Applied Corporate Finance

class #2

Raising Equity
Valuation

Paulo Soares de Pinho

Universidade Nova de Lisboa
 Going Public
Seasoned Equity Offers

Applied Corporate Finance Master in Finance Paulo Soares de Pinho 2

 Why Going Public?
• Raising capital from the general public
– Diluting initial investors
– Opening a channel for new funding
– Opening the window to access bank credit
– Use own shares as a currency in acquisitions
• Explore market anomalies
• Increase in visibility / awareness
• Gain liquidity for initial investment
– Although initial investors subject to lock-up
provisions
– Management may be subject to extended lock-up

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 Disadvantages
• Costs of Going Public
– Initial cost may go up to 10% of offer
– Reputational costs associated with potential failure
– IPO may underprice the firm
• Costs of remaining public
– Compliance with public company rules
• Disclosure; Sarbanes-Oxley?
– Management distraction by stock market performance
• Investor relations effort
– Too much focus on short-term performance
– Increased scrutiny from outsiders
– Complex corporate governance structure
• Two-tier Board; independent directors; Independent committees

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 IPO’s versus Volatility

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 IPO Process
• Underwriter selection
– Bake-off /beauty parade?
• Preparing business plan & equity story
• Prospectus
– Mandatory by EU Directive
• Road Show
– Presentations to investors in the targeted markets
• Bookbuilding
– Underwriter notes the orders received
• Greenshoe?
– If oversubscribed, banks may take up to 15% more shares
• Price settled the day before
• Price stabilisation contract with banks ?

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 Firm Commitment Underwriting
• The issuing firm sells the entire issue to the underwriting
syndicate.
• The syndicate then resells the issue to the public.
• The underwriter makes money on the spread between the price
paid to the issuer and the price received from investors when the
stock is sold.
• The syndicate bears the risk of not being able to sell the entire
issue for more than the cost.
• This is the most common type of underwriting

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 Best Efforts Underwriting
• Underwriters must make their “best effort” to sell the
securities at an agreed-upon offering price.
• The company bears the risk of the issue not being sold.
• The offer may be pulled if there is not enough interest at the
offer price. The company does not get the capital, and they
have still incurred substantial flotation costs.
• This type of underwriting is not as common as it used to be.

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 Dutch Auction Underwriting
• Underwriter accepts a series of bids that
include number of shares and price per
share.
• The price that everyone pays is the highest
price that will result in all shares being sold.
• There is an incentive to bid high to make
sure you get in on the auction but knowing
that you will probably pay a lower price than
you bid.
• Google was the first large Dutch auction IPO.

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 Dutch Auction Example
• Every interested investor places an order
Offer # P Q Cumulative
stating the desired quantity and the price
1 $ 100 100 100
offered
2 $ 95 200 300
3 $ 90 150 450 • Orders are sorted by price (descending)
4 $ 85 250 700 • Clearing price is the one that allows for
5 $ 80 300 1000 the sale of the total shares offered
6 $ 75 150 1150 • If we were selling 1000 shares, then the
7 $ 70 100 1250 clearing price would be $80 and all
8 $ 65 400 1650 investors who offered $80 or more would
9 $ 60 550 2200 pay that price; all other investors would
10 $ 55 600 2800 get no shares

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 Direct Listing vs IPO’s
• On a IPO we may have two types of sellers:
– Initial shareholders (VC’s, etc)
– The company itself
• On a Direct Listing no new shares are sold
– Therefore there is no need for bookbuilding and
underwriters
– But there is still need to produce a prospectus
and marketing the offer
– However, since initially the supply of shares is
limited (initial shareholders + employees) stock
price volatility may be enhanced by reduced
liquidity

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IPO expenses

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 IPO Underpricing
• It is difficult to price an IPO because there is not a current market
price available.
• Private companies tend to have more asymmetric information than
companies that are already publicly traded.
• Underwriters want to ensure that, on average, their clients earn a
good return on IPOs.
• Underpricing causes the issuer to “leave money on the table.”

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 IPO underpricing

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 Leaving Money on the table…

Paulo Soares de Pinho Applied Corporate Finance 15

Applied Corporate Finance Master in Finance Paulo Soares de Pinho 16
 Follow on Equity Issues

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 New issues: Impact on Value
• The market value of existing equity usually drops on the announcement
of a new issue of common stock.
• Reasons include
– Managerial Information
Since the managers are the insiders, perhaps they are selling new stock because
they think it is overpriced.
– Debt Capacity
If the market infers that the managers are issuing new equity to reduce their
debt-equity ratio due to the spectre of financial distress, the stock price will fall.
– Falling Earnings
•is EPS dilution a valid reason for the stock price to fall?

