Fin361 Week 5 Regression Analysis Case
FINS3625 APPLIED CORPORATE FINANCE
Case Study Written Report
Week 8 Valuation: Laura Martin
Name
Student Number
% Contributio n 20 20 20 20 20
Signature
Karen Chan Yifeng Chen (Nino) Tony Richardson Weitao Wu (Tony) Wendy (Wenyu) Yan
z3242429 z3283995 z3253113 z3284666 z3241580
1
Multiples versus DCF analysis Multiples analysis is simple to understand and apply. The inputs for the multiple are publicly available, though are vulnerable to accounting manipulation. Also, it is difficult to obtain a truly comparable large sample of firms. Multiples analysis is backward-looking, reliant on historical/current data to obtain multiples. It reflects relative value rather than the intrinsic value which DCF valuation produces. …show more content…
The “stealth tier” could also be valued using decision-tree analysis (see A9). An investment timing option could also be incorporated, which would allow Cox Communication to determine whether it would be profitable to “light up” and utilize the empty channels today or at a later date. Including the stealth tier option would impact the multiple analyses based on invested capital (see A10) and also EBITDA. For an effective valuation however, Cox Communications would have to be compared to companies that have a similar stealth tier, which is unrealistic. How is the stealth tier like a call option? Applicability of Martin’s option analysis The stealth tier is similar to a call option as the company has the right but not the obligation to use the unused capacity to implement further operating capacity. Therefore the decision of whether to use this capacity is a real option as the stealth tier has a value and a cost (see A11), and it is up to management as to it being exercised or not. Martin used the Black-Scholes model to value this stealth tier. Inputs from the real option illustration can be obtained as required by the Black-Scholes model (see A12). Thus it appears that the B-S model can value the stealth tier due to it resemblance to a call option, and that the 14% premium on …show more content…
Considering that the current price (or value of the option) is calculated as $23.15 per channel/per home, and the exercise price is $1.22 (opportunity cost of profit passed) the option is valuable (the current price is significantly larger than the exercise price). In addition, the option has an estimated 10 year life, which adds value as the holder of the option has a longer time to decide action. Finally for this scenario, the riskier the underlying, the more valuable the option. Volatility of 50% is high, adding value to the option. A9. Cash flows for the next 10 years generated under the stealth tier can be projected under different market condition scenarios. The cash flows under each scenario can then be discounted back to the current time, and the weighted average calculated to arrive at expected NPV of the tier” the
Case Study Written Report
Week 8 Valuation: Laura Martin
Name
Student Number
% Contributio n 20 20 20 20 20
Signature
Karen Chan Yifeng Chen (Nino) Tony Richardson Weitao Wu (Tony) Wendy (Wenyu) Yan
z3242429 z3283995 z3253113 z3284666 z3241580
1
Multiples versus DCF analysis Multiples analysis is simple to understand and apply. The inputs for the multiple are publicly available, though are vulnerable to accounting manipulation. Also, it is difficult to obtain a truly comparable large sample of firms. Multiples analysis is backward-looking, reliant on historical/current data to obtain multiples. It reflects relative value rather than the intrinsic value which DCF valuation produces. …show more content…
The “stealth tier” could also be valued using decision-tree analysis (see A9). An investment timing option could also be incorporated, which would allow Cox Communication to determine whether it would be profitable to “light up” and utilize the empty channels today or at a later date. Including the stealth tier option would impact the multiple analyses based on invested capital (see A10) and also EBITDA. For an effective valuation however, Cox Communications would have to be compared to companies that have a similar stealth tier, which is unrealistic. How is the stealth tier like a call option? Applicability of Martin’s option analysis The stealth tier is similar to a call option as the company has the right but not the obligation to use the unused capacity to implement further operating capacity. Therefore the decision of whether to use this capacity is a real option as the stealth tier has a value and a cost (see A11), and it is up to management as to it being exercised or not. Martin used the Black-Scholes model to value this stealth tier. Inputs from the real option illustration can be obtained as required by the Black-Scholes model (see A12). Thus it appears that the B-S model can value the stealth tier due to it resemblance to a call option, and that the 14% premium on …show more content…
Considering that the current price (or value of the option) is calculated as $23.15 per channel/per home, and the exercise price is $1.22 (opportunity cost of profit passed) the option is valuable (the current price is significantly larger than the exercise price). In addition, the option has an estimated 10 year life, which adds value as the holder of the option has a longer time to decide action. Finally for this scenario, the riskier the underlying, the more valuable the option. Volatility of 50% is high, adding value to the option. A9. Cash flows for the next 10 years generated under the stealth tier can be projected under different market condition scenarios. The cash flows under each scenario can then be discounted back to the current time, and the weighted average calculated to arrive at expected NPV of the tier” the