Courseware: #103-701

Contents Overview and Instructions Imported Financial Statements Standardized Financial Statements Accounting Adjustments Ratio Analysis Performance Charts Assumptions Pro Formas and Valuation

Overview The purpose of the Business Analysis and Valuation Model (BAV Model) is to aid users in analyzing and valuing any company with at least two years of historical financial statement data. This program may be used in conjunction with the Business Analysis & Valuation Using Financial Statements text, written by Professors Krishna Palepu, Paul Healy, and Victor Bernard (Cincinnatti, OH: South-Western College Publishing, 2004). Instructions links within this model require the Internet Explorer browser. Download a PDF version of Instructions with screenshots: http://www.hbs.edu/it/pdf/bav_help.pdf

Technical Note This workbook makes extensive use of macros. For these macros to be operational, your security level must be set to 'medium', and you must select the 'enable macros' button when the workbook is first opened. To check/adjust your security level, select Tools| Macro| Security| Medium (level). If your security level is set to 'high', the workbook will not operate correctly. To open multiple copies of the model at the same time, each copy should be opened in a new instance of Microsoft Excel (i.e. start Excel from the Start menu, then use File|Open to open the model). Excel allocates a fixed amount of memory for each launch, and multiple copies of the model can easily require more memory than allocated by a single Excel instance, resulting in 'Out of System Resources' errors. The Business Analysis and Valuation Model was developed by Professor Paul Healy and Professor Krishna Palepu with the assistance of Research Associate Jonathan Barnett. Development assistance was provided by Village Software, Inc. See BAV Navigator menu --> About BAV Model for software version number. Please do not use without the authors' permission.

Copyright 2002-2008 President and Fellows of Harvard College

Imported Income Statement Initial Setup Step 1: If you have a Compustat WRDS account If you do not have a Compustat account, fill in the yellow cells and proceed to Step 2. Company Name Ordering of Years on Financial Statements Latest Income Statement Year Earliest Income Statement Year Fiscal Year-End (Month, Day) Units

Download Company Financials from Compustat WRDS

Step 2: Select Valuation Type

Classifications

Change Sign?

Year Ended , () PASTE FINANCIAL STATEMENT LABELS IN THIS COLUMN PASTE IMPORTED FINANCIAL STATEMENT DATA HERE

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Imported Income Statement Change Sign?

Classifications

Year Ended , ()

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Imported Income Statement Change Sign?

Classifications

Year Ended , ()

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Imported Balance Sheet Change Sign?

Classifications

#N/A 0 -1 PASTE FINANCIAL STATEMENT LABELS IN THIS COLUMN PASTE IMPORTED FINANCIAL STATEMENT DATA HERE *

*Please import the BEGINNING balance sheet values for the years shown above. The beginning balance sheet values for a given year are equivalent to the prior year's ENDING balance sheet values.

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Imported Balance Sheet Change Sign?

Classifications

#N/A

-1

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Imported Balance Sheet Change Sign?

Classifications

#N/A

-1

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Imported Statement of Cash Flows Change Sign?

Classifications

Year Ended , () PASTE FINANCIAL STATEMENT LABELS IN THIS COLUMN

PASTE IMPORTED FINANCIAL STATEMENT DATA HERE

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Imported Statement of Cash Flows Change Sign?

Classifications

Year Ended , ()

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Imported Statement of Cash Flows Change Sign?

Classifications

Year Ended , ()

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Classification Lookup

Directions: 1. Select the financial statement (Income Statement, Balance Sheet, or Statement of Cash Flows) from the white drop-down menu below. 2. Select the desired line-item classification heading(s) from the yellow shaded drop-down menu for examples of financial statement line-items typically classified under that heading.
Income Statement

Please select Classification category here

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Classification Lookup Income Statement

