The very fact that I am emboldened to post at this thread again - after a big gap of 4 months - can only mean two things:
We had reached the end - in illustrating our ART of Valuation incremental learnings at VP (from 2011-2013); needed time off to take things forward and imbibe new stuff
there wasn’t anything original that we could come up with that DROVE HOME another (may not be new) exciting & insightful ART of Valuation Tenet - something very simple and powerful - that everyone could look to implement
I am excited, again. Think we got hold of something simple - something powerful - something that you and me can immediately put to use with (I think) telling effect. Really??
It all depends on my ability to reproduce my conversation with Mr S exactly as it went So pardon me if I can’t get you equally excited immediately - but eventually we will get there.
S: (A Senior Fund Manager & Friend) How would you incorporate (assess) Future Value creation in a Business and assign a Valuation multiple - with sound economic
I must say I didn’t provide a satisfactory answer - how could I - we are still grappling with these things. I told him we toiled hard in trying to decode with the very promising Economic Profit = Invested Capital *(RoIC - Cost of Capital); We also played around with (Nestle, Colgate, ITC, HUL, Page and scores of others in the FMCG pack) but clarity eluded us.
Mr S: How about breaking the Business Value into 2 components: a steady state value & a future value creation? [Merton Miller and Franco Modigliani -
Business Value = steady-state value + future value creation
Steady-State Value = (Net Operating Profit after Tax (Normalised))/(Cost of Capital ) + Excess Cash
Future Value Creation = [Investment *(RoIIC - Cost of Capital)*competitive advantage period]/[Cost of Capital * (1+ Cost of Capital)]
Seen another way
Value of Firm = Debt + Equity, then
Equity Value = Steady-State Value + Future Value Creation + Excess Cash - Debt
Steady state Value: calculated using teh perpetuity method assumes that current NOPAT is sustainable indefinitely and that incremental investments will neither add nor substract value
Future Value creation boils down to how much money a company invests, what spread that investment earns relative to the cost of capital, and for how long a company can find value-creating opportunities
Sorry for bumping this, but just had a query regarding this.
Was reading this concept a few days back and loved the paper - the concept of breaking value down into two parts. Just a query, from the comments and follow ups, since there is no effect of inflation accounted in calculating the steady state value,shouldn’tthe cost of capital also be inflation adjusted? So lets say, for a company having 50% equity and 50% debt as its capital structure: WACC = 16% (assumped CoE) + 11% (1-33%) (assumed CoD and tax rate) = 12%. However, IMHO, weshould notbe using this WACC in the equation for steady state value; rather we should be usinginflationadjusted WACC which should be much lower .
Any thoughts on this? Please correct me if I am wrong.
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VALUATION ART #4
Mr reasoning? _
Business Value Drivers Link: …/…/…/forum/valuepickr-scorecard-aug-2011/184497495 lots of lots of examples Link: …/…/…/forum/top-down-sectoral-dissections/531558273 Foundational paper on Valuation Link: http://student.bus.olemiss.edu/files/fuller/div/Miller%20and%20Modigliani%201961.pdf ]
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