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Module 7 – Residual Income Junichi Hara

Module 7 – Residual Income Junichi Hara. Where we are. BUDGETS, TARGETS, FORECASTED EVA * Performance Evaluation *Benchmarking. FORECASTS OF CASH FLOWS. FORECASTS OF EARNINGS (and Book Values). DISCOUNTED CASH FLOWS. ACCOUNTING-BASED VALUATION. FORECASTING. VALUE OF THE FIRM/

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Module 7 – Residual Income Junichi Hara

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  1. Module 7 – Residual IncomeJunichi Hara

  2. Where we are BUDGETS, TARGETS, FORECASTED EVA * Performance Evaluation *Benchmarking FORECASTS OF CASH FLOWS FORECASTS OF EARNINGS (and Book Values) DISCOUNTED CASH FLOWS ACCOUNTING-BASED VALUATION FORECASTING VALUE OF THE FIRM/ DIVISION CURRENT AND PAST FINANCIAL STATEMENTS (analysis of information, trends, comparisons, etc.)

  3. Where we are BUDGETS, TARGETS, FORECASTED EVA * Performance Evaluation *Benchmarking FORECASTS OF CASH FLOWS FORECASTS OF EARNINGS (and Book Values) DISCOUNTED CASH FLOWS ACCOUNTING-BASED VALUATION FORECASTING VALUE OF THE FIRM/ DIVISION CURRENT AND PAST FINANCIAL STATEMENTS (analysis of information, trends, comparisons, etc.)

  4. Where we are BUDGETS, TARGETS, FORECASTED EVA * Performance Evaluation *Benchmarking FORECASTS OF CASH FLOWS FORECASTS OF EARNINGS (and Book Values) DISCOUNTED CASH FLOWS ACCOUNTING-BASED VALUATION FORECASTING VALUE OF THE FIRM/ DIVISION CURRENT AND PAST FINANCIAL STATEMENTS (analysis of information, trends, comparisons, etc.)

  5. Conclusion BUDGETS, TARGETS, FORECASTED EVA * Performance Evaluation *Benchmarking Both paths take you to same destination FORECASTS OF CASH FLOWS FORECASTS OF EARNINGS (and Book Values) DISCOUNTED CASH FLOWS ACCOUNTING-BASED VALUATION FORECASTING VALUE OF THE FIRM/ DIVISION CURRENT AND PAST FINANCIAL STATEMENTS (analysis of information, trends, comparisons, etc.)

  6. Assumptions • Sales g%: 2.34% • EPM: 4.05% • EATO: 3.45 • WACC 7.34%

  7. DCF Method

  8. DCF Method

  9. Lots of algebra… • Free Cash Flow valuation: • Zero sum equation: • Sum the LHSs and RHSs yields:

  10. The Big Picture Value of firm right now

  11. The Big Picture Value of future

  12. The Big Picture Components of REI

  13. The Big Picture Creating Value = Earning more than equivalent investment

  14. Residual Income Method

  15. DCF Method

  16. DCF = REI Method

  17. Questions?

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