Equity Valuation: RAOCC, ROIC, EVA
A. Book Value per Share last 5 years.
B. Ratio Market/Book Value last 5 years.
G. Economic Value Added Balance Sheet (last 5 years)
1. Capital Expenditures
a) Purposes and growth of CAPEX.
b) CAPEX ROIIC.
c) ROICC versus RAOCC
C. Value Creation/ Destruction last 5 years.
1. Derivation of RAOCC
a) Cost of Equity
1) Use 3 factor CAPM (if possible.)
2) Consistent use of Rm ,RF, (Rm -RF)
3) Consistent derivation of Beta(s).
4) Consistent weighting for Equity.
b) Cost of Debt.
1) Consistent Sources for Debt Tranches, Totals Outstanding, Coupon Rates.
2) Consistent Source for Corporate Tax Rate.
3) Consistent Weighting for Debt.
2. Derivation of ROIC.
a) NOPLAT for Current Year in Numerator from Income Statement.
b) (Book Value of L.T. Debt + Book Value of Equity) for End of Prior Year in Denominator.
3. EVA last 5 years.
4. Trend in EVA.
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VII. Valuation Models
A. Valuation by Multiples
1. Pt/EttmValuation.
a) Care in Choice of P/E such as average for last five years. Recall Steady State P/E = inverse of P/E.
b) Care in Choice of EFTM.
Implied Growth Rate of Earnings
c) Care in Choice of Sector/Industry/ Peer P/E.
2. PEG Ratio (P/E to earnings growth)
3. Discounted Cash Flow Models (SMIF B/B; BKM; or Damadoran)
a) No Growth Stock Price = Earnings Power Value (perpetuity model) =EPST+1/RE.
b) Alternative to 6 a). No Growth Stock Price = NOPLAT / RAOCC + Excess Cash.
c) Growth Component of Stock Price = Future value creation = Investment *
(ROIC – RAOCC) x competitive advantage period (number of years)/ RAOCC * (1 + RAOCC).
d) Stock Price = either 6a) or 6b) plus 6c)
The Company is AT&T
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