Please select Classification category here

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Standardized Financial Statements As Reported ### Beginning Balance Sheet Assets Cash and Marketable Securities Accounts Receivable Inventory Other Current Assets Total Current Assets Long-Term Tangible Assets Long-Term Intangible Assets Other Long-Term Assets Total Long-Term Assets Total Assets Liabilities Accounts Payable Short-Term Debt Other Current Liabilities Total Current Liabilities Long-Term Debt Deferred Taxes Other Long-Term Liabilities (non-interest bearing) Total Long-Term Liabilities Total Liabilities Minority Interest Shareholders' Equity Preferred Stock Common Shareholders' Equity Total Shareholders' Equity Total Liabilities and Shareholders' Equity Common Shares Outstanding at Fiscal Year End

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Standardized Financial Statements

As Reported Year Ended , () Income Statement Sales Cost of Sales Gross Profit SG&A Other Operating Expense Operating Income Investment Income Other Income, net of Other Expense Other Income Other Expense Net Interest Expense (Income) Interest Income Interest Expense Minority Interest Pre-Tax Income Tax Expense Unusual Gains, Net of Unusual Losses (after tax) Net Income Preferred Dividends Net Income to Common Common Shares for Primary EPS Calculation

As Reported Year Ended , () Statement of Cash Flows Net Income

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Standardized Financial Statements After-tax net interest expense (income) Non-operating losses (gains) Long-term operating accruals Depreciation and amortization Other Operating cash flow before working capital investments Net (investments in) or liquidation of operating working capital Operating cash flow before investment in long-term assets Net (investment in) or liquidation of operating long-term assets Free cash flow available to debt and equity After-tax net interest expense (income) Net debt (repayment) or issuance Free cash flow available to equity Dividend (payments) Net stock (repurchase), issuance, or other equity changes Net increase (decrease) in cash balance

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BAV Identities

Beginning Balance Sheet & Identities #N/A I. Net Working Capital Accounts Receivable + Inventory + Other Current Assets - Accounts Payable - Other Current Liabilities = Beginning Net Working Capital II. Net Long-Term Assets Long-term Tangible Assets Long-term Intangible Assets Other Long-Term Assets Minority Interest Deferred Taxes Other Long-Term Liabilities (non-interest bearing) Beginning Net Long-Term Assets

+ + =

III. Total Assets Beginning Net Working Capital + Beginning Net Long-Term Assets = Beginning Net Assets IV. Total Net Capital Short-term Debt Long-term Debt Cash Beginning Net Debt Beginning Preferred Stock Beginning Common Shareholders' Equity Beginning Total Net Capital

+ = + + =

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BAV Identities

Income Statement & Identities Year Ended , () Sales Net Operating Profit after Tax (NOPAT): Net Interest Expense after Tax Net Income Preferred Dividends Net Income to Common

= =

I. Net Interest Expense after Tax Interest Expense Interest Income Net Interest Expense (Income) (1- Tax/Pre-Tax Income) Net Interest Expense after Tax

= x =

II. Net Operating Profit after Tax (NOPAT) Net Income Net Interest Expense after Tax Net Operating Profit after Tax Unusual Gains, Net of Unusual Losses (after tax) Net Operating Profit excluding Unusual Gains, Net of Unusual Losses (after tax)

+ = =

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Condensed Financial Statements

#N/A

Beginning Balance Sheet Beginning Net Working Capital + Beginning Net Long-Term Assets = Total Assets Beginning Net Debt + Beginning Preferred Stock + Beginning Shareholders' Equity = Total Net Capital

Year Ended , ()

Income Statement Sales Net Operating Profit after Tax Net Interest Expense after Tax Net Income Preferred Stock Dividends Net Income to Common Operating ROA ROE BV of Assets Growth Rate BV of Equity Growth Rate Net Operating Asset Turnover ratio

= =

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Ratio Analysis

Please choose calculation method:

