investment Banking, parte 1

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DWACC is just Kthe .E series of the UCFlows discounted at KTherfore, we consider the of the company ;Edebt (parte blu) add tax shield effect from debt (secondoWe put the and so, we themembro blu): summatory F.Ei Expenses,so, we add the of (Financial that means theinterests) times t tax rate of the company) discounted(that is the on the cost of debt ofthe company (K ).D TV (parte rossa) UCF at year n+1, discountedThen, we consider the and we have the atWACC. WACC 2 WACCs, both the cost of equity capital andNow the is the considering theof debt.cost actualize the TV at WACC power of n+1;Then we the2) … slide. when we add the positive tax effect of the debt,And consider that, we can’t use theimagine debt reduction process,current debt, but we can a sort of considering that we usesuch an approach for highly indebted companies and so it’s reasonably to assume that thedebt that the company has in t is too high and, therefore, the company has to decrease0over time its

Debt/Equity Ratio;subtract Net Financial Position, is debt in t (Dt ), also3) Then, we the which the which is the0 ocurrent debt (!); whereas the debt used for the estimation of WACC is not the currentdebt, but it’s a target Debt/Equity Ratio.example Debt/Equity Ratio reduction pathAn of application of a to a company when applying theAPV approach. Debt/Equity Ratio 6.Imagine that the company has a current which isfrom t to t able to decrease this Debt/Equity Ratio:We can imagine that this company will be1 nso, 4,5 in t , etc…1 the target Debt/Equity Ratio, industryAnd, finally, which we can imagine is the Debt/Equity Ratio,0.8.is current Debt/Equity Ratio subtract debt from year t to yearSo, we will use the to the for step 3; 1t Debt/Equity Ratios in the slide; in order to estimate the WACC, we use those and, which wen to use to calculate the TV, 0.8,have we can make reference to which is the industry targetDebt/Equity Ratio. 12We are talking about DCF analysis.Analysts

Potresti fare riferimento a 3 diversi approcci: l'approccio dell'attivo (unleveled/entity approach); 1) l'approccio del patrimonio netto (levered approach); 2) l'approccio APV (Adjusted Present Value). 3) L'approccio dell'attivo valuta l'azienda: quindi, stimando il valore dell'azienda, dell'entità. Sconto UCF. Pertanto, consideriamo il flusso di cassa futuro previsto UCF utilizzando il WACC e aggiungiamo il valore terminale: valore dell'azienda più una volta fatto ciò, otteniamo il valore dell'attivo. Sottraendo il valore dei debiti, otteniamo il valore del patrimonio netto. Se poi sottraiamo il valore delle passività, otteniamo (in una procedura a due fasi) la stima del valore degli azionisti. Mentre l'altro approccio, mirato a restituire un valore dell'equity, è l'approccio dell'equity Free Cash Flows, è una procedura a un solo passo, perché consideriamo il costo del capitale proprio come tasso di sconto (K) e otteniamo direttamente il valore dell'equity. Approccio APV. Lo utilizziamo nel caso di: aziende in difficoltà; aziende indebitate (quindi,

highly leveraged companies);- leveraged buy-out deals:when designing and projecting it’s some complex typologies of- acquisitions with high usage of debt.major issuesLet’s see what are the financial analysts have to face when applying a DCF analysis inorder to find out the stockholders’ value of the company.So: “forecast” time horizon, n: how many yearsdefining the which is so, deciding we have to1) consider for the explicit forecast period (3, 4, 5 years?);future cash flows;Forecasting2) terminal value;Estimating the3) cost of capital.Estimating the4)How many years does we have to consider as analysts in order to run an adequate and a soundDCF analysis? 3,4,5 years?isn’t a golden rule:It depends, there so, the number of years to consider in order to develop areliability predictivity futureforecast, business plan might change depending on the or the of yourcash flows.reliable (affidabile) estimates factors:And for future cash flows depends on

