Académique Documents
Professionnel Documents
Culture Documents
Stephen H. Penman
Prepared by Peter D. Easton and Gregory A. Sommers
Fisher College of Business The Ohio State University
With contributions by Stephen H. Penman Columbia University Luis Palencia University of Navarra, IESE Business School
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Chapter 2 Page 27
Asset-based valuation
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Content is the line items that are reported within the components parts of financial statements
The form gives the overall story in the statements. The content puts numbers into the story Form is given by accounting relations This chapter is about form
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2. Income Statement
3. Cash Flow Statement
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DELL COMPUTER CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL POSITION (IN MILLIONS) ASSETS JANUARY 29, 1999 Current assets: Cash Marketable securities Accounts receivable, net Inventories Other Total current assets Property, plant and equipment, net Other Total assets FEBRUARY 1, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable Accrued and other Total current liabilities Long-term debt Other Commitments and contingent liabilities Total liabilities Stockholders' equity: Preferred stock and capital in excess of $.01 par value; shares issued and outstanding: none Common stock and capital in excess of $.01 par value; shares issued and outstanding: 2,543 and 2,575, respectively Retained earnings Other Total stockholders' equity Total liabilities and stockholders equity $2,397 1,298 -------3,695 512 349 ---------4,556 -------$1,643 1,054 -------2,697 17 261 ---------2,975 --------
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Net revenue Cost of revenue Gross margin Operating expenses: Selling, general and administrative Research, development and engineering Total operating expenses Operating income Financing and other Income before income taxes and extraordinary loss Provision for income taxes Income before extraordinary loss Extraordinary loss, net of taxes Net income Basic earnings per common share (in whole dollars): Income before extraordinary loss Extraordinary loss, net of taxes Earnings per common share Diluted earnings per common share (in whole dollars): Weighted average shares outstanding: Basic Diluted
$18,243 14,137 ---------4,106 ---------1,788 272 ---------2,060 ---------2,046 38 ---------2,084 624 ---------1,460 ------------$ 1,460
$12,327 9,605 --------2,722 --------1,202 204 --------1,406 --------1,316 52 --------1,368 424 --------944 -----------$ 944
2,531 2,772
2,631 2,952
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Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Tax benefits of employee stock plans Other Changes in: Operating working capital Non-current assets and liabilities Net cash provided by operating activities Cash flows from investing activities: Marketable securities: Purchases Maturities and sales Capital expenditures Net cash used in investing activities Cash flows from financing activities: Purchase of common stock Issuance of common stock under employee plans Proceeds from issuance of long-term debt, net of issuance costs Cash received from sale of equity options and other Net cash used in financing activities Effect of exchange rate changes on cash Net increase in cash Cash at beginning of period . Cash at end of period
$ 1,460
$ 944
(16,459) 15,341 (296) ---------(1,414) ---------(1,518) 212 494 ------------(812) ---------(10) ---------200 320 ---------$ 520
(12,305) 12,017 (187) -------(475) -------(1,023) 88 ---37 -------(898) -------(14) -------205 115 -------$ 320
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COMMON STOCK AND CAPITAL IN EXCESS OF PAR VALUE SHARES Balances at February 1, 1998 Net income Stock issuance under employee plans, including tax benefits Purchase and retirement of 149 million shares Other 2,575 ---117 (149) ---_____ 2,543 AMOUNT $ 747 ---1,092 (60) 2 _____ $1,781 RETAINED EARNINGS $ 607 1,460 ---(1,458) (3) _____ $ 606 OTHER $ (61) ---(7) ---2 _____ $ (66) TOTAL $1,293 1,460 1,085 (1,518) 1 _____ $2,321
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Market Premium:
Market Value of Equity Book Value of Equity
Price-to-Book Ratio:
Market Value of Equity Book Value of Equity
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Price-to-Book Ratios
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0.5
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Price-to-Earnings Ratios
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Cash from operations Cash from investing Cash from financing Cash + Other Assets Total Assets - Liabilities Owners equity Net change in cash Statement of Shareholders Equity Cash + Other Assets Total Assets - Liabilities Owners equity
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How Parts of the Financial Statements Fit Together The Balance Sheet Assets Liabilities = Shareholders' Equity Income Statement Net Revenue Cost of Goods Sold = Gross Margin - Operating Expenses = Operating Income before Taxes (EBIT) - Interest Expense = Income Before Taxes - Income Taxes = Income After Tax and before Extraordinary Items + Extraordinary Items = Net Income - Preferred Dividends = Net Income Available to Common Cash Flow Statement (and the Articulation of the Balance Sheet and Cash Flow Statement) Cash Flow from Operations + Cash Flow from Investing + Cash Flow from Financing = Change in Cash
Statement of Shareholders' Equity (and the Articulation of the Balance Sheet and Income Statement) Dividends Net Income + Share Repurchases Beginning Equity + Other Comprehensive Income = Total Payout + Comprehensive Income = Comprehensive Income - Share Issues - Net Payout to Shareholders = Net Payout = Ending Equity
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Chapter 2 Page 40
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2. Identify measures for the comparable firms in their financial statements earnings, book value, sales, cash flow and calculate multiples of those measures at which the firms trade
3. Apply these multiples to the corresponding measures for the target firm to get that firms value
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Firm Mean P/B E/P (P-B)/R&D P/Revenue Mean over all values 4.16 0.0245 10.66 6.05
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The Method of Comparables: Dell, Gateway 2000 and Compaq, 1998 An example: Dell, April 1, 1999
Sales Compaq Computer Corp. Gateway 2000 Inc. Dell Computer Corp. $31,169 7,468 18,243 Earnings $ 846 346 1,460 Book Value Market P/S P/E P/B Value 3.6 7.8 ?
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If the market is efficient for the comparable companies....Why is it not for our target company ?
Implementation problems:
Finding the comparables that match precisely
How to reconcile the different prices (one for every multiple)? What about negative denominators?
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Firm Mean P/B E/P (P-B)/R&D P/Revenue Mean over all values 4.16 0.0245 10.66 6.05
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Price per share Sum of EPS for most recent four quarters
Price per share Forecast of next year' s EPS
Leading P/E
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Dividend-Adjusted P/E
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Multiple _______________________________________________ _________ Standard Leading Unlevered Unlevered Percentile P/B P/E P/E P/S P/S P/CFO P/EBITDA 95% 8.3 Negative 62.5 6.3 7.1 Negative 71.4 earnings cash flow 75% 3.3 29.4 20.0 2.0 2.5 18.9 12.3 50% 2.1 17.5 14.3 1.0 1.4 10.8 8.2 25% 1.4 12.3 10.8 0.6 0.8 6.8 6.1 5% 0.8 7.6 7.1 0.2 0.4 3.9 4.1 ________________________________________________________________
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Values the firms assets and then subtracts the value of debt:
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DELL COMPUTER CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL POSITION (IN MILLIONS) ASSETS JANUARY 29, 1999 Current assets: Cash Marketable securities Accounts receivable, net Inventories Other Total current assets Property, plant and equipment, net Other Total assets FEBRUARY 1, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable Accrued and other Total current liabilities Long-term debt Other Commitments and contingent liabilities Total liabilities Stockholders' equity: Preferred stock and capital in excess of $.01 par value; shares issued and outstanding: none Common stock and capital in excess of $.01 par value; shares issued and outstanding: 2,543 and 2,575, respectively Retained earnings Other Total stockholders' equity Total liabilities and stockholders equity $2,397 1,298 -------3,695 512 349 ---------4,556 -------$1,643 1,054 -------2,697 17 261 ---------2,975 --------
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