Ch 1

FIN-374C
Financial Planning and Policy for Large
Corporations
Fall 2014

Getting Started
 Introduction to Valuation
 Major Investment Decisions
 Project Valuation
 Find growth potential inside the firm

 Enterprise Valuation
 Find growth potential outside the firm

 Dealing with Complexity
 Investment Evaluation Process

 Case Study: CP3 Pharmaceuticals
Laboratories Inc.

Valuation
 The objective of a firm is to create wealth by initiating and managing investments that generate future cash flows that are worth more than the amount invested.
 Management’s goal is to avoid decision errors based on flawed or incomplete analysis
 Valuation provides tools for the evaluation of new investment opportunities
 More than discounting cash flows
 Effective valuation analysis involves a disciplined
3-phase investment evaluation process

Investments that Create Value
 Invest $100 million today in a project that generates a stream of cash flows valued at $150 million.  Investment generates an incremental $50 million in wealth for its shareholders.
 The project has a net present value (NPV) of $50 million.

Input
$100 M

Output
Project

$150 M

Value Created = $150M - $100M = $50
How is this possible?

Investments that Destroy Value
 DaimlerChrysler formed by the $36 billion acquisition of Chrysler by Germany's Daimler-Benz in 1998
 Net cash outflows, restructuring payments
 Chrysler “bleeding cash and unlikely to become profitable under the bestcase scenario until 2009”

 2007 Cerberus Capital Management acquisition of
80% of Chrysler for $7.4 billion
 According to one analyst, "Daimler is basically paying Cerberus to get rid of it.“
 More trouble in July 2007 with the debt capital market crunch
 Trouble in syndication - J.P. Morgan Chase, Bear Stearns and
Morgan Stanley asked Cerberus and DaimlerChrysler AG, to pay higher interest rates and change the convents.

Investments that Destroy Value
 Over half of all large investment projects fail to