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Faculty of Design, Media & Management Assignment Brief Module Title: International Financial Management Assignment No/Title: CW1 Submission Date: 13

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Faculty of Design, Media & Management Assignment Brief Module Title: International Financial Management Assignment No/Title: CW1 Submission Date: 13.05.2021 Module Co-ordinator/ Tutor: Module Code: Assessment Weighting: Feedback Target Date: Course Area AFUM751 40% 3 weeks MBA Submission Instructions: This assignment is to be submitted electronically using hfu-net 1. This assignment must be submitted electronically 2. You are reminded of the University’s regulations on cheating and plagiarism. In submitting your assignment you are acknowledging that you have read and understood these regulations. 4. Late submission within 10 working days of the deadline will result in the mark being capped at a maximum of 40%. Beyond this time the work will not be marked. (NB: only Mondays to Fridays are counted as working days). 5. You are reminded that it is your responsibility to keep an electronic copy of your assignment for future reference. Instructions to Students: 3. 1. 2. 3. 4. 5. 6. 7. Read through the assignment brief carefully taking note of key words. Produce both a cover page and a contents list. Ensure pages are numbered. Produce good paragraphs of Introduction and Conclusion. Use short sentences, avoiding jargon and verbosity. All research material should be referenced to their sources as failure to do so implies plagiarism. DO NOT COPY material from another student, as BOTH assignments will be disqualified. Do not exceed the number of words allowed: 2.500 WORDS. Please note:Part of the skillset of an MBA graduate is to communicate clearly and accurately to the given audience. It is important that you take this into consideration when constructing your assignment. You may request help from your tutors or the study support staff. This assignment tests the following Learning Outcomes for the module: On successful completion of the module, the student will be able to: 1. Critically review the methods available to a company to establish itself and trade successfully in the international market. 2. Evaluate and compare the financial instruments used by multinational corporations to minimise risk and maximise shareholder returns. The Assignment Task: Your identity: You are a management consultant and specialized on acquisitions of international companies. Request for service One of your clients is interested in acquiring the car manufacturer VW. The directors of your client company are unsure of the financial position and financial performance of the company, as they have so far not carried out any analysis and want to know more about the competitional environment and future trends. Specific instruction Study the latest available annual reports and decide on the selected time frame from the company web sites and pursue a financial and a commercial diligence. The coursework should be accompanied by: (i) (ii) The set of company s reports and accounts to which it refers and A certificate signed by you that the report is based on your own unassisted effort Requirement: Describe meaning and importance of a diligence in connection with a company acquisition. Describe relevant financial models and their kpi-s Execute a financial and commercial diligence of the company. Explain what documents and what ratios are adequate to analyse profitability and liquidity of the selected company. Why the cashflow statement is of special importance for the judgement of the company performance. Describe the selected company and the environment- using a commercial diligence approach. Structure Note that marks will be rewarded for knowledge and a properly analysis of the financial models which are supporting your proposal to your client. Literature review, structure, grade of abstraction as well as a convincing conclusion based on your findings is requested. Assessment Criteria: Knowledge and theoretical background Financial diligence Commercial diligence Structure and writing Literature review 20 marks 40 marks 15 marks 15 marks 10 marks **total 100 marks Quality Assurance Record Valuation Harald Y. Schul Financial and operational excellence / International