我思念你

Robert Taggart, PhD

Key25 Mergers for stock: know how much you are paying

When one company acquires another, it can pay cash or stock. In a cash deal, the acquiring company buys all of the target company’s common shares for cash. In a stock deal, the acquiring company issues new shares and exchanges them for the target company’s shares. In the latter case, the target company’s former shareholders become shareholders in the combined company.

Key24 Mergers: understand incremental benefits

In principle, evaluating a proposed merger with another company is no different from any other capital expenditure project. We need to estimate the incremental merger cash flows, discount these at an appropriate rate, and subtract the merger’s cost. If N.P.V. is positive, the merger is worthwhile.

Key23 Be alert for project-specific financing opportunities

A project’s characteristics may result in financing opportunities that can enhance N.P.V. In some cases, this takes the form of financing subsidies, such as low-interest loans or loan guarantees that a host government offers to attract investment. In other cases, the project’s attributes may allow it to be effectively separated from the rest of the company and financed in a way that minimizes negative interactions with the company’s capital structure.

Key22 Arrange financing with an eye toward future investment opportunities

In large part, the analysis of investment projects is conducted in dependently of financing decisions. The rationale is that, if a project has a positive N.P.V., we should be able to find a way to finance it. But in some instances, investment and financing decisions interact, and it is neither feasible nor prudent to try to keep them separate.

Key21 Continue to monitor projects after approval

Approval of a positive N.P.V. project does not signal the end of its analysis. Projects evolve as uncertainty is resolved, and company management continually faces additional decisions. By monitoring a project’s progress, management can also gain valuable information that can be used to make better decisions about future projects.

Key20 Perform sensitivity analysis

Once you have estimated a project’s N.P.V., it is critical to understand your estimate’s sensitivity to underlying assumptions. Your estimate depends on assumptions about product prices, operating costs, the cost of capital, working capital and capital expenditure requirements and terminal value. While all of these may be subject to bias or other forms of error, the final N.P.V. estimate may be more sensitive to some assumptions than others. It is important to identify which assumptions these are, so that we can devote special effort to assessing our faith in them.

Key19 Watch out for biased forecast

In large corporations, ideas for capital expenditure projects often come up to headquarters from the plant or division level. Project proposals may have to pass through several approval levels, depending on their size, and they must be accompanied by supporting analysis, including cash flows forecasts, an N.P.V. calculation and other summary information. By subjecting each major project to several layers of scrutiny and analysis, this process is intended to insure that only value-enhancing projects are approved. For the process to work properly, however, top management must be alert for potential biases in the supporting analysis.

Key18 Know where positive N.P.V.s come from

Key17 Understand the value of R. & D.

Key16 Know how and when to make replacement investments

Key15 Watch out for project options

Key14 Overseas investment: incorporating exchange rates

Multinational corporations have projects in different countries whose cash flows are denominated in different currencies. This raises the question of whether to discount these cash flows in terms of our domestic currency or in foreign currency units. As in the case of inflation, it is important to be consistent between cash flows and discount rates.

Key13 Inflation:be consistent between cash flows and discount rates

When inflation is expected to cause future changes in prices, it is important to distinguish between real and nominal cash flows and discount rates. Nominal cash flows are measured using the prices prevailing at the time the cash is received. Thus, inflation creates differences between real and nominal cash flows. Similarly, real discount rates are based on returns that are measured in constant price level, or constant purchasing power terms, while nominal rates are based on the dollar returns an investor actually receives.

Key12 Include project tax consequences

Another essential element in estimating project cash flows is to include all relevant tax consequences. These are particularly important at the beginning and end of a project. During the course of the project, depreciation and interest tax shields must be treated properly.

Key11 Don't forget terminal value (but don't overestimate it, either)

It is important to include a terminal value, or an estimated project value at the end of the analysis period, in net present value estimation. However, it is also important to avoid gross overestimates of terminal value.

Key10 Don't forget additional investment in working capital, plant and equipment

A project’s operating cash flows include after-tax cash revenues and expenses as well as the tax effects of depreciation. While these are easily recognized as components of project cash flows, periodic changes in net working capital and capital expenditures, which can have equally important consequences, are often overlooked.

Key9 Estimate incremental cash flow effects

When estimating a project’s future cash flows, it is important to include all incremental effects. We must include all cash flows resulting from a current decision and exclude any cash flows that are unaffected by this decision.

Key8 The cost of capital is project-specific

We can calculate W.A.C.C. for a company as a whole, as in the example in Key 6, but it is important to remember that the cost of capital is really a project characteristic. We can think of a project as a stand-alone company with a separate balance sheet and then ask how investors would value this company’s securities. As with other companies, investors would discount expected project cash flows at a rate that reflects both its business and financial risk.

Key7 Know your cost of capital

The discount rate used in net present value analysis is also called the cost of capital. Investors value a company by discounting anticipated future cash flows at the rate of return they could expect to earn elsewhere on assets of similar risk. Thus, the cost of capital is an opportunity cost, or the return investors sacrifice by not investing elsewhere. Because investors would not advance funds for a project unless they could expect to earn at least their opportunity cost, we can also interpret the cost of capital as a minimum acceptable rate of return. Finally, because investors can earn higher returns in the market for bearing more risk, the cost of capital reflects compensation for risk-bearing.