Corporate Valuation - Step by step calculation with example by Howard Lee

Author:Howard Lee [Lee, Howard]
Language: eng
Format: azw3
Publisher: UNKNOWN
Published: 2016-08-22T04:00:00+00:00

Where and are the cumulated probabilities on a standard normal distribution on and:

In which g is the growth rate and K is the unlevered equity derived using CAPM:

Unlevered Beta is calculated from its relationship with tax, corporate structure, and lever beta:

With DCF, tax and valuation adjustment, real option should be the last material valuation required from the total firm and equity value.

Results and analysis

The underlying is the value of producing gold, and the exercise price is the cost of production. This reflects AEM’s right but not the obligation to extract the gold only when the benefit is greater than the cost (i.e. call option).

The key challenge to this estimation is the variety of factors; each of which must be estimated with the best accuracy or be selected appropriately to achieve the best results:

Gold price - While the price for gold at the end of 2001 and 2002 are provides, and a linear price of $299.30 can be calculated, a historical rate of $308.20 on the actual date of 30th April, 2002 is deemed more appropriate. This rate is from a public source.

Factor – Effectively bring the cost of production back to PV.

K, B(u) and MRP – MRP of 6.70% is provided while the CAPM and unlevered Beta formula are used to calculate K. This allows unlevered equity rate to be applied on the discounting of production cost.

g – Set at zero to reflect growing cost offset by increase in by-product.

T, t – 16 years is suggested by the given materials for AEM to extract the gold. Assume that t and T are the same with no cost of holding the land.

– The 10 year government bond is deemed as the most efficient instrument to reflect the risk free rate.

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