WACC, CoC, Structure
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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…
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When discounting cross-border cash flows, several questions arise: which country’s cost of capital should be used? In which currency? And how should the beta of a subsidiary company be determined? Firstly, it is essential to consider the tax situation. There are instances when taxation occurs according to the laws of the subsidiary company’s country, or…
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How Do I Find the Discount Rate to Determine the Fair Price of a Specific Organization? The sensitivity of an organization’s value to the discount rate is very high, making this a critical and complex issue. Here, I’ll touch on a few conceptual considerations to help understand the problem. We start with the fact that…
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Do you know the value of your organization? Knowing and increasing the value of a commercial organization is a fundamental responsibility of top management. However, in developing countries like ours, making an accurate valuation is very difficult, and a superficial approach can lead to strategic errors. On one hand, forecasting cash flows, and on the…
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Does your organization generate “economic rent”? How often can this occur? Economic rent is the surplus that accrues to capital above the weighted average cost of capital (WACC). Its existence is determined by an organization’s monopoly, enabling it to seek and execute positive NPV projects. This is objectively based on ownership of competitive advantage. Here…
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To calculate the WACC, it is also necessary to know the cost of debt, and this is not simply the interest rate. Essentially, the interest rate and the cost of debt are equal only for risk-free loans. Since an organization always carries default risk, the cost of debt depends on the probability of default and…
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