Day 73 in MIT Sloan Fellows Class 2023, Financial Management 2, Harris Seafood - NPV
Three components of investment
- Strategy
- Valuation
- Execution
The most common three methods used in valuation
- Calculate NPV by DCF method
- Earning multiple using P/E,EBIT and EBITDA
- Asset multiples using Book Value
Steps to value projects by DCF
- Forecast free cash flow
- Calculate the WACC
- Calculate NPV with the WACC
Company or project?
To calculate the WACC, you need to collect a lot of information.
Cost of debt, cost of equity, debt ratio, tax rate etc...
However, so many companies made mistakes to calculate it with company's metrics. You should calculate it by "project" number.
Cost of capital is different from projects. Then, acceptable levels of return would differ.
CAPM- how to calculate beta-
Beta is the most controversial metric to calculate.
What is the beta of a treasury bond? - Zero
What is the beta of the market - One
Beta of public utility? - 0.75
What is the beta of a AA corporate bond? - 0.15
The important thing to do is to identify Pure Plays. (Comparables, twins)
Your project is not public, but there would be a public company with similar project without any other projects. Then you can use the beta of that company with unlevered calculation(recalculate debt ratio balance)
Multiples
- Identify comparables
- Estimate firm value/EBIT multiples for comparables
- Compute the average multipls for comparables
- Multiply EBIT of the project by the average multiple for comparables
Sensitivity analysis
- Sensitivity to discount rate
- Sensitivity to growth rate
- Sensitivity terminal value book/market value
