Acronyms
• TAPP: rising tide dilemma, APP higher than calculated because entire market pushed up in later phase
• Problem HLT affect company:
o Leverage company – uncompetitive
o CF direct to service debt instead of investment
o U shape of WACC ratio of debt to equity – limit to how much debt, coverage ratio, downgrade – increase cost of debt, covenants
§ Turn into fallen angel – pink sheet/AIM
• EER: expected economic return
• Reverse synergies: increased costs from resulting merger
• GCBP – good company, bad price – trophy company value destructive, no synergies to offset triple digit APP
• NRS vs S: incorporates time – take years to achieve therefore discounted to PV using WACC
• CFROI: cash flow return on investment (ROE+ROA)
• ODCAP: operations defined CAP
o Target share price range derived from Internal CFs
• MICAP: market implied competitive advantage period
o DCF with EPP found by trial and error to match implied equity price to current stock price. EPP is the MICAP
• CAP: competitive advantage period
o Number of years company expected to generate excess returns on incremental investment i.e.
o CFROI=WACC = viability threshold
§ Reflects end point of corporate value lifespan
o Dominance Threshold : marginal CFROI = WACC
§ end of period of firm’s greatest value creation in spread terms
• OV: operational valuation
• GFAP: gordon formula assuming perpetuity – three variables
o Four variable = time – used in DCF valuation
• 3 vs 4 variable issue = perpetuity problem – indefinite =/= infinite
o Gordon/Shapiro three variables is FCF,g, WACC
§ T is fourth variable they missed
§ Assumed t is infinite for all companies so disregarded regardless of circumstances that shorten company life span
permanently e.g. circuit city or palm
§ Perpetuity conjecture is erroneous is two ways
• Impossible life span which no company reaches
• One duration applies to all firms inflexible rule
o serial approach is alternative to perpetuity
o assume finite brief TVP period instead of perpetuity
o then Gordon formula becomes sum of period NPV calcs ending in final year of TVP
• High TV in high tech/cosmetics = high front end investment requirements plus losses in early years
o Upfront High investment at start – spend to establish technology, educate customer, create market, get momentum and market
share
o Cosmetics – advertising, endorsements, educate the customer
o First 4 years losses
• SSME = semi strong market efficiency
• Clean Surplus – change in Dividend = Change in SP – correlation is 0.46
• Post merger improvement vs true synergy
o Include improvements past mgmt. could have made but didn’t
§ E.g. gap in abilities, resources, skills
o True synergies – only possible once combined
• Why MMF
o Ego/Hubris
o CEO believes their the exception (one third)
o Looking for alternative
§ Cash hoarded on BS
§ Low rates
§ Limited organic growth opportunities
o Spending imagined wealth
• TAPP: rising tide dilemma, APP higher than calculated because entire market pushed up in later phase
• Problem HLT affect company:
o Leverage company – uncompetitive
o CF direct to service debt instead of investment
o U shape of WACC ratio of debt to equity – limit to how much debt, coverage ratio, downgrade – increase cost of debt, covenants
§ Turn into fallen angel – pink sheet/AIM
• EER: expected economic return
• Reverse synergies: increased costs from resulting merger
• GCBP – good company, bad price – trophy company value destructive, no synergies to offset triple digit APP
• NRS vs S: incorporates time – take years to achieve therefore discounted to PV using WACC
• CFROI: cash flow return on investment (ROE+ROA)
• ODCAP: operations defined CAP
o Target share price range derived from Internal CFs
• MICAP: market implied competitive advantage period
o DCF with EPP found by trial and error to match implied equity price to current stock price. EPP is the MICAP
• CAP: competitive advantage period
o Number of years company expected to generate excess returns on incremental investment i.e.
o CFROI=WACC = viability threshold
§ Reflects end point of corporate value lifespan
o Dominance Threshold : marginal CFROI = WACC
§ end of period of firm’s greatest value creation in spread terms
• OV: operational valuation
• GFAP: gordon formula assuming perpetuity – three variables
o Four variable = time – used in DCF valuation
• 3 vs 4 variable issue = perpetuity problem – indefinite =/= infinite
o Gordon/Shapiro three variables is FCF,g, WACC
§ T is fourth variable they missed
§ Assumed t is infinite for all companies so disregarded regardless of circumstances that shorten company life span
permanently e.g. circuit city or palm
§ Perpetuity conjecture is erroneous is two ways
• Impossible life span which no company reaches
• One duration applies to all firms inflexible rule
o serial approach is alternative to perpetuity
o assume finite brief TVP period instead of perpetuity
o then Gordon formula becomes sum of period NPV calcs ending in final year of TVP
• High TV in high tech/cosmetics = high front end investment requirements plus losses in early years
o Upfront High investment at start – spend to establish technology, educate customer, create market, get momentum and market
share
o Cosmetics – advertising, endorsements, educate the customer
o First 4 years losses
• SSME = semi strong market efficiency
• Clean Surplus – change in Dividend = Change in SP – correlation is 0.46
• Post merger improvement vs true synergy
o Include improvements past mgmt. could have made but didn’t
§ E.g. gap in abilities, resources, skills
o True synergies – only possible once combined
• Why MMF
o Ego/Hubris
o CEO believes their the exception (one third)
o Looking for alternative
§ Cash hoarded on BS
§ Low rates
§ Limited organic growth opportunities
o Spending imagined wealth
