Step-by-step summary of the lectures and workshops of BM08FI Valuation. Focus put on the DCF model. Step-by-step explanation of the adjustments to all line items, capitalizations and calculations made in excel based on the examples provided by Anjana Rajamani and Mikael Paaso.
Step 1: Adjust earnings
- Non-recurring, R&D capitalization, Op. Lease capitalization
- See headers R&D, Op. Lease, Income Statement, and Balance Sheet below
R&D capitalization:
1. Determine amortizable life
2. Amortization % per year = 100%/amortizable life
3. Calculate unamortized portion per year of R&D (100% current year and 0% year -10)
4. Calculate unamortized value by multiplying unamortized portion % by R&D expense
5. Sum of this is value of R&D asset
6. Calculate the current’s year R&D expense by multiplying the amortization % per year
with the R&D expense of the year and summing all up
Implications:
Balance sheet:
- Add value of R&D asset to non-current intangible assets
- Add (marginal tax rate * R&D asset value) deferred tax liability
- Add (value of R&D asset - (marginal tax rate * R&D asset value)) to SE
Income Statement:
- Add back R&D expense
- Subtract current year’s R&D amortization
- Adjust for tax expense by taking difference of the 2 above and multiplying it by
tax rate. Either add or subtract based on sign.
Op. Lease fin. capitalization:
1. Adjust only for years before 2019, because otherwise already incorporated
2. Check operating lease payment schedule in footnote operating lease
3. Determine interest rate and tax rate
4. Check actual lease payment in footnote operating lease
5. Create payment schedule by resembling payments to annuity:
Payment within in a year is just the amount given, payments between e.g. 2-5 years
divide amount by 4, from year 5 onwards make minimum function with min(amount
per year in year 2-5, total amount outstanding for > 5 years) and for every year
subtract amount per year in year 2-5 (e.g. min(amount per year in year 2-5, (total
amount outstanding for > 5 years - amount per year in year 2-5)) until the outstanding
amount is less that amount paid per year in year 2-5.
6. Determine total PV by adding payments of all years
7. Determine PV at end of previous year by adding payments of all years excluding
current year.
Implications:
Balance sheet:
- Add value of lease asset to non-current tangible assets
Using the formula:
(total PV of previous year + (total PV current year – (PV year 2- of previous year
* (1+interest rate)) - D&A)
So, if D&A is negative, D&A is added as positive number
- Add value of lease asset to non-current debt
Using the same formula as above
, Income Statement:
- Add back lease expense (given number in AR)
- Subtract interest expense (-1 * total PV previous year * interest rate) as finance
cost
- Subtract current’s year lease amortization (-1 * (lease expense - interest expense))
- This should all cancel out, so PBT and net income are the same after the
adjustments
Income Statement
4 categories of income:
- From continued operations
- From discontinued operations
- From extraordinary profits/losses
- From changes in accounting principles
Only include first in valuation
1. Adjust for non-recurring recurring income/expenses:
- Adjustments for gain or loss on disposal of assets (other op. income)
Gains/losses on disposal of intangible assets
Gains/losses on disposal of short-term investments
Gains/losses on disposal of other non-current assets
- Adjustments for gain or loss on short-term investments/receivables/payables (fin.
instruments)
Gains/losses on payables/receivables
Gains/losses on disposal of short-term investments
Gains/losses on other available for sale investments
- Adjustments for legal settlements
- Impairment of assets
- Additional payments made into joint ventures
If <20% do not include dividends
If 20%<x<50% do not include dividends and net income
If >50% all profits firm included in IS, exclude minority of other firms if
same business (often already done via non-controlling income), exclude if
other line of business
- Exceptional finance income/costs
- Take average of % of revenue if changing in level each year but recurring
2. Adjust for R&D capitalization:
- Add back the R&D expense
- Subtract the amortization on R&D asset
3. Adjust for Lease capitalization:
- Add back operating lease expense
- Subtract the depreciation on R&D asset
- Subtract interest on op. lease liability under Finance Expense section
4. Adjust taxation for new PBT that was calculated doing all the adjustments above by:
- Add back previous taxation
- Multiply new, current PBT with the marginal tax rate
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