Summary: A note on Valuing Companies in Corporate Restructuring The article is a note that describes how to apply the Discounted Cash Flow method of Company Valuation in companies undergoing corporate restructuring. The concept is based on the change in shareholders wealth as a direct result of the change in the firm’s value- which depends on multiple factors including corporate restructuring. The note describes in details about the technical aspects of the DCF method. First it defines the DCF as a sum of the PV of all expected future cash flows and how every method identifies two main sources of future cash flows namely operating cash and tax shields from interest an NOL. The note then describes the methodology for calculating the discount rate applied to each cash flow. The main formula is
Rj = Rf + Bj (Rm-Rf)
Rj-expected rate of return
Rf-risk free rate
Bj-beta ie the correlation between the value of the asset and the value of the portfolio The difference between Rm and Rf shows the market risk premium or the additional risk the market expects to receive on any given investment. The note then goes on to explain how to calculate the B of any given asset as Ba= (D/V)*Bd + (E/V) *Be
Ba=b of asset
D-value of total debt
V-value of entire company (E+D)
Bd-b of debt
Be-b of equity
Then the three main methods are identified and each described in detail. 1.
In this method total cash flows form a company is adjusted to the PV and the sum is the company’s value. There are three components or buckets that make a part of this value. The first is the cash generated from the company operations. For this the EBAIT is calculated as after tax EBIT. CFA includes any cash adjustments needed including new capital equipment and net working capital. The discount used is the Ra as the gain in cash is an asset to the company. The second bucket is from the tax shield created by the interest. The interest on debt is the amount the company would have paid if...
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