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Summary Valuation
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Lecture 1 (NORMALIZING)• R&D Adjustments:
o R&D should be treated as CapEx and not OpEx:
▪ Make an assumption on the amortizable life
▪ Collect the research spending during that amortizable life
▪ Calculate the unamortized and amortized portion of R&D spending
each year
EXAMPLE:
o Balance Sheet: increase intangible asset (by the value of research asset),
increase deferred tax liabilities (by value of the research asset * marginal tax
rate), increase retained earnings (by the difference between value of
research asset and deferred tax liabilities)
o Income Statement: add back the last year research spending to operating
income, subtract the amortization of research asset in current year from the
operating income
,• Operating Lease Adjustments
o Operating Lease should be treated as financial expenses and should be
recognized as debt on the balance sheet:
▪ Tabulate the lease liabilities in each of the following years
▪ Calculate the PV of the lease payments by discounting to the cost of
debt
▪ Compute PV Yr 2 EXCLUDING the lease payments due in 1 year
EXAMPLE:
,• Income Statement adjustments:
▪ Add back lease expense for both years
▪ Calculate the interest expense and subtract it as a finance cost (taking
into account the total NPV of 2017 in this case which will impact
2018)
▪ Subtract depreciation expense on the operating lease asset
• Balance Sheet adjustments:
▪ Add to non-current tangible assets as PPE (formula below)
▪ Add to non-current debt the same amount (long term)
= 1540.9+(1978.4 – (1342.8*1.06)) - 420
, • Four types of extraordinary items:
o One-time expenses or income: calculate operating income after excluding
these items
o Expenses or income that do not occur every year but recur at regular
intervals: average the expense or income and subtract/add the average
expense/income to the annual operating income
o Expense or income that do occur every year but highly volatile: same as
above
o Items that recur every year that change signs: ignore these
expenses/incomes from operating income
Lecture 2 (CALCULATING REINVESTMENT)
• Free Cash Flow to the Firm:
EBIT * (1 – tax rate) + Non-Cash Expenses + Change in Deferred tax liabilities – Non-
cash income – Capital reinvested in the firm
• Capital reinvestment in the firm:
CapEx – DA&I expenses – R&D expenses + Net acquisition spending + Change in non-cash
NWC
For DA&I, add also the
amortization of research
asset in current year!!!!
Net acqu. Spending:
difference between
acquisition and divestitures
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