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# Terminal Value

Terminal Value Basics The spreadsheet must be completed with at least 4 Comparable Acquisitions with Apple Fill out the “DCF”, “NWC”, “WACC”, “A1” and “A2”…

Terminal Value
Basics
The spreadsheet must be completed with at least 4 Comparable Acquisitions with Apple

Fill out the “DCF”, “NWC”, “WACC”, “A1” and “A2”
You need change the years in the template to recent years. The historical period should be 2017, 2018, 2019, then 2020.

THEN provide a written analysis as to the statistics.
Terminal Value
Steps and how to calculate the statistics(FORMULAS)
Analysis Steps

Determine the company’s key performance drivers
Project cash flow – 5 years
Calculate the WACC
Determine terminal value
Calculate PV and Determine valuation

Terminal Value
Determine Key Performance Drivers

Know the company
Drivers

a) Sales growth

1)  New products
2)  Opening of stores
3)  New markets
4)  Market trends
5)  Government influences
6)  M&A
Terminal Value

b) Expense growth

1) Sales growth
2)  M&A
3)  Start-up costs

c)  Cap Expenditures
d)  Working capital requirements

Want to make sure that year 5 of the projections is at a normal rate representative of the company’s normalized operations.
Terminal Value
Make sure that there is a logic to the projection

a) Higher sales mean greater expenses,          higher cap exp. And higher working capital

Operating expenses are usually based on historical operating margins.
S,G &A is usually based on historical % of sales
Expense margins are usually held constant unless there is something specific going on with the company
Comparable Acquisitions
Terminal Value
EBIT
Less: Taxes at the Marginal Rate
Equal EBIAT
What we are trying to avoid is earnings that are benefitting from extraordinary low rates for that year.  Want projections to be built based on taxes that are at a normalized rate.
Terminal Value
What is the marginal tax rate or the normalized rate?  – Look at the historical tax rate
EBIAT
Plus: Depreciation and amortization
Less: Capex
Less:  (Increase or decrease in net working capital)
Depreciation is usually estimated going forward as the existing level of depreciation plus a % of CAPEX or of sales.
Amortization usually lumped in with depreciation or estimated as a % of sales
Capital expenditures are shown on the cash flow statement

a) Usually, use the historical number and the historical growth rate
b) May be adjusted if there are anticipated changes in the company’s strategy, etc.
c) You usually revert back to the historical rates

Terminal Value
Networking capital
Current assets (accounts receivable, inventory, prepaid expenses and other)
Less
Current liabilities (accounts payable, accrued liabilities and other)

The growing company usually has working capital requirements – Sales growth causes an increase in inventory and accounts receivable

Can estimate net working capital as a whole but if possible the components of current assets and current liabilities are estimated and then put together
DSO (Days sales outstanding) = A/R / Sales x 365

Inventory Turns = COGS / Average Inventory

Terminal Value

Prepaid and other current assets projected as a % of sales

DPO = Average A/P / COGS x 365

Other current liabilities and accrued liabilities projected as a % of sales

Weighted Average Cost of Capital
Rd x (1- t) x (total debt / total capitalization)
Re x (total equity / total capitalization)
The cost of debt is equal to the weighted average cost of each outstanding debt issuance.  Where there are bond issues it the current yield to maturity of the bonds.
t is the current tax rate
Terminal Value
Cost of Equity
Capital Asset Pricing Model
Rf + Beta x (market risk premium) = Cost of Equity
Beta found on financial web sites.  It is dependent on the capital structure of the company.
Rf is the yield to maturity of the 10 year US Treasury
Terminal Value
We need to look at the debt to total capital of comparable companies.  If it is similar then you can use the beta for the company.  If it is not then you need to go through the calculation of the average unlevered beta.
Terminal Value
Sensitivity Analysis
Usually derived based on the comparable company approach.  Most often EBITDA x (EBITDA multiple)
Determine the Value
Calculate the PV of each projected cash flow
Remember to add terminal value to the last period.  The terminal multiple is multiplied times the last 12 months results.
Add the PVs to get the value
Divide by the fully diluted number of shares to get the value per share
Comparable Acquisitions
Terminal Value

Usually, you create a chart of values with a number of different terminal values and WACCs
Then you need to pick the value that makes the most sense. 