Management of Finance Skype Example • 2005: eBay buys Skype for 3,1 bn USD • 2007: eBay writes down Skype by 1,4 bn USD, valuing the company 1,7 bn USD • 2010: eBay sells 70 % of Skype for 1,9 bn USD, valuing the company 2,7 bn USD • 2011: Microsoft buys Skype (still losing money at that point) for 8,5 bn USD Valuation 2 Typical due diligence process 1. People from two businesses get together to discuss a potential acquisition 2. If they decide to get serious, the will usually sign a confidentiality agreement, allowing them to share sensitive data such as financial statemenst, trade secrets, intellectual property, market research, customer data etc. without fear that this information will be made public. 3. If a deal seems possible, the potential acquirer sends out Letter of Intent, outlining the broad parameters of a potential agreement: price, terms and conditions, contingencies, a time frame, responsibilities of both businesses. 4. Now a formal process called due diligence may begin. Valuation 3 Information typically required in the due diligence process • Current financial statements and financial forecasts, with detailed information such as accounts receivable and inventory, depreciation or amortization schedules, capital expenditures, debt structure • Customer lists indicating the revenues and margins for each customer • Salary and benefits for all employees • All customer and employee contracts • Ongoing business agreements: open purchase orders, documentation of banking relationships, insurance policies • Litigation records, present and past • Capitalization tables (breakdown of equity ownership) • Business licences • Documentation of strategic business relationships Valuation 4 Commercial due diligence Due diligence of markets and strategy: • Attractiveness of market • Customers analysis • Analysis of competition • Evaluation of business model and company strategy Valuation 5 Methods of valueing a company Four different methods of valueing a company have evolved as being practically relevant: • EBITDA Multiple Method • Revenue Multiple Method • Book Value Method • Discounted Cash Flow Model Valuation 6 EBITDA Multiple Method Valuation 7 EBITDA • Earnings: net income, “bottom-line”, Jahresüberschuss/-fehlbetrag • Before: starting out with earnings, we will add some items back in that were initially deducted when calculating earnings • Interest: sum of interest income (positive number) and interest expense (negative number) • Taxes: taxes du on pre-tax earnings • Depreciation: expense for a physical asset already acquired, whose costs are spread out over the asset’s useful life • Amortization: like depreciation, but for intangible assets like trademarks, patents, software Valuation 8 Earnings statement (text book) Sales revenues 500 $ - Cost of goods sold 200 $ = Gross profit 300 $ - Expenses 120 $ = Operating profit 180 $ - Interest 30 $ - Taxes 50 $ = Net earnings Contains 40 $ for D&A 100 $ EBITDA = E + I + T + D + A = 100 $ + 30 $ + 50 $ + 40 $ = 220 $ Valuation 9 GuV-Rechnung Volkswagen Konzern (real world) Valuation Example 10 Berechnung EBITDA (Geschäftsb. 2020 VW, S. 365) Valuation Example 11 Current EBITDA-Multiple for Volkswagen Example • Market Capitalization VW (23. April 2021): 130,75 Mrd. Eur • This means that currently Volkswagen is valued with a EBITDA Multiple of: 130.750 ??? ??? = 5,345 24.462 ??? ??? • Historical EBITDA Multiple Ranges • EV/EBITDA Auto/Truck as of Jan 21: 45,73 • Why so high? • Tesla EBITDA-multiple for 2020: 109 with a market cap of 661 bn USD Valuation 12 Weighted EBITDA Valuation Method Example • To take out current fluctuations, one could also use a weighted EBITDA-average over several years. • Usually one would weigh the more current years higher, for example 3:2:1 for 2020, 2019 and 2018 respectively: ! × #$.$&# '() *+,- # × #../0& '() *+,-#&./0/ '() *+, !