Business Valuation Whats an apple tree worth Old

Business Valuation What’s an apple tree worth?

“Old Man and Apple Tree” Consider the following valuations: • Salvage • Current production • Future production • Market price • Book value Balance Sheet

Time value of money What is the value of $1?

Time value of money Let’s say I offer you either $500 today or $800 in three years. Which is better?

Time value of money Invest $500 Year 1 Year 2 Year 3 10% $50. 00 $55. 00 $60. 50 Balance $550. 00 $605. 00 $665. 50 $800 in 3 years is better than $500 today (assuming a 10% rate for money)

Time value of money Invest $500 Year 1 Year 2 Year 3 20% $100. 00 $120. 00 $144. 00 Balance $600. 00 $720. 00 $864. 00 $500 today is better than $800 in 3 years (assuming a 20% rate for money)

Time value of money Mathematically $500 * (1+. 20)3 = $864

Time value of money What if somebody offers you $864 in three years. Or $1000. What is it worth to you?

Time value of money Discount $864 Year 3 Year 2 Year 1 End of year 20% Start of year (divide by 1. 20) $864 $720 $600 $144 $120 $100 $720 $600 $500 $864 (discounted at 20% rate) = $500

Time value of money Discount $1000 Year 3 Year 2 Year 1 End of year 20% Start of year (divide by 1. 20) $1000 $833 $694 $167 $139 $115 $833 $694 $579 $1000 (discounted at 20% rate) = $579

Time value of money Mathematically $1000 / (1+. 20)3 = $578. 70

“Old Man and Apple Tree” Value of cash flows? (from Class Notes)

Precision Tools Net income Depreciation Bonuses Net cash flow Adjusted CF $390, 000 $250, 000 $120, 000 $760, 000 $500, 000 Discount rate 33% Growth rate 8% Capitalization rate 25% (discount minus growth) Cap multiplier DCF 4 $2, 000

Precision Tools Comparables Method Use P/E ratio Company X • Price = $4, 000 • Adj Earnings = $520, 000 Precision Tools • Price = ? ? • Adj Earnings = $760, 000 4000 PT Price 520 = 760 PT Price = $5, 850, 000 Company X • Price = $4, 000 • Adj Earnings = $520, 000 • P/E = 7. 7 Precision Tools • Price = P/E * Earnings • Adj Earnings = $760, 000 7. 7*$760, 000 = $5, 850, 000

Price-earnings ratio Precision Tools U. S. stock market (average stock) Price = $2, 000 Earnings = $390, 000 P/E = 5. 13 Price = $36 Earnings = $1. 80 P/E = 20 Irrationally exuberant?

Precision Tools