sse riga investment fund board 2011/2012 elections
DESCRIPTION
SSE Riga Investment Fund Board 2011/2012 Elections. 23/05/2011. Agenda. Info about iFund Elections’ procedure Questions. iFund Structure. 5 board members Several associates from Y2 ~40 supporting people from Y1. iFund Structure: Board. Chairman of the Board Investment Game Organizer - PowerPoint PPT PresentationTRANSCRIPT
SSE Riga Investment Fund Board 2011/2012 Elections
23/05/2011
Agenda
Info about iFundElections’ procedureQuestions
iFund Structure
5 board membersSeveral associates from Y2~40 supporting people from Y1
iFund Structure: Board
Chairman of the BoardInvestment Game OrganizerCorporate Relations ManagerPortfolio ManagerMacroeconomist/Y1 coordinator
iFund ActivitiesFundraisingInvestment GamePortfolio managementEducational seminarsInvestment [UN]limitedGuest lecturesScholarships
Elections’ Procedure
Signing upValuation of a companyPresentationsInterviewsHandover party
Signing up
Send an email to [email protected] expressing your wish to participateASAP
Valuation of a CompanyMain part of electionsTime - from May 23rd to June 8th More on it later tonight
Presentations & InterviewsPresentations on June 10/13th
10 minutes + time for questions
Interviews on June 14-15th
Short interviews with current board members
Handover Party
One of the most exclusive eventsTime – June 18th
Place – Laba pirtsMembers of new board announcedElections of the chairman
WHY?Managerial Experience
Something to put on your CV
NetworkingSome way to get good contacts for good internship during Year 2
Real investment opportunitiesPortfolio worth of 1500LVL
WHY (2)?There is a robust tendency that iFund ex-board members get sexy future employment positions
Barclay’s CapitalMerrill LynchCentral Banks (LV)BCG
Thank you for your attention
Questions?
Valuation Instructions
May 23, 2010
Your Task€ Prepare a DCF valuation of a company
listed on any of Baltic stock exchangesRefrain from financial and insurance companies!
€ Task has been developed by 2001/2002 board
Introduction to the Model
Your output must consist of two parts:
€ Valuation model:Excel file
€ Valuation report:Up to 10 pages of text excluding appendices
Valuation ReportGeneral company dataCompany’s market environment:
Industry outlook
Company’s market position
Products/services of the company
Evaluation and analysis of financial performanceResults of the valuation modelAdvice to investors
DCF Steps
#1: Forecast and construct future IS, BS, CF#2: Calculate Free Cash Flows (FCF)#3: Find the equity risk () and risk premium (rm-rf)
#4: Find required rate of return on equity (re)
#5: Find the discount rate (WACC)#6: Find the Terminal Value, and discount all cash flows
DCF Steps
#1: Forecast and construct future IS, BS, CF#2: Calculate Free Cash Flows (FCF)#3: Find the equity risk () and risk premium (rm-rf)
#4: Find required rate of return on equity (re)
#5: Find the discount rate (WACC)#6: Find the Terminal Value, and discount all cash flows
Forecasting Financial Statements (1)€ Choose a listed company from any of the Baltic
stock exchanges€ Create the model in MS Excel first€ Make separate sheets for:
Inputs, IS, CF, BS, (Sales, Costs, Investments, etc)For Free Cash Flows (CFC) calculations
€ Construct IS, BS, CF for the future € IS and BS of 2010 as a starting point
Do not try to re-create previous CF statements!€ Make sure the model is error-free
Fixed assets 1 500 1 520 Revenues 450 500 Cash Flows from Operations 167 Plant 1 000 1045 COGS -145 160 EBIT 135 Equipment 500 475 Gross profit 305 340 (+) Interest income 5Current assets 300 357 Operating expenses -185 -205 (-) Interest expense -30 Inventory 100 110 Salaries -50 -55 (-) Taxes paid -33 Debtors 150 135 R&D -30 -35 (+) Depreciation 80 Cash 50 112 Marketing -25 -30 Change in Working CapitalTotal assets 1 800 1 877 Depreciation -75 -80 (-/+) Increase / decrease in inventory -10
Other -5 -5 (-/+) Increase / decrease in Debtors 15EBIT 120 135 (+/-) Increase / decrease in creditors 5
Equity and reserves 1 395 1 412 Interest income 5 5 Capital 1 200 1 200 Interest expense -25 -30 Cash Flows from Investments -100 Retained earnings 125 135 Earnings before taxes 100 110 (-) Investments in f ixed assets (i.e. plant) -100 Last year profit 70 77 Taxes, 30% -30 -33 (+) Sale of f ixed assets 0Long-term liebilities 250 300 Net Income 70 77
Loan, 10% 250 300 Cash flows from Financing activities -5Short-term liabilities 155 165 proposed dividends 55 60 (-) Dividends payed -55 Creditors 100 105 (-) Shares repurchase 0 Dividends payable 55 60 (+) New shares issue 0Total liabilities 1 800 1 877 (-) Loan repayment 0