-#-1 = 26.684 Mio EUR 130.750 ??? ??? = 4,9 26.684 ??? ??? Valuation 13 EBIT Multiple Method • Similarly one could value a company by taking a multiple of EBIT: earnings before interest and tax • Disadvantage: EBIT includes depreciation and amortization, which may vary depending on accounting practices Valuation 14 EBITDA Multiple Method Pro Con • Easy to calculate and verify in the due diligence process • Based on historical performance, and does not take into account future potential • Better than looking at net profit which relies on the estimates and assumptions made to determine depreciation and amortization • Multiples can be compared across businesses within the same industry Valuation • Because of its simplicity, this method may be overused to detriment of other methods • Caveat: EBITDA is not the same as cash flow 15 Revenue Multiple Method Valuation 16 Revenue Multiple Method • Company is valued at a multiple of revenues. • Simple calculation, that can be used when the company to be acquired is unprofitable or when it has a revenue stream that is appealing to the acquirer • Can be used in conjunction with the EBITDA multiple • Can be used as a plausibility check for the seller’s expectations Valuation 17 Example Example • Valuation Rules of thumb for the Revenue Multiple Method • Gourmet coffee shops: 40 % of sales + inventory • Valuation for a coffee shop with sales revenues of 800.000 USD and an inventory of 75.000 USD: (40 % ? 800.000 USD) + 75.000 USD = 395.000 USD • If the seller’s price expectations are in that ballpark, we can proceed with negotiations Valuation 18 Weighted Revenues • Just as with EBITDA, we may us the weighted average of sales revenues over several years. • For Volkswagen, again using the same weights of 3:2:1, this means: ! × ###.22$ '() *+,- # × #3#.&!# '() *+,-#!3.2$. '() *+, !-#-1 = 234.961 Mio EUR 130.750 ??? ??? = 0,556 234.961 ??? ??? Valuation 19 Revenue Multiple Method Pro Con • Even simpler than EBITDA Multiple Method • Does not consider profitability and cash flow • Can help parties determine whether to proceed with the M&A process • Based on historical information, not taking into account future development • Easy to compare within an industry, and a useful tool to evaluate small businesses that are not yet profitable Valuation • Conclusion: on the basis of this method alone, one would rarely come to a deal. 20 Book Value Model Valuation 21 Book value multiple method • When creating their balance sheet, companies must attribute monetary values to all their assets and liabilities. This value is called book value. • When evaluating a business using the book value multiple method, the book value of a business’s equity is multiplied by a factor. • Multiples vary by industry, for example 7,58 for auto & truck Valuation 22 Balance sheet Volkswagen Konzern: assets Valuation Example 23 Balance sheet Volkswagen Konzern: equity and liabilities ????????. 130.750 ??? ??? = ???????????? 128.783 ??? ??? = 1.015 Was sagt das aus? Valuation 24 Example Application of book value method • Used in industries that have balance sheets heavy with physical assets such as machinery. • Also commonly used when valuing financial companies Example Deutsche Bank: • Eigenkapital am 31.12.2020: 55 Mrd EUR • Markwert am 22.4.2021: 20,29 Mrd EUR • Price-to-book ratio: 0,406 Valuation Was sagt das aus? 25 Application of book value method • Some private equity firms look for opportunities to buy businesses valued near or even below their equity value. This can happen in distressed industries or to companies in trouble. • Sometimes book value does not represent current value of the underlying assets, for example if real estate is listed in the balance sheet at cost. If such a company trades at a low multiple, it may be buying opportunity Valuation 26 Book value multiple method Pro Con • Simple way to check the value of a deal • Book value is based on assets listed on the balance sheet, most of which are recorded at cost. So most businesses are worth more than book value • Useful in capital intensive businesses and in financial services, such as banks and insurance companies • Can be used as a reality check for stock prices • Does not take into account cash flow and profitability • Based on historical information Valuation 27 Discounted Cash Flow Model Valuation 28 Discounted cash flow method • Has been described in the chapter ”Investment appraisal techniques” • Commonly used approach, second in popularity only to the EBITDA multiple method. • Many acquirers use both methods to get a better estimate of a target company’s value • DCF can be used for start-ups or companies, that are not yet profitable • DCF is therefore often used in the technology sector Valuation 29 Challenges of DCF: assumptions • The valuation of a company depends