Lecture Notes: Valuation with Excel Spreadsheet

Introduction

• Focus on using a simple Excel spreadsheet for valuation, called FCFF Simple Ginzu.
• Emphasis on simplicity and practicality in valuation models.

Key Concepts

FCFF Model

• FCFF: Free Cash Flow to the Firm model, used to value the entire business.
• Differences with FCFE: Free Cash Flow to Equity model focuses on equity valuation.

Spreadsheet Features

• Spreadsheets can be complex but aim for simplicity and clarity.
• Ginzu Concept: Initially simple with added functionalities (like Ginzu knives in infomercials).
• Updated frequently (latest version: January 2024).
• Built-in data for industry averages and country risk premiums.

Personal Approach to Excel

• Not an advanced Excel user: minimal use of macros or functions.
• Values transparency and manual calculations to understand inputs clearly.

Preparations Before Using the Spreadsheet

Requirements

1. Pick a company and obtain at least one year of financial statements (annual report or quarterly report).
2. Gather market data:
   • Current risk-free rate.
   • Current stock price, share count, and market cap.

Circular Reasoning in the Spreadsheet

• Users must enable iterative calculations in Excel preferences.

Step-by-Step Input Process

Initial Input Cells

• Company Identification: Name, incorporation country, and industry (using pull-down menus).
• Recent Financial Data: Revenues, operating income, interest expenses (from income statements).

Balance Sheet Inputs

• Shareholders' equity and book value of debt (from balance sheet).
• Negative shareholders' equity is not always a red flag (e.g., stock buybacks).

Additional Inputs

• Capitalization of R&D and operating expenses:
  • R&D expenses for recent years.
  • Capitalize leases if necessary (using Operating Lease Converter).

Cash and Other Assets

• Cash and marketable securities.
• Cross holdings and other non-operating assets.

Share Count and Tax Rates

• Current shares outstanding and effective/marginal tax rates.

Forecasting Future Cash Flows

Key Forecast Inputs

1. Revenue growth and operating margins for the next year.
2. Growth rates for years 2 through 5.
3. Target operating margin for long-term stability.
4. Sales to capital ratio to estimate reinvestment needs.

Cost of Capital Calculations

• Risk-free rates, equity risk premiums, and cost of debt.
• Options to use industry averages or detailed calculations.

Valuation Output

• Review outputs and ensure they align with inputs.
• Valuation results depend heavily on input accuracy.

Additional Features

• Diagnostic page to check input reasonableness.
• Industry averages and country risk premiums built into the model.

Conclusion

• Spreadsheet serves as a personal tool for valuation.
• Adapt and modify the spreadsheet to fit user needs.
• Encourage ownership of the valuation results.

Final Thoughts

• Approach valuation with a narrative for better understanding.
• Use visuals to represent data effectively.
• Always update data for accuracy in valuation.