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 EPS Dilution effect - example
• Net Profit = €6,000
• # of shares = 1000  EPS= €6
• P= €60  P/EPS= 10
• Capital increase = +500 shares
• New EPS = €6,000 / 1,500 = €4
• New price = 10  4 = 40? Dilution?

• What was the issuing price?

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 Impact of rights issue
• Before:
Equity value: E = 60  1000 = €60,000
• After:
E = 60,000 + Proceeds
If P = €60, Proceeds = 500  60 = €30,000
E = €90,000
P’ = €90,000 / 1,500 = €60 (!)

What if P was other?

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 Rights issue at “low” price
• In the previous rights issue example shares are issued at €40
– 750 shares will be issued at price of €40
– Each shareholder may purchase 0.75 new shares per each share she
already owns
• Value of firm’s equity after the offer:
– E’ = €60,000 + 750  €40 = €90,000
– P’ = €90,000 / (1,000 + 750) = €51.42
• For a shareholder with 4 shares:
– Before: 4  € 60 = €240 (may buy 3 shares at offer)
– After: 7  €51.42 – 3  €40 = €240
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 Rights Mechanics

Ex-RIGHTS PRICE
OLD PRICE
€51.42
€60
RIGHT = €8.58

• Investor purchases 4 rights = 4 × €8.58 = €34.32

• Uses her 4 rights to purchase 3 new shares for €120
• Total cost = €154.32 => Average cost per share = €154.32 / 3 ≈ €51.42
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 The price on a rights issue
• Apparently, on a rights issue the offer price is irrelevant
– The gain shareholders make on the new shares is offset by the loss on
their “old” shares
• Sometimes rights issues are offered at significant discount
– To induce shareholders not to miss the opportunity
– To force shareholders to buy or sell their rights at any price
• This is more common in fully underwritten offers; a low price acts as a
protector of underwriters who may risk taking a significant number of unsold
shares whose theoretical price will be higher than the offer price
• Old price > new theoretical price > offer price

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 €60 Original price
In volatile or otherwise high
Price dilution due to low issuing price risk situations, underwriters
may demand that the rights
issue will be performed at
€51.42 Ex-rights price
a very low (below market
price) issuing price in order
Underwriters’ safety margin to maximize their safety
margin
€40 Issuing price - Underwriters’ price

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Issues on Valuation

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 Valuation framework
Present value of
Strategic & Competitive Framework Value of the firm’s financial
future unlevered Macroeconomic context debt net of the firm’s
financial assets.
cash-flows of the Capital Markets context
firm discounted at It does not include non-
the appropriate wacc financial liabilities whose
impact is incorporated via
Net Financial
Practical valuations NWCR on CFU.
Debt It should also include off
are based upon
multiples of Enterprise balance sheet liabilities such
as unfunded pension
comparable firms’ Value
proxies of unlevered liabilities, expected costs on
(EV) Market Value pending litigation, etc.
cash-flow:
EV / EBIT of Equity Once the Enterprise value
EV / EBITDA
EV / Sales has been computed via
Discounted Cash Flow or
multiples:
MVE = EV – Net Debt

S
Represents the market Alternatively, it may be
E[CFU(t)] valuation for 100% of the directly computed using a
shares of the firm
EV = t
(1+wacc)t
multiple of comparable’s
earnings:
MVE = Share Price × #Shares MVE = (P/E) × Net Profit

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 Valuation Methods: Multiples
• Multiples of comparable firms
– The logic behind this method is that similar companies should trade at similar prices
– Estimate EV of comparables: EV = Market Value of Equity + Net Debt
– Operating metrics may be used to value EV:
• EV/EBITDA; EV/EBIT; EV/Revenue
– Since profits (earnings) are net of financial expenses can only be used to value equity: MV Equity
= P/E × Earnings
– Should different companies trade at different multiples (?)
• Multiples of comparable transactions
– More appropriate in M&A context due to control premium
– Transaction data may not reflect current market conditions
• Main problems with multiples
– What are really comparable firms? Are we sure about our choice?
– Are we looking at recurrent numbers? Are they sustainable?