(+) New loan 50
Total Cash flow 62
(+) Opening cash 50Closing cash 112
old assets + invest - depreciation(if investments at the beginning of the year is assumed)
dividends proposed for 2002; liability to shareholders
taxes are assumed to be paid imediately (1500+100) * 5%
(if 20 years depreciation)
Balance sheet 2001 2002 Income Statement 2001 2002 CF statement 2002
Fixed assets 1 500 1 520 Revenues 450 500 Cash Flows from Operations 167 Plant 1 000 1045 COGS -145 160 EBIT 135 Equipment 500 475 Gross profit 305 340 (+) Interest income 5Current assets 300 357 Operating expenses -185 -205 (-) Interest expense -30 Inventory 100 110 Salaries -50 -55 (-) Taxes paid -33 Debtors 150 135 R&D -30 -35 (+) Depreciation 80 Cash 50 112 Marketing -25 -30 Change in Working CapitalTotal assets 1 800 1 877 Depreciation -75 -80 (-/+) Increase / decrease in inventory -10
Other -5 -5 (-/+) Increase / decrease in Debtors 15EBIT 120 135 (+/-) Increase / decrease in creditors 5
Equity and reserves 1 395 1 412 Interest income 5 5 Capital 1 200 1 200 Interest expense -25 -30 Cash Flows from Investments -100 Retained earnings 125 135 Earnings before taxes 100 110 (-) Investments in f ixed assets (i.e. plant) -100 Last year profit 70 77 Taxes, 30% -30 -33 (+) Sale of f ixed assets 0Long-term liebilities 250 300 Net Income 70 77
Loan, 10% 250 300 Cash flows from Financing activities -5Short-term liabilities 155 165 proposed dividends 55 60 (-) Dividends payed -55 Creditors 100 105 (-) Shares repurchase 0 Dividends payable 55 60 (+) New shares issue 0Total liabilities 1 800 1 877 (-) Loan repayment 0
(+) New loan 50
Total Cash flow 62
(+) Opening cash 50
125+70-60 (dividends)
Forecasting Financial Statements (2)€ Revenues disaggregated by products or countries:
i.e. industry / market growth (%), market share (%)€ Creditors, debtors (credit days), inventories, COGS
depend on sales € Interest income and expense depend on financial
assets (cash and other), and loans€ Dividends follow earnings in the long run€ Investments depend on company’s strategy€ Check for consistency of past and future ratios
(profitability, credit days, margins, turnovers)
Forecasting Financial Statements (3)In theory, to calculate a company value, future cash flows should be forecasted as long as they lastNo sense to forecast up to infinityTwo-stage valuation:
Forecast 4 - 5 years in detail to get cash flowsCalculate company’s value (terminal value) after explicit forecast period assuming constant future growth and profitability
44
433
221
0 r)(1
P
r)(1
CF
r)(1
CF
r)(1
CF
r)(1
CFP
4
Calculating FCF
€ Which cash flows to discount?Dividends (equity value)Earnings * payout ratio (equity value)FCF (company value)
€ FCF advantage over dividends and earnings:no need to forecast how cash flows will be distributed among capital providers
€ Free Cash Flows (FCF) – cash flows to all providers of capital€ FCF is obtained by modifying Cash Flow statement
DCF Steps
#1: Forecast and construct future IS, BS, CF
#2: Calculate Free Cash Flows (FCF)#3: Find the equity risk () and risk premium (rm-rf)
#4: Find required rate of return on equity (re)
#5: Find the discount rate (WACC)#6: Find the Terminal Value, and discount all cash flows
CF statement 2002 Modified CF statement 2002
Cash Flows from Operations 167 Cash Flows from Operations 126EBIT 135 EBIT 135(+) Interest income 5 (-) Taxes on EBIT, 30% -40,5(-) Interest expense -30 NOPLAT 94,5(-) Taxes paid -33 (+) Depreciation 80(+) Depreciation 80 Change in Working CapitalChange in Working Capital (-/+) Increase / decrease in inventory -10 (-/+) Increase / decrease in inventory -10 (-/+) Increase / decrease in Debtors 15 (-/+) Increase / decrease in Debtors 15 (-/+) Increase / decrease in Cash -62 (+/-) Increase / decrease in creditors 5 (+/-) Increase / decrease in creditors 5
(+) Interest income after taxes 3,5Cash Flows from Investments -100(-) Investments in f ixed assets (i.e. plant) -100 Cash Flows from Investments -100(+) Sale of f ixed assets 0 (-) Net investments -100
Cash flows from Financing activities -5 FREE CASH FLOW 26
(-) Dividends payed -55(-) Shares repurchase 0 Cash flows from Financing activities(+) New shares issue 0 (-) Dividends payed -55(-) Loan repayment 0 (-) Shares repurchase 0(+) New loan 50 (+) New shares issue 0
(-) Loan repayment 0Total Cash flow 62 (+) New loan 50
(+) Opening cash 50 (-) Interest expense, less taxes -21Closing cash 112 Cash flows from Financing activities -26
135 * 30%
if cash increased, the diference shouldbe substractedbecause it is not paidout to capital providers