on projections about future cash flows • The investors then discounts these projected cash flows their present value • When eBay purchased Skype for 3,1 bn USD, most of the purchase price was goodwill, that is a projection of future returns. Book value, revenues and EBITDA at the time were much too small for such a valuation. • When actual results turned out to be disappointing as compared to projections 18 months later, it led to a write-off of 1,4 bn USD against profits. Valuation 30 Influence of discount rate • Results of the DCF-method depend strongly on the choice of interest rate used to discount future cash flows. • The higher the discount rate, the lower the value of future cash flows • The discount rate may be chosen to represent cost of capital and risk of the investment that is to be evalued • For example Weighted Cost of Capital Valuation 31 Auswirkungen der Covid-19-Pandemie auf die ersten Jahre des Planungszeitraumes. Erwartete Belastungen des Ergebnisses ab 2021 aus der verschärften Abgas- und Verbrauchsgesetzgebung und nachhaltige Effekte aus der Covid-19-Pandemie sollen durch entsprechende Effizienzsteigerungsprogramme kompensiert werden. Die im Rahmen des Werthaltigkeitstests für das Geschäftsjahr 2021 unterstellte Entwicklung der operativen Rendite liegt dabei im Rahmen der Prognose von Volkswagen. Für die Ermittlung der Cash-flows werden grundsätzlich die erwarteten Wachstumsraten der betreffenden Märkte zugrunde gelegt. Die Schätzung der Cash-flows nach Beendigung des Planungszeitraums basiert im Segment Pkw grundsätzlich auf einer Wachstumsrate von bis zu 1 % p.a. (Vorjahr: bis zu 1 % p.a.) und in den Segmenten Power Engineering sowie Nutzfahrzeuge auf einer Wachstumsrate von bis zu 1 % p.a. (Vorjahr: bis zu 1 % p.a.). Bei der Ermittlung des Nutzungswerts im Rahmen des Werthaltigkeitstests für den Goodwill und für immaterielle Vermögenswerte mit unbestimmter Nutzungsdauer sowie immaterielle Vermögenswerte mit begrenzter Nutzungsdauer, im Wesentlichen aktivierte Entwicklungskosten, werden folgende Kapitalkostensätze (WACC) vor Steuern zugrunde gelegt, die, soweit notwendig, um länderspezifische Abzinsungsfaktoren angepasst werden: WACC: Weighted Average Cost of Capital WACC 2020 2019 Segment Pkw 6,8 % 5,7 % Segment Nutzfahrzeuge 8,7 % 7,7 % Segment Power Engineering 9,3 % 7,9 % Die Ermittlung der Kapitalkostensätze basiert auf dem Zinssatz für risikofreie Anlagen, der Marktrisikoprämie und dem Fremdkapitalzinssatz. Darüber hinaus werden spezifische Peer-Group-Informationen für Beta-Faktoren und Verschuldungsgrad berücksichtigt. Die Zusammensetzung der Peer Groups zur Ermittlung der BetaFaktoren und der Verschuldungsgrade wird fortlaufend überprüft und, falls geboten, angepasst. Bezüglich der Annahmen im Detailplanungszeitraum wird auf den Prognosebericht verwiesen, der Teil des Lageberichts ist. Für die Folgejahre werden plausible Annahmen über die künftige Entwicklung getroffen. Die Valuation Planungsprämissen werden jeweils an den aktuellen Erkenntnisstand angepasst. SACHANLAGEVERMÖGEN Das Sachanlagevermögen wird zu Anschaffungs- oder Herstellungskosten vermindert um planmäßige und, sofern erforderlich, außerplanmäßige Abschreibungen bewertet. Investitionszuschüsse werden grundsätzlich Example 32 Other assumptions • We have to assume, that a company cannot forever grow at a higher rate than the world economy. Otherwise it’s share of the world economy would, at some point, approach 100 %. • We therefore project growth for period we deem foreseeable, say for ten years. • As cash flow for year eleven, we assign a terminal value to the company. Valuation 33 Terminal value • Liquidation value: we can assume that we sell the investment at the end of the time period we are looking at. Terminal value would then be our estimate of the proceeds from that sale • Going-concern: we assume, that cash flows will continue to grow into eternity, but at a lower rate. Terminal value would then be estimated by: Terminal value n = Valuation KLMN OP)Q (R STLU R-1 (W(MX)YRZ ULZT [\TU]TZYLP ^U)QZN ULZT) 34 Working capital investment ratio • Working capital (Nettoumlaufvermögen) is the difference between a company’s current assets, such as inventories and accounts receivables, and its current liabilities, such as accounts payable. • A companies need for working capital will