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 What drives multiples?
Growth rate: 2%
ROIC: 14% after tax: 11.2% After-tax ROIC exceeds
Tax rate: 20% cost of capital
Cost of Capital: 8%

Year: 1 2 3 4 5 Perpt
Invested Capital 1000.0 1020.0 1040.4 1061.2 1082.4 Grows at 2%
EBIT 140.0 142.8 145.7 148.6 151.5 14% of IC
Taxes on EBIT 28.0 28.6 29.1 29.7 30.3 25% of EBIT
NOPLAT 112.0 114.2 116.5 118.9 121.2
Investment 20.0 20.4 20.8 21.2 21.6 Variation of IC
Cash Flow 92.0 93.8 95.7 97.6 99.6 1692.9
Present Value: 1533.3
99.6×1.02
EV/EBIT 11.0 0.08 – 0.02
EBIT multiple

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 Multiples’ determinants
• Now that we know that the required cost of capital is wacc, we may
rewrite the value of the company as:
112 − 20 IC  ROIC − g  IC IC  ( ROIC − g )
V= = =
0.08 − 0.02 wacc − g wacc − g
• Therefore, the relationship between value and invested capital is:
IC  ( ROIC − g ) ROIC − g This is close – but not identycal - to
V=  V / IC =
wacc − g wacc − g the P/BV of the firm

• And the relationship between value and EBIT is:

NOPLAT − g  IC EBIT (1 − t )(1 − g / ROIC ) (1 − t )(1 − g / ROIC )
V= =  V / EBIT =
wacc − g wacc − g wacc − g
• Clearly, the higher ROIC and g, the higher the multiple should be; also
higher taxes and wacc lowers the firm’s multiple
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Multiples, growth and future ROIC
EV/EBIT Company's growth rate
10.952 0% 1% 2% 3% 4% 5% 6%
4% 10.0 8.6 6.7 4.0 0.0 -6.7 -20.0

Company's after-tax Return on Invested Capital

5% 10.0 9.1 8.0 6.4 4.0 0.0 -8.0
6% 10.0 9.5 8.9 8.0 6.7 4.4 0.0
7% 10.0 9.8 9.5 9.1 8.6 7.6 5.7
8% 10.0 10.0 10.0 10.0 10.0 10.0 10.0
9% 10.0 10.2 10.4 10.7 11.1 11.9 13.3
10% 10.0 10.3 10.7 11.2 12.0 13.3 16.0
11% 10.0 10.4 10.9 11.6 12.7 14.5 18.2
12% 10.0 10.5 11.1 12.0 13.3 15.6 20.0
13% 10.0 10.5 11.3 12.3 13.8 16.4 21.5
14% 10.0 10.6 11.4 12.6 14.3 17.1 22.9
15% 10.0 10.7 11.6 12.8 14.7 17.8 24.0
16% 10.0 10.7 11.7 13.0 15.0 18.3 25.0
17% 10.0 10.8 11.8 13.2 15.3 18.8 25.9
18% 10.0 10.8 11.9 13.3 15.6 19.3 26.7
19% 10.0 10.8 11.9 13.5 15.8 19.6 27.4
20% 10.0 10.9 12.0 13.6 16.0 20.0 28.0

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 Valuation Methods: DCF
• Involves the estimation of future expected cash-flows to be discounted at the
appropriated cost of capital
– Methodological choice: APV, WACC or FTE?
– APV preferred mode when debt balances are not constant
– FTE useful in project finance situations
• Problems:
– Too sensitive to cash-flow estimates
– Even more sensitive to terminal value assumptions
• Gordon’s model with an arbitrary g (much sensitive to this parameter)
• A value based upon a multiple of last year’s EBITDA
– Determination of cost of capital
• Practitioners use WACC – however WACC requires knowledge about the market value of the firm’s
equity
• Too sensitive to the (many) inconsistencies and errors used in real-life estimation of the cost of capital

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32
 Questions
• Why is FCA “carving out” Ferrari and listing it on the NYSE?
– Who gets the money?
– Why NYSE? Isn’t this na Italian company? Why not Milan?
– Why spinning it off later?
• How much is Ferrari worth?
• How should the IPO be priced?