5 * (1 - 0,30)
30 * (1 - 0,30)
Net Operating profitsless adjusted taxes
should be equal
DCF Steps
#1: Forecast and construct future IS, BS, CF#2: Calculate Free Cash Flows (FCF)
#3: Find the equity risk () and risk premium (rm-rf)
#4: Find required rate of return on equity (re)
#5: Find the discount rate (WACC)#6: Find the Terminal Value, and discount all cash flows
Finding Discount Rate€ For company valuation, Weighted Average
Cost of Capital (WACC) is the appropriate discount rate
Assume constant D/E ratioIt is reasonable to assume that MV(D)=BV(D)MV (Equity) – capitalization (number of shares outstanding multiplied by share price)If substantial changes in WACC inputs are expected, it should be recalculated each year
44
433
221
0 r)(1
P
r)(1
CF
r)(1
CF
r)(1
CF
r)(1
CFP
4Recall:
Discount Rate (WACC)
)D(MV MV(Equity)
MV(Equity)r)T1(
)D(MV MV(Equity)
)MV(DCODWACC
ibequityc
ib
ibib
CODib – Cost of interest bearing debt
Tc – Corporate tax rate
MV – market valuerequity – required rate of return of equity
Required Rate of Return (re) (1)
€ Cost of Debt can be calculated and estimated from IS and BS:
CODib = [Interest expense] / Dib
€ Required rate of return on equity?€ CAPM: Capital Asset Pricing Model
Finding required returns on all risky assets
Re – Required rate of return
(Rm – Rf) – Risk premium (Rm – market return)
Rf – Risk free interest rate
- Asset risk
Required Rate of Return (re) (2)€ Risk free interest rate (Rf)€ Risk premium (Rm – Rf) in mature (US) market (in
1926 – 1998) was 6.1%)€ If country of interest is not US, additional
country risk exists
€ Adjustment for Re calculations in emerging markets is offered by A. Damodaran
Risk Premium for Emerging Markets€ Re = Rf + * RPb + RPc
Rf - Risk free interest rate (Gov. bonds/interbank rate)
RPb – Base risk premium for mature market (US)
RPc – Country risk premium, calculated:
€ RPc = Ds * (Qe / Qb) Ds – country default spread http://www.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html
Qe – standard deviation of local equity index
Qb – standard deviation of local bond index
€ More information in A. Damodaran paper “Estimating equity risk premiums”
http://www.stern.nyu.edu/~adamodar/pdfiles/papers/riskprem.pdf
Equity Risk – Beta (1)€ Holders of a risky assets are paid only for systematic risk (health of economy, interest rates, etc) and not for company specific risk (delays in product launch, etc)€ Company specific risk can be diversified
Beta () – measurement ofsystematic risk Beta shows by how much the asset price changes
when the market risk premium increases by 1% Systematic risk
Company Specific risk
Number of companiesin portfolio
Var
Equity Risk - Beta (2)
security,market – covariance between the returns on the security and market returnsm
2 – market return varianceFor calculations daily/weekly returns can be takenTo estimate beta it is recommended to calculate industry beta by taking industry stocks portfolio (weighted according to capitalization) returns instead of stock ones.
2market
market security,
σ
σβ
Equity Risk - Beta (3)
€ Betas calculated according to emerging markets returns can be rather misleading
€ Possible way outUse already calculated relevant industry’s betas http://www.stern.nyu.edu/~adamodar/New_Home_Page/data.html
€ Try calculating both for local market and taking already calculated numbers. Use the one, which you think to be more appropriate. Discuss your choice
Terminal Value (1)€ If you have forecasted cash flows for n years,
what is the company value at the end of nth year?
€ CFn+1 – cash flow for the (n+1)th year€ g – growth rate (industry growth pace)
€ T=(CFn+1)/(r-g)€ Where, g- growth rate and r - WACC
RecapSelect forecasting horizon (4 - 5 years)Project future sales, costs, working capital, etcConstruct IS, BS, CF statementsUsing financial ratios check for consistencyFind Beta and risk premium, calculate required rate of return on equityCalculate Weighted average cost of capitalCalculate Free Cash Flows and Terminal valueDiscount using WACC
Recommendations€ V(equity) = V(company) – Net Debt€ Share price = V(equity) / number of shares€ Sensitivity analysis before making recommendations is
suggested:Check how results change if you increase / decrease by 1% or 2% WACC and growth rate (g)
€ Because future forecasts are obviously inaccurate, suggestions to buy (or sell) stock can be made only if value obtained by calculations is bigger (or smaller) than the current market price by at least 15%
Submission
Your valuations (excel file and report) should be received at [email protected] no later than 23:59 June 8th
Good luck!