Beginning Balance Sheet values

DECOMPOSING PROFITABILITY: DUPONT ALTERNATIVE x = x = NOPAT / Sales Sales / Net Assets Operating ROA Spread Net Financial Leverage Financial Leverage Gain ROE (Operating ROA + Spread * Net Financial Leverage) EVALUATING OPERATING MANAGEMENT Key Growth Rates: Annual Sales Growth Annual Net Income Growth Key Profitability Ratios: Sales / Sales Cost of Sales / Sales Gross Margin SG&A / Sales Other Operating Expense / Sales Investment Income / Sales Other Income, net of Other Expense / Sales Minority Interest / Sales EBIT Margin Net Interest Expense (Income) / Sales Pre-Tax Income Margin Taxes / Sales Unusual Gains, Net of Unusual Losses (after tax) / Sales Net Income Margin EBITDA Margin NOPAT Margin Recurring NOPAT Margin Page 19 of 27 NA* NA

Ratio Analysis

Please choose calculation method:

Beginning Balance Sheet values

EVALUATING INVESTMENT MANAGEMENT Working Capital Management: Operating Working Capital / Sales Operating Working Capital Turnover Accounts Receivable Turnover Inventory Turnover Accounts Payable Turnover Days' Receivables Days' Inventory Days' Payables Long-Term Asset Management: Net Long-Term Assets Turnover Net Long-Term Assets / Sales PP&E Turnover Depreciation & Amortization / Sales

EVALUATING FINANCIAL MANAGEMENT Short-Term Liquidity: Current Ratio Quick Ratio Cash Ratio Operating Cash Flow Ratio Debt and Long-Term Solvency: Liabilities-to-Equity Debt-to-Equity Net-Debt-to-Equity Debt-to-Capital Net-Debt-to-Net Capital Interest Coverage Ratio: Interest Coverage Page 20 of 27

Ratio Analysis

Please choose calculation method: Payout Ratio: Dividend Payout Ratio Sustainable Growth Rate:

Beginning Balance Sheet values

* NA - not available, n/a - not applicable

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Key Assumptions

Note: All yellow-shaded cells require input (including those preset to zero). If the appropriate value for a blank input cell is zero, enter 0. Inputs are optional for gray-shaded cells. Historical Ratios Year Ended , () Assumptions for years 1-15: Sales growth rate Net operating profits after tax / sales Beginning net operating working capital / sales Beginning net operating long-term assets / sales Assumptions for year 16 and beyond: Sales growth rate Net operating profit after tax / sales Beginning net operating working capital / sales Beginning net operating long-term assets / sales Book Value Leverage (beginning of year) Net debt / book value of net capital Preferred equity / book value of net capital Shareholders' equity / book value of net capital 0.0% Market Value Leverage (beginning of year) Net debt / market value of net capital Preferred equity / market value of net capital Shareholders' equity / market value of net capital 0.0% Cost of Capital parameters: Market risk premium Risk free rate Tax rate Cost of debt Cost of preferred equity (if applicable) Implied debt beta Implied preferred equity beta Common equity beta Implied asset beta After tax cost of debt Cost of common equity Number of Common shares outstanding 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0 Forecast Horizon 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Terminal Years 16 17

Note: Only the most recent historical years reflect accounting adjustments that have been made. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

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Performance Charts

HISTORIC and FORECAST CHARTS for Overview and Instructions Return to BAV Dashboard
10-Year Historic Performance of Comparable U.S. Firms(1)

Sales Growth
70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30%
0 1

10-Year Historic Sales Growth for Comparable U.S. Firms

50% -80% -210% -340% -470% View Company's Historic Performance -600% View Company's Pro Forma Performance -730% View Historic Performance of US Companies -860% -990% -1120% -1250% -1380% -1510% 1 2 3 4 5 Year

Annual Sales Growth

Annual Sales Growth

10

Year

Net Operating Profit after Tax (NOPAT) Margin Net Operating Profit after Tax/ Sales
25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% -35%
0 1

10-Year Historic NOPAT Margin for Comparable U.S. Firms

10% -145% -300% -455% -610% -765% -920% -1075% -1230% -1385% -1540% -1695% -1850% -2005% 1 2 3 4 5 Year 6 7 8 9 10

