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Home Questions Questions for Jae Jun – Re: Calculations

Questions for Jae Jun – Re: Calculations
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5:53 pm
November 2, 2009


scrilla_gorilla

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OK, thank you for clearing that up.

12:18 am
November 2, 2009


Jae Jun

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Post edited 2:51 pm – November 2, 2009 by Jae Jun

@ scrilla_gorilla,

Thanks for the questions. Always good to get feedback and here are the answers to your questions.

1) Net reproduction value is not the value of the business. It is the amount a competitor will need to spend in order to reproduce the operations of the business. Cash does not reproduce the business. Pepsio could have 10x more cash than Coca Cola but it wouldn't add to the reproduction value.

2) Again, this is in respect to reproducing the asset value of the business.

Non interest bearing debt is really spontaneous liabilities. Total liabilities isn’t used because it could also include items that are not related to the business such as liabilities for damages, something a new entrant won’t have to pay for.

This is all defined by Greenwald.

3) The FCF formula I use is the one defined by Buffett but I had a discussion about including changes in working capital with another reader but upon thinking about it further, I may include it. I'll have to think about it more. So thanks for bringing this up. I'll write about this a later time.

4) Terminal value is already included. Cells B64 to K64 is included in the NPV formula (B67)

5) You can easily update this by including a manual override. I didn't find a good source that is able to provide the accurate number of diluted shares.

9:18 pm
October 30, 2009


scrilla_gorilla

New Member

posts 2
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First, let me say that the spreadsheet is a great tool.  Well worth the $30.

I showed the spreadsheet to a friend of mine who values companies professionally (first as a consultant with S&P, now with a hedge fund) to see what he thought.  He was impressed overall, but did pose some questions about a few of the calculations.

Please understand I'm not criticizing your methods.  Just trying to understand why you use a different calculation than my friend.

Note that when I refer to cell numbers, I am referring to their position on the 5yr spreadsheet.

1) On the Net Reproduction Value valuation, cell I46, you are subtracting out excess cash (O52).  Why?  My friend didn't understand this at all.  (And although I am new to valuation, it doesn't make sense to me either, as cash held clearly adds to the value of the company.)

2) On the Net Reproduction Value valuation, also cell I46, you are subtracting out non-interest-bearing debt (O51), but you are NOT subtracting out interest-bearing debt (O50).  Why?  Shouldn't all debt be subtracted out?

3) On the FCF valuation, you are not taking out investment in working capital to calculate FCF.  My friend said this is typically done in a FCF valuation.  What's the reason for not taking this out?

4) On the FCF valuation, you are not including a terminal value for the company.  Is this just being extra conservative, or is there another reason?

5) On the FCF valuation, you are not accounting for future dilution of equity with stock options?  Why?

Thanks.
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