Table of Content
Subtract out changes in non-cash working capital. You can get the individual items out of the 10K statement of cashflows or look at the Bloomberg summary of the statement of cashflows where you consolidate the non-cash working capital. Here again, the sign on the cashflow should tell you whether non-cash working capital changes are creating positive or negative cashflows. Your final recommendation on debt ratio for your firm should reflect this downside assessment and may very well be lower than the unconstrained optimal that you computed in the previous step. The fcffsimpleginzu.xls spreadsheet allows you to do all of the above. You may still find your equity to be worth little or even a negative amount.
The best source for expected growth on the S&P 500 is zacks.com, a service that collects and reports on analyst estimates of growth for companies. While the premium edition requires a paid subscription, there is enough on the site which is free, for you to get this input. You can also get the growth rate from Yahoo! Finance, by looking up any company, and then clicking on estimates. The only problem with the Yahoo estimates is that they average out the expected growth rate from analysts following individual companies and are biased upwards. To check for downside risk, there are two paths you can take.
Picking a company
Broadly speaking, the website is broken down into four sections. You will find not only the material for the classes , but also webcasts of the classes that you can access on different platforms. The third, data, contains the annual updates that I provide on industry averages, for US and global companies, on both corporate finance and valuation metrics . It is also where I provide my estimates of equity risk premiums and costs of capital.
You can use the attached ratings.xls spreadsheet to get a synthetic rating for your firm . You can use this spreadsheet for non-US companies as well. If your company has a market cap of $ 5 billion and higher use 1 . If you really want to see how betas change, capture a Bloomberg terminal (this may require hand-to-hand combat), find your stock, type BETA and play with the defaults.
Getting data on the company
The spreadsheet will compute your interest expenses to be $ 400 million and compute an interest coverage ratio and rating using this expense. Remember that this is an implied premium for an entire market. You need to input a dividend yield and growth rate for the entire market.
The data can be obtained by going to updated data on my web site and clicking on historical returns. You need the stock returns and the T.Bill rates for each of the years for which you have data. Once you have it, browse through it to find the breakdown of your firm's business. Usually, the company will give you at least revenue and operating income by business.
Share this document
(The standard error itself is related to the R-squared of the regression; high R-squared generally goes with low standard errors). If you believe that numbers revert back to historical averages, use the historical premium. In some cases, another company can be the largest investor in your company. In this case, you need to find the top investors in that company to find the marginal investor in your company.
Since a stock cannot trade for less than zero, your estimate of value would then be zero for the stock. You cannot include it with debt since preferred dividends are not tax deductible. You cannot include it with equity, because it is not equity.
Financial Strategy
If it is below investment grade, the chance of bankruptcy is high. Go to the input page and input the numbers for your firm. Read the comment before you input the value.
Should you use this premium or the historical premium? If you want your valuation to be market neutral, use the current implied equity risk premium. I then looked up the growth rate that equity research analysts were estimating for earnings for the next 5 years (5%) and used it to get expected cash flows for the next 5 years.
If you have a non-US company, you should be able to find this information in their annual report. I know that the concept is complex but it is well worth understanding. If you are up to it, try computing today's implied equity risk premium in the attached spreadsheet . Unlike a bond, stocks do not come with promised cash flows. All you can do is look at the past and make your best estimates for the future. He best source for the cash flows on the S&P 500 is S&P.
You can also make any of these models a 3-stage growth model by saying yes to the question of whether you want your inputs to adjust gradually during the second half. Based upon the qualitative factors, make a judgment on how much your company should be paying in dividends. The book value of capital should not be negative...
