Day 2 - World of Returns and DCF Issues

Day 2 a.m. - World of Returns

This program focuses on the analysis of returns. First, the importance of returns in relation to value creation is illustrated. The concept of invested capital is then introduced and practical examples are used to show how to calculate the return on invested capital, and what its advantages and disadvantages are. We then show how to incorporate explicit returns assumptions in a DCF model, by using the value driver formula to calculate the terminal value. The relevance of returns in an M&A context is also discussed.

Key topics:

• Returns analysis
• Value creation: what it is and what its drivers are (ROE and ROIC)
• The concept of invested capital
• Return on invested capital (ROIC)
• Relationship between ROIC and WACC
• Relationship between ROIC and ROE
• Relationship between ROIC and growth
• Using ROIC in DCF valuation
• Value driver terminal value approach
• Concept of fading returns
• Impact of returns on M&A analysis

Day 2 p.m. - DCF Issues

This session focuses on the different approaches of terminal value calculations. Participants will model a 2 stage steady state terminal value and understand how returns fade to WACC over time.

Key topics:

• Re-cap of free cash flows, and how to discount and make the mid-year adjustment when the deal date is not at year end
• Understanding how to correctly model the steady state cash flow
• Traditional terminal value approaches and pitfalls in long term return and reinvestment rates
• Understanding the value gap concept
• Disaggregating return on invested capital - profitability and efficiency
• Alternative terminal value approach: value driver
• Building a two-stage steady state terminal value model
• Sensitizing the WACC for different capital structures
• Building a graph of the optimal capital structure analysis