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 Who are the comparables?
Market
Millions € Total Capital Projected Value of Total
Revenue Expend EBITDA Growth Rate Equity Debt Cash
Auto Manufacturers
BMW 80 401 6 099 16 426 6.1% 56 562 77 506 7 688
Daimler 129 872 6 307 18 514 6.9% 77 906 86 689 15 543
Fiat Chrysler 96 090 8 121 8 271 4.6% 18 657 33 724 23 601
Ford Motor 108 619 5 626 8 537 10.1% 52 925 98 484 25 743
General Motors 117 554 8 946 6 674 4.5% 46 554 38 710 24 391
Honda Motor 96 196 6 374 12 730 6.9% 51 128 52 483 11 427
Hyundai Motor 63 924 3 385 7 233 6.8% 33 631 40 802 19 547
Kia Motors 33 730 1 446 2 800 1.6% 16 977 3 535 5 502
Nissan Motor 82 101 11 432 10 879 6.2% 40 013 51 796 6 698
Peugeot 53 607 2 428 3 318 7.0% 12 230 21 914 10 521
Renault 41 055 2 703 3 967 8.9% 23 096 36 299 14 049
Tata Motors 33 811 4 100 5 647 5.5% 16 701 10 952 7 125
Tesla Motors 2 411 731 9 94.9% 26 400 2 051 1 590
Toyota Motor 196 622 24 233 30 260 3.2% 186 069 147 344 40 497
Volkswagen 202 458 16 613 23 048 3.5% 52 916 139 021 34 143

Luxury Brands
Burberry Group 3 221 199 745 2.6% 7 691 90 865
Cie Financiere 10 410 708 2 902 3.1% 38 986 3 093 8 553
Hermes International 4 119 279 1 478 6.8% 35 297 41 1 481
LVMH Moet Hennessy 30 638 1 848 7 027 2.1% 80 731 9 243 4 648
Prada 3 552 362 954 1.9% 8 772 519 720
Tiffany & Co. 3 248 189 819 4.7% 9 125 989 648

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 Cars sold
Full Year First Half of Year
Millions €
2012 2013 2014 2014 2015
By Geography
Europe, Middle East, and Africa
United Kingdom 686 686 705 408 456
Germany 755 659 616 353 214
Switzerland 366 350 332 181 155
Italy 318 206 243 132 139
France 330 273 253 138 129
Middle East 423 472 521 232 185
Rest of EMEA 825 663 604 349 320
Total EMEA 3 703 3 309 3 274 1 793 1 598
Americas
Americas 2 208 2 382 2 462 1 199 1 287
Asia Pacific
Greater China 789 572 675 289 261
Rest of APAC 705 737 844 387 548
Total APAC 1 494 1 309 1 519 676 809
Total 7 405 7 000 7 255 3 668 3 694

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 How much growth is there?
First Half
Millions € 2012 2013 2014 2015 CAGR
Sales
Cars and Spare Parts (1) 1 695 1 655 1 944 1 007
Engines (2) 77 188 311 121
Sponsorship, Commercial and Brand (3) 385 412 417 212
Other (4) 69 80 91 46
Total Sales 2 225 2 335 2 762 1 387 11.4%

Cost of Sales excluding Dep and Amort 961 964 1 217 592
Depreciation & Amortization Expense 238 270 289 130
Selling, General, and Admin. Expense 243 260 300 152
Research & Development 431 479 541 291
Other Operating Expense 17 -2 26 4
Operating Income (EBIT) 335 364 389 218 7.7%

Net Financial Income (Expense) -1 3 9 -27

Profit before Tax 335 366 398 191
Income Tax Expense 101 120 133 65
Net Profit 233 246 265 126 6.5%

Capital Expenditures 258 271 330 151 13.0%

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 Internal Forecast
Assumptions 2014 2015 2016 2017 2018 2019 CAGR
Millions €
Growth in Cars Shipped 3.6% 7.0% 5.0% 4.0% 4.0% 3.0%
Growth in Revenue/Car 5.0% 5.0% 5.0% 5.0% 5.0%
Growth in Engine Revenue 3.0% 3.0% 3.0% 3.0% 3.0%
Growth in Other Revenue 3.0% 6.0% 6.0% 6.0% 6.0%

Operating Margin - Cars 12.5% 13.0% 13.5% 14.0% 14.0% 14.0%

Operating Margin - Engines 9.1% 10.0% 10.0% 10.0% 10.0% 10.0%
Operating Margin - All Other Revenue 24.9% 25.0% 27.0% 28.0% 30.0% 30.0%

