investment valuation(投资金融学方面的书籍)ch15

0CHAPTER15FIRMVALUATION:COSTOFCAPITALANDAPVAPPROACHESInthelasttwochapters,weexaminedtwoapproachestovaluingtheequityinthefirm--thedividenddiscountmodelandtheFCFEvaluationmodel.Thischapterdevelopsanotherapproachtovaluationwheretheentirefirmisvalued,byeitherdiscountingthecumulatedcashflowstoallclaimholdersinthefirmbytheweightedaveragecostofcapital(thecostofcapitalapproach)orbyaddingthemarginalimpactofdebtonvaluetotheunleveredfirmvalue(adjustedpresentvalueapproach).Intheprocessoflookingatfirmvaluation,wealsolookathowleveragemayormaynotaffectfirmvalue.Wenotethatinthepresenceofdefaultrisk,taxesandagencycosts,increasingleveragecansometimesincreasefirmvalueandsometimesdecreaseit.Infact,wearguethattheoptimalfinancingmixforafirmistheonethatmaximizesfirmvalue.TheFreeCashflowtotheFirmThefreecashflowtothefirmisthesumofthecashflowstoallclaimholdersinthefirm,includingstockholders,bondholdersandpreferredstockholders.Therearetwowaysofmeasuringthefreecashflowtothefirm(FCFF).Oneistoaddupthecashflowstotheclaimholders,whichwouldincludecashflowstoequity(definedeitherasfreecashflowtoequityordividends),cashflowstolenders(whichwouldincludeprincipalpayments,interestexpensesandnewdebtissues)andcashflowstopreferredstockholders(usuallypreferreddividends).FCFF=FreeCashflowtoEquity+InterestExpense(1-taxrate)+PrincipalRepayments-NewDebtIssues+PreferredDividendsNote,however,thatwearereversingtheprocessthatweusedtogettofreecashflowtoequity,wherewesubtractedoutpaymentstolendersandpreferredstockholderstoestimatethecashflowleftforstockholders.Asimplerwayofgettingtofreecashflowtothefirmistoestimatethecashflowspriortoanyoftheseclaims.Thus,wecouldbegin1withtheearningsbeforeinterestandtaxes,netouttaxesandreinvestmentneedsandarriveatanestimateofthefreecashflowtothefirm.FCFF=EBIT(1-taxrate)+Depreciation-CapitalExpenditure-ΔWorkingCapitalSincethiscashflowispriortodebtpayments,itisoftenreferredtoasanunleveredcashflow.Notethatthisfreecashflowtothefirmdoesnotincorporateanyofthetaxbenefitsduetointerestpayments.Thisisbydesign,becausetheuseoftheafter-taxcostofdebtinthecostofcapitalalreadyconsidersthisbenefitandincludingitinthecashflowswoulddoublecountit.FCFFandothercashflowmeasuresThedifferencesbetweenFCFFandFCFEariseprimarilyfromcashflowsassociatedwithdebt--interestpayments,principalrepayments,newdebtissuesandothernon-equityclaimssuchaspreferreddividends.Forfirmsattheirdesireddebtlevel,whichfinancetheircapitalexpendituresandworkingcapitalneedswiththismixofdebtandequity.Asfortheuseofdebtissuestofinanceprincipalrepayments,thefreecashflowtothefirmwillexceedthefreecashflowtoequity.Onemeasurethatiswidelyusedinvaluationistheearningsbeforeinterest,taxes,depreciationandamortization(EBITDA).Thefreecashflowtothefirmisacloselyrelatedconceptbutittakesintoaccountthepotentialtaxliabilityfromtheearningsaswellascapitalexpendituresandworkingcapitalrequirements.Threemeasuresofearningsarealsooftenusedtoderivecashflows.Theearningsbeforeinterestandtaxes(EBIT)oroperatingincomecomesdirectlyfromafirm’sincomestatements.AdjustmentstoEBITyieldthenetoperatingprofitorlossaftertaxes(NOPLAT)orthenetoperatingincome(NOI).Thenetoperatingincomeisdefinedtobetheincomefromoperations,priortotaxesandnon-operatingexpenses.Eachofthesemeasuresisusedinvaluationmodelsandeachcanberelatedtothefreecashflowtothefirm.Each,however,makessomeassumptionsabouttherelationshipbetweendepreciationandcapitalexpendituresthataremadeexplicitintheTable15.1.Table15.1:FreeCashFlowstotheFirm:ComparisontoothermeasuresCashflowusedDefinitionUseinvaluation2FCFFFreeCashflowtofirmDiscountingfreecashflowtothefirmatthecostofcapitalwillyieldthevalueoftheoperatingassetsofthefirm.Tothis,youwouldaddonthevalueofnon-operatingassetstoarriveatfirmvalue.FCFEFCFF-Interest(1-t)–Principalrepaid+NewDebtIssued–PreferredDividendDiscountingfreecashflowstoequityatthecostofequitywillyieldthevalueofequityinabusiness.EBITDAFCFF+EBIT(t)+CapitalExpenditures+ChangeinworkingcapitalIfyoudiscountEBITDAatthecostofcapitaltovalueanasset,youareassumingthattherearenotaxesandthatthefirmwillactivelydisinvestovertime.Itwouldbeinconsistenttoassumeagrowthrateoraninfinitelifeforthisfirm.EBIT(1-t)(NOPLATisaslightlymodifiedversionofthisestimateanditremovesanynon-operatingitemsthatmightaffectthereportedEBIT.)FCFF+CapitalExpenditures–Depreciation+ChangeinworkingcapitalIfyoudiscountafter-taxoperatingincomeatthecostofcapitaltovalueafirm,youareassumingnoreinvestment.Thedepreciationisreinvestedbackintothefirmtomaintainexistingassets.Youcanassumeaninfinite3lifebutnogrowth.GrowthinFCFEversusGrowthinFCFFWillequitycashflowsandfirmcashflowsgrowatthesamerate?Considerthestartingpointforthetwocashflows.Equitycashflowsarebaseduponnetincomeorearningspershare–measuresofequityincome.Firmcashflowsarebaseduponoperatingincome–i.e.incomepriortodebtpayments.Asageneralrule,youwouldexpectgrowthinoperatingincometobelowerthangrowthinnetincome,becausefinancialleveragecanaugmentthelatter.Toseewhy,letusgobacktothefundamentalgrowthequationswelaidoutinChapter11.Expectedgrowthinnetincome=EquityReinv