WACC, CoC, Structure
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Understanding what creates value and how it is created is critically important. A good format to grasp this is through a value creation tree diagram: First, let’s start with the idea that the opportunities for value growth are greater at the lower levels of the organization. Therefore, the lower the level we observe on the…
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To assess an organization’s value, we need to accurately measure the beta. Since the beta statistic for an individual organization is not reliable, we perform an industry beta analysis. This means we find similar companies, take their betas, unlever them, and then relever them according to the company’s leverage. This process is influenced by the…
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An Interesting Approach Used by McKinsey for Calculating Market Expected Returns: Aggregating Current Stock Prices and Expected Fundamentals The fundamental formula for value creation can be expressed solely for the equity portion (instead of EV): Thus, integrating the P/E ratio. If we plug in the long-term 14.5% return on equity for the S&P 500 and…
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The statistically derived beta of an organization is highly volatile, with even one standard deviation often being significant. Therefore, industrial betas or betas from several organizations are taken, then de-levered and re-levered to obtain a more reliable beta. The calculation of WACC should be based on the target financial structure. Some organizations have it determined,…
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Simplifying horizon forecasts with formulas also imposes some limitations. Such situations are visible in photos, how forecasts are made under uncertain conditions for ROIC. Assuming ROIC = WACC. In such a scenario, when substituting ROIC with WACC in the main formula, we get: CV = NOPAT [t+1]/ WACC It’s evident that if we use this…
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For calculating the value after the horizon, it’s necessary to explain the stability of financial indicators. What does this mean? NOPAT – must be normalized. This is the basic figure for subsequent projections. Therefore, inadequately high or low figures here can lead to significant errors. The final forecast year’s NOPAT should be based on normalized…
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Even good fundamental indicators do not necessarily mean good profitability for investors, as profitability can affect the investment price of shares, which, apart from fundamental data, depends on market expectations. Shares of organizations with good ROIC and Growth Rates are generally considered future-oriented, so further increases in the prices of such shares due to future…