Scharfinkel had been exposed to the residual income valuation approach during her MBA, and recalled the...
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Scharfinkel had been exposed to the residual income valuation approach during her MBA, and recalled the following list of the major steps that would be required: Obtain the balance sheet and income statement from the firm's 10-K Create a condensed balance sheet and income statement Derive the key assumptions for forecasting Calculate the valuation Scharfinkel had already obtained the balance sheet and income statement for Coca-Cola (see Exhibits 1a and 1b). She had also prepared a condensed balance sheet and income statement (see Exhibits 2a and 2b), and derived a list of the key assumptions necessary to forecast the valuation (see Exhibit 3). To simplify the valuation exercise for her audience, she had only forecast two years and considered the period after that as the terminal value period. Scharfinkel recognized that her audience would be unfamiliar with the steps used in the valuation process. As such, she would have to elaborate on the role each step played. This would include discussing the benefits of standardizing the firm's financial statements in a condensed form. Then, she would have to perform the remaining step of calculating the valuation. Scharfinkel knew that to convince her audience on the merits of this calculation, she would also need to build up the pro forma balance sheets and income statements for the forecasted years. Further, since she knew that her audience would have likely used the more familiar discounted cash flow method, she would have to demonstrate how it mapped into the DCF approach. BALANCE SHEET ASSETS Cash and Marketable Securities Accounts Receivable Inventory Other Currents Assets TOTAL CURRENT ASSETS Long-Term Tangible Assets Long-Term Intangible Assets Other Long-Term Assets TOTAL LONG-TERM ASSETS TOTAL ASSETS LIABILITIES Accounts Payable Short-Term Debt Other Current Liabilities TOTAL CURRENT LIABILITIES Long-Term Debt Deferred Taxes Other Long-Term Liabilities TOTAL LONG-TERM LIABILITIES SHAREHOLDERS' EQUITY Minority Interest Common Shareholders' Equity (2,303 and 2,292 million shares outstanding) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY INCOME STATEMENT SALES Cost of Goods Sold GROSS PROFIT Selling, General, and Administrative Other Operating Expenses OPERATING INCOME Other Income Other Expense Interest Income Interest Expense Minority Interest PRETAX INCOME For the years ended Tax Expense Unusual Gains, Net of Unusual Losses NET INCOME Source: Capital IQ. December 31, 2008 $ 31,944 10,146 21,798 11,774 1,283 8,741 53 (1,976) 333 (438) 0 6,713 1,632 726 $ 5,807 December 31, 2009 S 9,409 3,758 2,354 2,030 17,551 11,441 12,828 6,755 31,024 $ 48,575 $ 1,410 6,800 5,511 13,721 5,059 1,484 2,965 9,508 547 24,799 $ 48,575 December 31, 2009 $ 30,006 9,864 21,142 11,381 1,343 8,418 92 (253) 249 (341) (82) 8,083 2,040 781 $ 6,824 December 31, 2010 $ 11,511 4,430 2,650 2,988 21,579 $ 16,672 26,909 7,663 51,244 $ 72,823 1,887 9,376 7,245 18,508 14,041 4,163 4,794 22,998 314 31,003 $ 72,823 December 31, 2010 $ 35,200 11,234 23,966 13,179 1,703 9,084 5,312 (887) 317 (608) (50) 13,168 2,384 1,025 $ 11,809. Beginning Net Working Capital Beginning Net Long-Term Assets NET OPERATING ASSETS For the year ending Sales NOPAT Net Interest Expense After Tax NET INCOME Less: Preferred Dividends NET INCOME TO COMMON SHAREHOLDERS Source: Casewriter. Net Debt Preferred Stock Shareholders' Equity NET CAPITAL Exhibit 2b Coca-Cola, Condensed Income Statement (in $ millions) Exhibit 3 Coca-Cola, Forecasting Assumptions Panel A. Cost of Capital Parameters Market Risk Premium Risk-Free Rate Tax Rate Cost of Debt Common Equity Beta Panel B. Future Performance Forecasts Sales Growth Rate NOPAT/ Sales Beginning Net Operating Working Capital / Sales Beginning Net Operating Long-Term Assets / Sales As of Net Debt / Book Value of Net Capital Preferred Equity / Book Value of Net Capital Shareholders' Equity / Book Value of Net Capital Source: Casewriter. January 1, 2009 $ $ 740 24,065 24,805 $ December 31, 2008 $ 4,333 0 20,472 24,805 31,944 5,886 79 5,807 0 5,807 2011 10.0% 20.0% 27.75% 0.0% 72.25% January 1, 2010 $ 1,221 26,028 27,249 2,450 0 24,799 $ 27,249 December 31, 2009 $ $ 31,006 6,892 69 6,824 0 6,824 5.0% 3.0% 35.0% 4.5% 0.6 2012 8.0% 20.0% 3.0% 105.0% 27.75% 0.0% 72.25% January 1, 2011 $ 936 41,973 42,909 11,906 0 31,003 $ 42,909 December 31, 2010 $ 35,200 12,047 238 11,809 0 $ 11,809 Terminal 3.0% 15.0% 3.0% 100.0% 27.75% 0.0% 72.25% Scharfinkel had been exposed to the