Cipralex For How Long

The concept of value

a large text on the Quebec budget, I thought it would be interesting to settle for a small column on the simple concept of value.

WhiteShad As mentioned in his blog ( http://portefeuille-financier.blogspot.com/ ) in February, the intrinsic value of an enterprise is the maximum amount you are willing to pay to buy the future cash flows generated by the company. I will now explore this concept of value and introduce the concept of risk.

The value of continuity: going concern value

This value has described and WhiteShad that we tend to regard as the single value. It is the value of the company, considering that it will continue its operations in the foreseeable future. In the situation where one seeks the value of business continuity, we must look to the future of the company and ONLY the future. Past performance gives no value (but it could serve as a basis for calculating future Cashflows).

In such a situation, how to assess the value of the company? We must determine the future Cashflows and update to the present with a discount rate that we have chosen.


Take the example of a company which has only one client with whom she has a long-term (75 years) that will provide a net profit of $ 100 000 guaranteed per year (the Cashflows are some). How much is this company? It depends on the discount rate chosen. If we require a 10% return, the value will be $ 999 214. But at 11%, the value is only $ 908 728. At 15%? $ 666 648!

This shows that the required rate of return assumption makes it very volatile the value of the company. And it was not even incorporated the concept of risk on the side of the cash flows! Indeed, we have assumed that the $ 100 000 was secured and stable. But in a business, this amount varie et cette variation peut être complexe à prévoir. Quel sera le bénéfice de Bombardier dans 8 ans ? Nous pourrions tous avancer un chiffre, mais il sera aussi réaliste que la prévision météo pour le jour de Noël l'an prochain !

Calculer la valeur de continuité d'une entreprise par l'actualisation des flux monétaires futurs est une lourde tâche et un léger changement de 2 ou 3 hypothèses peut affecter grandement notre calcul de la valeur intrinsèque d'une entreprise. C'est pourquoi plusieurs analystes utilisent des méthodes d'évaluation relative, i.e. qu'ils comparent l'entreprise à d'autres. La méthode la plus populaire est sans contredit le P/E, but there are more than twenty (I will not cover here).


And the concept of risk in all this?
A method for using the discounted cash flow is the use of sensitivity analysis. Such an analysis would include a notion of risk in each case and it would run the model a thousand times (or more) to see what value comes out every time. This gives a mean value with a potential distribution. A simple example based on what has been said before:

• Profits of $ 100 000 now have a standard deviation of 10% and follow a normal
• The required rate of return is 10%, and follows a normal distribution with standard deviation of 1%. In stock

model a thousand times on a mathematical platform (eg Matlab), we could obtain a value of the company in the confidence interval [902,150; 1096250]. In our model, there would be 95% chance that the true value is in this range. If the market value is $ 910 000, we can not declare that the company is currently undervalued (then as above, with 10% it was like she was).


The NAV
This enterprise value is often forgotten by people because it is normally less than the value of continuity. The NAV is that if the company would shut its doors, liquidating its assets and paid all its liabilities. This value is convenient for a company that announced the imminent closure of its doors (in such a situation, there is no continuity).

So how is this calculated value? A quick way to assess the asset value is the book value of the action. However, such a method assumes that the long-term assets, net of depreciation is indeed the resale value of assets. Rather, it should proceed in assessing the overall assets at prevailing prices in the markets. Let Becker Milk. This company owns real estate for over 50 years, she rented to stores. The book value of these assets is approximately $ 15M, but on the market, they easily worth $ 40M.

It is interesting to calculate the net asset value of a company. Why? Because it will find the wrong business. Let Becker Milk. The value of continuity is about $ 12-13 per share (the title is 10 now). Its net asset value is estimated at $ 20 per share with very conservative assumptions. So this tells us that the company would be more expensive if it liquidated its assets and closed shop. There are two possible answers to this situation (and both me off this type of track). Either the industry in which the company operates is no longer viable, or the company is mismanaged and management destroys value. So there

two important values for a business: the value of continuity and its net asset value. The first should be consistently higher than the second and should be calculated by considering the uncertainty in setting our assumptions.