depend on its revenues. As revenues grow, more cash will be tied up in working capital. • The working capital investment ratio (WCIR) represents the required amount of additional investment in working capital for every additional dollar of revenues. Valuation 35 Videos on Valuation • Youtube channel of Aswath Damodaran Valuation 36 Faculty of Design, Media & Management Assignment Brief Module Title: International Financial Management Assignment No/Title: CW1 Submission Date: 13.05.2021 Module Co-ordinator/ Tutor: Module Code: Assessment Weighting: Feedback Target Date: Course Area AFUM751 40% 3 weeks MBA Submission Instructions: This assignment is to be submitted electronically using hfu-net 1. This assignment must be submitted electronically 2. You are reminded of the University’s regulations on cheating and plagiarism. In submitting your assignment you are acknowledging that you have read and understood these regulations. 4. Late submission within 10 working days of the deadline will result in the mark being capped at a maximum of 40%. Beyond this time the work will not be marked. (NB: only Mondays to Fridays are counted as working days). 5. You are reminded that it is your responsibility to keep an electronic copy of your assignment for future reference. Instructions to Students: 3. 1. 2. 3. 4. 5. 6. 7. Read through the assignment brief carefully taking note of key words. Produce both a cover page and a contents list. Ensure pages are numbered. Produce good paragraphs of Introduction and Conclusion. Use short sentences, avoiding jargon and verbosity. All research material should be referenced to their sources as failure to do so implies plagiarism. DO NOT COPY material from another student, as BOTH assignments will be disqualified. Do not exceed the number of words allowed: 2.500 WORDS. Please note:Part of the skillset of an MBA graduate is to communicate clearly and accurately to the given audience. It is important that you take this into consideration when constructing your assignment. You may request help from your tutors or the study support staff. This assignment tests the following Learning Outcomes for the module: On successful completion of the module, the student will be able to: 1. Critically review the methods available to a company to establish itself and trade successfully in the international market. 2. Evaluate and compare the financial instruments used by multinational corporations to minimise risk and maximise shareholder returns. The Assignment Task: Your identity: You are a management consultant and specialized on acquisitions of international companies. Request for service One of your clients is interested in acquiring the car manufacturer VW. The directors of your client company are unsure of the financial position and financial performance of the company, as they have so far not carried out any analysis and want to know more about the competitional environment and future trends. Specific instruction Study the latest available annual reports and decide on the selected time frame from the company web sites and pursue a financial and a commercial diligence. The coursework should be accompanied by: (i) (ii) The set of company s reports and accounts to which it refers and A certificate signed by you that the report is based on your own unassisted effort Requirement: Describe meaning and importance of a diligence in connection with a company acquisition. Describe relevant financial models and their kpi-s Execute a financial and commercial diligence of the company. Explain what documents and what ratios are adequate to analyse profitability and liquidity of the selected company. Why the cashflow statement is of special importance for the judgement of the company performance. Describe the selected company and the environment- using a commercial diligence approach. Structure Note that marks will be rewarded for knowledge and a properly analysis of the financial models which are supporting your proposal to your client. Literature review, structure, grade of abstraction as well as a convincing conclusion based on your findings is requested. Assessment Criteria: Knowledge and theoretical background Financial diligence Commercial diligence Structure and writing Literature review 20 marks 40 marks 15 marks 15 marks 10 marks **total 100 marks Quality Assurance Record