Net Working Capital Turnover 1.9 2.0 2.1 2.2 2.2 2.2
Net Fixed Asset Turnover 3.2 3.2 3.3 3.5 3.7 3.8
Deprec&Amort/PPE 34% 34% 34% 34% 34% 34%

Financial Forecast
Car Shipments (000s) 7.26 7.76 8.15 8.48 8.82 9.08 4.6%
Avg Revenue per Car (Euro 000s) 268 281 295 310 326 342 5.0%
Car Revenue 1 944 2 184 2 408 2 629 2 871 3 105 9.8%
Engine Revenue 311 320 330 340 350 361 3.0%
All other Revenue 507 523 554 587 623 660 5.4%
Total Revenue 2 762 3 027 3 292 3 556 3 844 4 126 8.4%
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 Valuation Metrics
Market
Total Capital Projected Value of Total EV / EV/
Revenue Expend EBITDA Growth Rate Equity Debt Cash Net Debt EV EBITDA Revenue
Auto Manufacturers
BMW 80 401 6 099 16 426 6.1% 56 562 77 506 7 688 69 818 126 380 7.7 1.57
Daimler 129 872 6 307 18 514 6.9% 77 906 86 689 15 543 71 146 149 052 8.1 1.1
Fiat Chrysler 96 090 8 121 8 271 4.6% 18 657 33 724 23 601 10 123 28 780 3.5 0.3
Ford Motor 108 619 5 626 8 537 10.1% 52 925 98 484 25 743 72 742 125 666 14.7 1.2
Should we
General Motors 117 554 8 946 6 674 4.5% 46 554 38 710 24 391 14 319 60 873 9.1 0.5 use this
Honda Motor 96 196 6 374 12 730 6.9% 51 128 52 483 11 427 41 057 92 185 7.2 1.0
Hyundai Motor 63 924 3 385 7 233 6.8% 33 631 40 802 19 547 21 255 54 885 7.6 0.9 metric?
Kia Motors 33 730 1 446 2 800 1.6% 16 977 3 535 5 502 -1 967 15 009 5.4 0.4
Nissan Motor 82 101 11 432 10 879 6.2% 40 013 51 796 6 698 45 097 85 110 7.8 1.0
Peugeot 53 607 2 428 3 318 7.0% 12 230 21 914 10 521 11 393 23 623 7.1 0.4
Renault 41 055 2 703 3 967 8.9% 23 096 36 299 14 049 22 250 45 346 11.4 1.1
Tata Motors 33 811 4 100 5 647 5.5% 16 701 10 952 7 125 3 827 20 528 3.6 0.6
Tesla Motors 2 411 731 9 94.9% 26 400 2 051 1 590 462 26 862 3114.0 11.1
Toyota Motor 196 622 24 233 30 260 3.2% 186 069 147 344 40 497 106 848 292 916 9.7 1.5
Volkswagen 202 458 16 613 23 048 3.5% 52 916 139 021 34 143 104 878 157 794 6.8 0.8
Avg 214.9 1.6
Median 7.7 1.0
Luxury Brands
Burberry Group 3 221 199 745 2.6% 7 691 90 865 -775 6 916 9.3 2.1
Cie Financiere 10 410 708 2 902 3.1% 38 986 3 093 8 553 -5 460 33 526 11.6 3.2
Hermes International 4 119 279 1 478 6.8% 35 297 41 1 481 -1 440 33 857 22.9 8.2
LVMH Moet Hennessy 30 638 1 848 7 027 2.1% 80 731 9 243 4 648 4 595 85 326 12.1 2.8
Prada 3 552 362 954 1.9% 8 772 519 720 -201 8 571 9.0 2.4
Tiffany & Co. 3 248 189 819 4.7% 9 125 989 648 341 9 467 11.6 2.9
Avg 12.7 3.6
Median 11.6 2.8