1. That is, if we have to evaluate a company that works in the textile industry, it's a different story if we have to develop forecasts with companies working in the service or in the financial industry: so the cash flow generation, the capital intensity, the production process are completely different. Then, in some industries, for instance, every 2 or 3 years, we have to renew our machinery, plant and equipment and therefore the capital intensity is truly high; whereas in other industries, once we set up our production process and plant and equipment, we can produce for many many years (also 20-30 years) so, that has surely an impact on the estimation of n, so on the estimation of the duration of the forecast time period.
2. Second issue we have to consider: the competitive positioning of the company. Are we evaluating a company which is a market leader within its industry or are we considering a company

which is a follower? Because, if I'm a market leader, if my competitive position is truly high, that has clearly an impact volatility of your cash flows; on the stability, on the whereas, if I'm a weak competitor within my reference industry, that means that also my cash flows are much more volatile, so are much more variable: this is no way a source of risk, having a negative impact on the predictability of the company cash flows for a long wide: therefore, in this case, we have to keep short the explicit time period for my forecast; business cyclical We have to consider also if my is or not one: that means that we have to 3) whether my company directly or consider and the reference industry are related either inversely related macroeconomic cycle domestic and international to the both of standpoint (punto di vista); So, as far as we are understanding, once again we are starting facing the relevance of the qualitative analysis. When we were taking about the relevance of the qualitative analysis (so,we need to take into account various factors such as internal analysis, SWOT analysis, and the stage of the company's life cycle. For example, if we are dealing with a mature company, it is relatively easier to forecast cash flows for a longer period of time. However, if we are dealing with a growth company or a startup, it becomes more challenging to develop hypotheses and estimate future cash flows. In such cases, it may be prudent to limit the forecast period to no longer than 2 years due to the high intrinsic riskiness of the venture. Therefore, the golden rule when deciding the duration of the explicit forecast time period is to consider all these arguments. This will help us make informed decisions for our business plan and forecasting procedure.

Try to consider when a company is able to design and run a competitive strategy, they will be giving it a sustainable competitive advantage: my company can enjoy thanks to a favorable competitive positioning and, therefore, due to the strength and effectiveness of my strategy, I'm able to develop and produce cash flows. Once not able any more strategy, I can say that my company is not allowed anymore to presume a sustainable competitive advantage, I'm to that higher growth rate when compared to the average industry growth rate: therefore, it's time to move beyond the explicit forecast time period and to move to the terminal value and, so, it's time "stable growth" models. To get access to the overall value of the company sum components: So, we can say the is the of 2 value explicit forecast time period: 1) The we are able to estimate in the we know that then years.

1. For each year, duration of the forecast time period is (for instance, 5 years) and we estimate the future cash flows and sum the present value of the cash flows produced in each year within the explicit time period.
2. The value in the company in its indefinite time period:
   1. The second component of the value is the terminal value. Our assumption is that our company will grow at a long-term average industry growth rate, which is usually the stable growth rate.
   2. This is the period starting from 12 months after the end of the explicit forecast time period.
   3. For instance, the most common methodology aiming at estimating the terminal value is one where we consider the UCF at year n, apply a growth rate in order to have the UCF 12 months later (so, at year 6, for instance), then apply the standard perpetuity formula. Therefore, we divide by the WACC minus the growth rate and obtain the estimation of the Terminal Value, which obviously...

we have to discount.
One common mistake in corporate evaluation is that, when we are looking at the growth rate, it is sometimes truly high, much higher than the industry growth rate, and that means that a portion of the overall value coming from the terminal value is very high.
Whereas, if we consider the growth rate within the explicit forecast time period (and it's easy to have that because we only have to estimate the C.A.G.R, meaning Compound Annual Growth Rate), we can discover that from year n to year 1, the growth rate is low and much lower than the growth rate implied in the estimation of the terminal value.
So, in situations like that, we have to stop and consider that maybe there's a mistake in this kind of evaluation, because usually you should have an opposite high growth rate in the first years, those years where we are able to develop explicit forecasts and, therefore, to

estimate future cash flows year by year, because we have a business plans and we can argue my estimation with all the qualitative analysis and all the value drivers deriving from my qualitative analysis.

So, we can use the business plan in order to argue my forecast during the explicit forecast period: I can't be that much conservative in the first years, so in the portion of the company value coming from the business plan (so the estimation of the explicit time period) an