Third, if a company is expected to continue with its policy of using the boutique based compensation, you have to decide how to adjust the value per share today for future grants of options or shares. The present value of the expected cash flows across all 10 years is $41,333 million, and netting out debt and adding back cash, yields an equity value of $33,124 million; the value per share is $189.23. However, this value includes the present value of expected cash flows from years 1 through 8, which are negative in my forecast,s and have a present value of $16,157 million. The latter will reduce the present value (value of operating assets), and that reduction captures the dilution effect. The aggregate value of equity that you compute today includes the present value of expected cash flows, including the negative cash flows in the up front years. As a consequence, in a discounted cash flow valuation, you can expect to see negative expected cash flows, at least for the first few years of your forecast period. To survive these years and make it to positive earnings and cash flows, the company will have to raise fresh capital, and given its lack of earnings, that capital will generally take the form of new equity, i.e., expected dilution, which, in turn, will affect value per share.
The Consequence: If you are valuing a young company with growth potential, you will generally find yourself facing two realities. Even though the dot com bubble is a distant memory, that pattern of listing early has continued, and there are far more young companies listed in markets today. I will be watching key technical levels today on both the Nasdaq and Dow Jones. While we have implicitly assumed that Tesla will have access to capital markets and be able to raise capital, there is a chance that capital markets could shut down or become inaccessible to the firm. If Tesla is able to issue shares at a higher price (than its intrinsic value), we will have under estimated the value per share, and if it has to issue shares at a price lower than its intrinsic value, we will have over estimated value. Implicitly, I am assuming that the firm will fund 88.06% of its capital needs with equity, consistent with the debt ratio that I assumed in the DCF, and that the shares will be issued at the intrinsic value per share (estimated in the valuation), with that value per share increasing over time at the cost of equity.
The question for analysts then becomes whether, and if yes, how, to adjust the value per share today for these additional shares. Top Gold stock for 2011. PZG hit a low of $3.09 Thursday and then rallied back. Exide Technologies (XIDE) – Exide Technologies (XIDE) Reports Operating Income Up 36% for Its Fiscal 2011 Third Quarter – XIDE now has resistance located at $12. Now the simplest way to find these kind of neglected stocks is to find the number of negative days to positive days ratio over a long period of time. To the extent that some or all of this new capital will come from new share issuances, the share count at these companies can be expected to climb over time. Expected Dilution: As young companies and start-ups get listed on public market places, investors are increasingly being called upon to value companies that will need to access capital markets in future years, to cover reinvestment and operating needs.
Note that while none of these developments are new, analysts in public markets dealt with them infrequently a few decades ago, and could, in fact, get away with using short cuts or ignoring them. There was a time, not so long ago, when getting from the value of equity for a company to value per share was a trivial exercise, involving dividing the aggregate value by the number of shares outstanding. The second is how to adjust the value per share today for the restricted shares and options that have already been granted to managers. You can divide the value of equity by the number of share outstanding today, and you will have already incorporated dilution. Today, they have become more pervasive, and the old evasions no longer will stand you in good stead. If a company has voting and non-voting shares, and you believe that voting shares have more value than non-voting shares, you cannot divide the aggregate value of equity by the number of shares outstanding to get to value per share. If these cash flows had not been considered, the value of the operating assets would have been $57,490 million and the value of equity would have been $48,282 million, a value per share of $284.41.