Net Operating Profit after Tax / Sales

Year

Historic Net Operating Asset Turnover

7.0 6.5 7.0 6.5 6.0

10-Year Historic Net Operating Asset Turnover for Comparable U.S. Firms

Sales / Net Operating Assets

Sales / Net Operating Assets

0 1

6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Year

5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Year

Operating Return-on-Assets (ROA)

40%

10-Year Historic Operating ROA for Comparable U.S. Firms

500% Net Operating Profit after Tax / Net Assets 0% -500% -1000% -1500% -2000% -2500% -3000% -3500% 1 2 3 4 5 Year 6 7 8 9 10

Net Operating Profit after Tax / Net Assets

30% 20% 10% 0% -10% -20% -30% -40% -50%

0 1

Year

Return-on-Equity (ROE)
40% 500% 30% 20% 10% 0% -10% -20% -30% -40% -50% -60%
0 1

10-Year Historic ROE for Comparable U.S. Firms

0% -500% -1000% -1500% -2000% -2500% -3000% -3500% -4000% 1 2 3 4 5 Year 6 7 8 9 10

Net Income / Beginning Shareholders' Equity

Year

(1) Herein, comparable firms are defined as all publicly traded U.S. firms between the years 1984 and 2001, whose measure of interest (e.g., sales growth, NOPAT margin, ROE, etc.) resides within the same quintile as (for which the measure was taken in the latest income statement year).

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Net Income / Beginning Shareholders' Equity

Pro Formas & Valuation

PRO FORMA FINANCIAL STATEMENTS

Overview and Instructions Return to BAV Dashboard
Historical Year Ended , () -1 0 Forecast Horizon 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Terminal Years 16 17

Beginning Balance Sheet Beg. Net Working Capital + Beg. Net Long-Term Assets = Net Operating Assets Net Debt + Preferred Stock + Shareholders' Equity = Net Capital

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0

Income Statement Sales Net operating profits after tax - Net interest expense after tax = Net income - Preferred dividends = Net income to common Operating Return on Assets Return on Common Equity Book Value of Assets Growth Rate Book Value of Common Equity Growth Rate Net Operating Asset Turnover Free Cash Flow to Equity Discount Factor - Common Equity Book Value of Equity Growth Factor (cumulative) Cost of Common Equity

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0.0%

0.0% 0.0%

0.0% 0.0% 0.0

0.0% 0.0% 0.0

0.0% 0.0% 0.0

0.0% 0.0% 0.0

0.0% 0.0% 0.0

0.0% 0.0% 0.0

0.0% 0.0% 0.0

0.0% 0.0% 0.0

0.0% 0.0% 0.0

0.0% 0.0% 0.0

0.0% 0.0% 0.0

0.0% 0.0% 0.0

0.0

0.0

1.00 1.00 0.0% Forecast Horizon

1.00 0.0%

1.00 0.0%

1.00 0.0%

1.00 0.0%

1.00 0.0%

1.00 0.0%

1.00 0.0%

1.00 0.0%

1.00 0.0%

1.00 0.0%

1.00 0.0%

1.00 0.0%

1.00 0.0%

1.00 0.0%

1.00 0.0% Terminal Years

1.00 0.0%

Year Ended , () DCF Valuation of the Equity Net Income to Common - Investment in Net Working Capital - Investment in Net Long-Term Assets + Increase in debt obligations + Increase in preferred equity = Free Cash Flow to Equity * Discount factor - Common Equity (CAPM) = Present value of Free Cash Flow to Equity PV of FCF to Equity (years 1-15) +PV of FCF to Equity beyond Year 15 = Value of the Equity Number of shares outstanding (MM) Estimated value per share

10

11

12

13

14

15

16

17

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

0 0.0

Forecast Horizon Year Ended , () Abnormal Earnings Valuation of the Equity Net Income to Common - Charge for Common Equity Capital = Residual Operating Income * Discount factor - Common Equity = Present Value of Residual Operating Income PV of Residual Operating Income (years 1-15) + PV of Residual Operating Income beyond Year 15 + Beg. Book Value of Equity = Value of the Equity Number of shares outstanding (MM) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Terminal Years 16 17