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 How comparable are they?
Market
Total Capital Projected Value of Total EV /
Revenue Expend EBITDA Growth Rate Equity Debt Cash Net Debt EV EBITDA Note
Auto Manufacturers
BMW 80 401 6 099 16 426 6.1% 56 562 77 506 7 688 69 818 126 380 7.7 Luxury + MassM
Daimler 129 872 6 307 18 514 6.9% 77 906 86 689 15 543 71 146 149 052 8.1 Luxury + many
Fiat Chrysler 96 090 8 121 8 271 4.6% 18 657 33 724 23 601 10 123 28 780 3.5 Parent Co
Ford Motor 108 619 5 626 8 537 10.1% 52 925 98 484 25 743 72 742 125 666 14.7 Mass Market
General Motors 117 554 8 946 6 674 4.5% 46 554 38 710 24 391 14 319 60 873 9.1 Mass Market
Honda Motor 96 196 6 374 12 730 6.9% 51 128 52 483 11 427 41 057 92 185 7.2 Mass Market
Hyundai Motor 63 924 3 385 7 233 6.8% 33 631 40 802 19 547 21 255 54 885 7.6 Mass Market
Kia Motors 33 730 1 446 2 800 1.6% 16 977 3 535 5 502 -1 967 15 009 5.4 Mass Market
Nissan Motor 82 101 11 432 10 879 6.2% 40 013 51 796 6 698 45 097 85 110 7.8 Mass Market
Peugeot 53 607 2 428 3 318 7.0% 12 230 21 914 10 521 11 393 23 623 7.1 Mass Market
Renault 41 055 2 703 3 967 8.9% 23 096 36 299 14 049 22 250 45 346 11.4 Mass Market
Tata Motors 33 811 4 100 5 647 5.5% 16 701 10 952 7 125 3 827 20 528 3.6 Mass Market
Tesla Motors 2 411 731 9 94.9% 26 400 2 051 1 590 462 26 862 3114.0 Luxury Brand
Toyota Motor 196 622 24 233 30 260 3.2% 186 069 147 344 40 497 106 848 292 916 9.7 Mass Market
Volkswagen 202 458 16 613 23 048 3.5% 52 916 139 021 34 143 104 878 157 794 6.8 Mass Market
Avg 214.9
Median 7.7

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 How comparable are they?

Market
Total Capital Projected Value of Total EV / EV/
Revenue Expend EBITDA Growth Rate Equity Debt Cash Net Debt EV EBITDA Revenue Note
Luxury Brands
Burberry Group 3 221 199 745 2.6% 7 691 90 865 -775 6 916 9.3 2.1 Slow Growth
Cie Financiere 10 410 708 2 902 3.1% 38 986 3 093 8 553 -5 460 33 526 11.6 3.2
Hermes International 4 119 279 1 478 6.8% 35 297 41 1 481 -1 440 33 857 22.9 8.2
LVMH Moet Hennessy 30 638 1 848 7 027 2.1% 80 731 9 243 4 648 4 595 85 326 12.1 2.8 Slow Growth
Prada 3 552 362 954 1.9% 8 772 519 720 -201 8 571 9.0 2.4 Slow Growth
Tiffany & Co. 3 248 189 819 4.7% 9 125 989 648 341 9 467 11.6 2.9
Avg 12.7 3.6
Median 11.6 2.8

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 A better set?

Market
Total Capital Projected Value of Total EV /
Revenue Expend EBITDA Growth Rate Equity Debt Cash Net Debt EV EBITDA
Auto Manufacturers
BMW 80 401 6 099 16 426 6.1% 56 562 77 506 7 688 69 818 126 380 7.7
Daimler 129 872 6 307 18 514 6.9% 77 906 86 689 15 543 71 146 149 052 8.1
General Motors 117 554 8 946 6 674 4.5% 46 554 38 710 24 391 14 319 60 873 9.1
Renault 41 055 2 703 3 967 8.9% 23 096 36 299 14 049 22 250 45 346 11.4
Toyota Motor 196 622 24 233 30 260 3.2% 186 069 147 344 40 497 106 848 292 916 9.7
Avg 9.2
Median 9.1
Luxury Brands
Cie Financiere 10 410 708 2 902 3.1% 38 986 3 093 8 553 -5 460 33 526 11.6
Hermes International 4 119 279 1 478 6.8% 35 297 41 1 481 -1 440 33 857 22.9
Tiffany & Co. 3 248 189 819 4.7% 9 125 989 648 341 9 467 11.6
Avg 15.3
Median 11.6