residual income valuation approach during her MBA, and recalled the following list of the major steps that would be required: Obtain the balance sheet and income statement from the firm's 10-K Create a condensed balance sheet and income statement Derive the key assumptions for forecasting Calculate the valuation Scharfinkel had already obtained the balance sheet and income statement for Coca-Cola (see Exhibits 1a and 1b). She had also prepared a condensed balance sheet and income statement (see Exhibits 2a and 2b), and derived a list of the key assumptions necessary to forecast the valuation (see Exhibit 3). To simplify the valuation exercise for her audience, she had only forecast two years and considered the period after that as the terminal value period. Scharfinkel recognized that her audience would be unfamiliar with the steps used in the valuation process. As such, she would have to elaborate on the role each step played. This would include discussing the benefits of standardizing the firm's financial statements in a condensed form. Then, she would have to perform the remaining step of calculating the valuation. Scharfinkel knew that to convince her audience on the merits of this calculation, she would also need to build up the pro forma balance sheets and income statements for the forecasted years. Further, since she knew that her audience would have likely used the more familiar discounted cash flow method, she would have to demonstrate how it mapped into the DCF approach. BALANCE SHEET ASSETS Cash and Marketable Securities Accounts Receivable Inventory Other Currents Assets TOTAL CURRENT ASSETS Long-Term Tangible Assets Long-Term Intangible Assets Other Long-Term Assets TOTAL LONG-TERM ASSETS TOTAL ASSETS LIABILITIES Accounts Payable Short-Term Debt Other Current Liabilities TOTAL CURRENT LIABILITIES Long-Term Debt Deferred Taxes Other Long-Term Liabilities TOTAL LONG-TERM LIABILITIES SHAREHOLDERS' EQUITY Minority Interest Common Shareholders' Equity (2,303 and 2,292 million shares outstanding) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY INCOME STATEMENT SALES Cost of Goods Sold GROSS PROFIT Selling, General, and Administrative Other Operating Expenses OPERATING INCOME Other Income Other Expense Interest Income Interest Expense Minority Interest PRETAX INCOME For the years ended Tax Expense Unusual Gains, Net of Unusual Losses NET INCOME Source: Capital IQ. December 31, 2008 $ 31,944 10,146 21,798 11,774 1,283 8,741 53 (1,976) 333 (438) 0 6,713 1,632 726 $ 5,807 December 31, 2009 S 9,409 3,758 2,354 2,030 17,551 11,441 12,828 6,755 31,024 $ 48,575 $ 1,410 6,800 5,511 13,721 5,059 1,484 2,965 9,508 547 24,799 $ 48,575 December 31, 2009 $ 30,006 9,864 21,142 11,381 1,343 8,418 92 (253) 249 (341) (82) 8,083 2,040 781 $ 6,824 December 31, 2010 $ 11,511 4,430 2,650 2,988 21,579 $ 16,672 26,909 7,663 51,244 $ 72,823 1,887 9,376 7,245 18,508 14,041 4,163 4,794 22,998 314 31,003 $ 72,823 December 31, 2010 $ 35,200 11,234 23,966 13,179 1,703 9,084 5,312 (887) 317 (608) (50) 13,168 2,384 1,025 $ 11,809. Beginning Net Working Capital Beginning Net Long-Term Assets NET OPERATING ASSETS For the year ending Sales NOPAT Net Interest Expense After Tax NET INCOME Less: Preferred Dividends NET INCOME TO COMMON SHAREHOLDERS Source: Casewriter. Net Debt Preferred Stock Shareholders' Equity NET CAPITAL Exhibit 2b Coca-Cola, Condensed Income Statement (in $ millions) Exhibit 3 Coca-Cola, Forecasting Assumptions Panel A. Cost of Capital Parameters Market Risk Premium Risk-Free Rate Tax Rate Cost of Debt Common Equity Beta Panel B. Future Performance Forecasts Sales Growth Rate NOPAT/ Sales Beginning Net Operating Working Capital / Sales Beginning Net Operating Long-Term Assets / Sales As of Net Debt / Book Value of Net Capital Preferred Equity / Book Value of Net Capital Shareholders' Equity / Book Value of Net Capital Source: Casewriter. January 1, 2009 $ $ 740 24,065 24,805 $ December 31, 2008 $ 4,333 0 20,472 24,805 31,944 5,886 79 5,807 0 5,807 2011 10.0% 20.0% 27.75% 0.0% 72.25% January 1, 2010 $ 1,221 26,028 27,249 2,450 0 24,799 $ 27,249 December 31, 2009 $ $ 31,006 6,892 69 6,824 0 6,824 5.0% 3.0% 35.0% 4.5% 0.6 2012 8.0% 20.0% 3.0% 105.0% 27.75% 0.0% 72.25% January 1, 2011 $ 936 41,973 42,909 11,906 0 31,003 $ 42,909 December 31, 2010 $ 35,200 12,047 238 11,809 0 $ 11,809 Terminal 3.0% 15.0% 3.0% 100.0% 27.75% 0.0% 72.25%
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Related Book For
Systems analysis and design
ISBN: 978-0136089162
8th Edition
Authors: kenneth e. kendall, julie e. kendall
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