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

0.0

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Pro Formas & Valuation Estimated value per share

Forecast Horizon Year Ended , () Abnormal Returns Valuation of the Equity Return on Common Equity - Cost of Common Equity = Abnormal Returns * Discount Factor - Common Equity * Book Value of Equity Growth Factor = Present Value of Abnormal Return on Common Equity Beg. Book Value of Common Equity * PV of Abnormal ROE (years 1-15) + Beg. Book Value of Common Equity * PV of Abnormal ROE beyond year 15 + Beg. Book Value of Common Shareholders' Equity = Value of the Equity Implied Market to Book Value Ratio Number of shares outstanding (MM) Estimated value per share 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Terminal Years 16 17

0.0% 1.00 1.00

0.0% 1.00

0.0% 1.00

0.0% 1.00

0.0% 1.00

0.0% 1.00

0.0% 1.00

0.0% 1.00

0.0% 1.00

0.0% 1.00

0.0% 1.00

0.0% 1.00

0.0% 1.00

0.0% 1.00

0.0% 1.00

0.0% 1.00

0.0% 1.00

0.0

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Valuation Summary Reminders:

Table 1. Valuation SummaryValuation Summary:

() Discounted Cash Flows Abnormal Earnings Abnormal Returns

Equity Value $0.0 $0.0 $0.0

Equity Value per share

No reminders to report.

Table 2. Accounting Adjustments and Summary of Effects on 's Financial Statements:

Accounting Adjustments Effect on: () Net Income to Common Beginning Book Value of Common Shareholders' Equity Return on Common Equity (ROE) NO ADJUSTMENTS RECORDED As Reported Adjusted Difference

Table 3. Key Assumptions (Note: Assumptions cannot be modified in this worksheet. To further revise assumptions, please return to the Key Assumptions sheet.)
Historical Ratios Forecast Horizon Terminal Years

Year Ended , () Assumptions for years 1-15: Sales growth rate Net operating profits after tax / sales Beginning net operating working capital / sales Beginning net operating long-term assets / sales Assumptions for year 16 and beyond: Sales growth rate Net operating profit after tax / sales Beginning net operating working capital / sales Beginning net operating long-term assets / sales Book Value Leverage (beginning of year) Net debt / book value of net capital Preferred equity / book value of net capital Shareholders' equity / book value of net capital

10

11

12

13

14

15

16

17

0.0% Market Value Leverage (beginning of year) Net debt / market value of net capital Preferred equity / market value of net capital Shareholders' equity / market value of net capital 0.0% Cost of Capital parameters: Market risk premium Risk free rate Tax rate Cost of debt Cost of Preferred equity (if applicable) Implied Debt Beta Implied Preferred Equity Beta Common Equity Beta Implied asset beta After tax cost of debt Cost of common equity Pro Forma ROE 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Number of Common shares outstanding

Table 4. Valuation Summary, all stored scenarios for :

() Equity Value Equity Value per share

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Valuation Summary Scenario 1 Discounted Cash Flows Abnormal Earnings Abnormal Returns Scenario 2 Discounted Cash Flows Abnormal Earnings Abnormal Returns Scenario 3 Discounted Cash Flows Abnormal Earnings Abnormal Returns Scenario 4 Discounted Cash Flows Abnormal Earnings Abnormal Returns Scenario 5 Discounted Cash Flows Abnormal Earnings Abnormal Returns $0.0 $0.0 $0.0 $0.00 $0.00 $0.00 $0.0 $0.0 $0.0 $0.00 $0.00 $0.00 $0.0 $0.0 $0.0 $0.00 $0.00 $0.00 $0.0 $0.0 $0.0 $0.00 $0.00 $0.00 $0.0 $0.0 $0.0 $0.00 $0.00 $0.00

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