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 Multiples summary

EV/EBITDA Low Med High

2014 EBITDA 678

Car Manufacturers 8 9.1 11.4

EV 5 424 € 6 170 € 7 729 €

Luxury Comps 11 11.6 15

EV 7 458 € 7 865 € 10 170 €

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 DCF valuation
• Cost of Capital
– Case: wacc = 5%
• Alternative:
– Unlevered beta of comparables;
• Auto and truck. 0.5 (Damodaran); Other source: 0.6
• Rf = 1.70%
• MRP = 6.5%
• Ferrari’s target debt/equity (?) = 20%
– => bL = 0.55×(1+0.2×0.62) = 0.62
– R0 = 1.7% + 0.55 × 6.5% = 5.275%
– RE = 1.7% + 0.62 × 6.5% = 5.73%
• Cost of Debt: a 0.75% spread over Treasuries (?) = 2.45%
• Wacc = (1/1.2) × 5.73% + (1- 1/1.2) × 2.45% × 0.62 = 5%
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DCF Valuation
Assumptions 2014 2015 2016 2017 2018 2019
Financial Forecast Perpet
Car Shipments (000s) 7.26 7.76 8.15 8.48 8.82 9.08
Avg Revenue per Car (Euro 000s) 268 281 295 310 326 342
Car Revenue 1 944 2 184 2 408 2 629 2 871 3 105
Engine Revenue 311 320 330 340 350 361
All other Revenue 507 523 554 587 623 660
Total Revenue 2 762 3 027 3 292 3 556 3 844 4 126

Operating Profit-Cars 243 284 325 368 402 435

Operating Profit-Engines 28 32 33 34 35 36
Operating Profit-All Other Revenue 126 131 150 164 187 198
Total Operating Profit 398 447 508 567 624 669
Taxes on Operating Profits 170 193 215 237 254
NOPLAT 277 315 351 387 415
Dep & Amort 289 317 339 345 353 369
Change in NWCR 88 54 49 131 128
CAPEX 398 404 364 376 416
Free Cash Flow 107 195 284 233 240 12 343
Enterprise Value 10 575

Cost of capital 5.0%

Perpetuity Growth 3.0%

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 EV Sensitivity

EV Perpetuity Growth Rate

7 289 1.50% 1.75% 2.00% 2.25% 2.50% 2.75% 3.00% 3.25% 3.50%
4.50% 7 425 8 034 8 765 9 658 10 774 12 210 14 124 16 804 20 823
Cost of Capital

4.75% 6 846 7 356 7 959 8 683 9 568 10 674 12 096 13 992 16 646
5.00% 6 350 6 783 7 289 7 886 8 603 9 479 10 575 11 983 13 861
5.25% 5 920 6 292 6 721 7 222 7 814 8 524 9 392 10 477 11 872
5.50% 5 543 5 866 6 234 6 660 7 156 7 742 8 445 9 305 10 380
5.75% 5 211 5 493 5 813 6 178 6 599 7 090 7 671 8 368 9 220
6.00% 4 916 5 164 5 444 5 760 6 122 6 539 7 026 7 601 8 291

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 The “football field”

Multiple 7.5 8.0 8.5 9.0 9.5 10.0 10.5 11.0 11.5 12.0 12.5 13.0 13.5 14.0 14.5 15.0 16.0 17.0 18.0 19.0 20.0 21.0

Enterprise Value 5.1 5.4 5.8 6.1 6.4 6.8 7.1 7.5 7.8 8.1 8.5 8.8 9.2 9.5 9.8 10.2 10.8 11.5 12.2 12.9 13.6 14.2

Equity Value 3.1 3.4 3.8 4.1 4.4 4.8 5.1 5.4 5.8 6.1 6.5 6.8 7.1 7.5 7.8 8.2 8.8 9.5 10.2 10.9 11.6 12.2

Price per Share (USD) 18.5 20.6 22.6 24.6 26.7 28.7 30.8 32.8 34.8 36.9 38.9 41.0 43.0 45.0 47.1 49.1 53.2 57.3 61.4 65.4 69.5 73.6

Top Automakers

Selected Luxury

DCF

How do you value potential hype?

46
 Share Price Calculation
• Approved EV: €10.500 million
• Net Debt € 2.009
• Equity Value: € 8.491

• Number of shares post IPO: 189 million

• Share Price = € 8.491 / 189 = €44.9
• Share Price (USD) = €44.9× 1.1375 = $51.1

• The valuation above represents a multiple of €10.500 / €678 = 15.5 ×

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Find all that is wrong in this:

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