forecast period Continuing-value period Time
Slide 95: Impact of Continuing-Value Assumptions $3,000 g = 8% $2,000 g = 6% CONTINUING VALUE ($) $1,000 g = 4% g = 2% g = 0% 0 10% 12 14 16 18 20 RETURN ON NET NEW INVESTED CAPITAL
Slide 96: Relative Positions of Selected Industries Along Continuing-Value Parameters > Inflation Entertainment Sporting goods Not economic Growing EARNINGS GROWTH Most Information Soft firms processing drinks = Inflation CONSUMPTION Tobacco Not economic Defense Steel < Inflation < WACC = WACC RETURN ON NEW CAPITAL Factors affecting returns Low Many Short High Entry costs Substitutes Life cycle Price elasticity High Few Long Low Declining > WACC
Slide 97: A Forecast Period that Will Result in a Poor Valuation of a Cyclical Business NOPLAT Date of valuation TIME End of forecast period
Slide 98: Risk/Return Trade-Offs of Hedging Programs E (Return) E (Return) A B Beta decreased Beta unchanged Beta unchanged A Rf B Beta decreased Total risk Rf Beta (undiversifiable risk)
Slide 99: Framework for Evaluating the Value of an Acquisition Standalone value of acquiror (pre-merger) Stand-alone value of target (without any takeover premium) Value Transaction of costs synergies Combined value Value of next best alternative Value of target to acquiror Price paid including premium Net value gained from acquisition
Slide 100: Patent Valuation: DCF Method Overview Value (NPV) of technology/project/product NPV = Estimation of present value of a business using discounted cash flows Maximal value of technology = NPV x Max Protection Factor Max Protection Factor = Empirical factor indicating maximal impact of patents on NPV Value of patents = NPV x Pfmax x PPF Patent Protection Factor = Measure of the quality of the patent protection
Slide 101: Patent Valuation: Maximal Protection Factor Maximal Protection Factor 30% Empirical curve 5% Age of Technology Technology under R&D Mature Technology Patent-Value = Maximal-Protection-Factor x Patent-Protection-Factor x NPVtec Pval = Pmax x PPF x NPVtec
Slide 102: Acquisition of Real Options High Big bets Alliance leverage LEVEL OF INVESTMENT (OPTION PRICE) Low Entry stakes Risk pooling Internal External SOURCE OF OPTIONS
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