| How many valuation Rule #1 uses and describe a bit of each? | 1) 10 Cap - for under utilized company
2) MOS - for earning & growth (growing fast)
3) Payback time - for company with lots of free cash flow |
| What the company is really worth is called? | The intrinsic value of the company |
| What does Cap rate stands for? | Capitalization rate |
| With which industry do we see any similarities when we talk about Cap Rate and why? | 1) Similarity with Real Estate
2) Because both are investments in a revenue producing asset |
| How does the Cap Rate method looks at the business? | By analyzing the amount of cash it is generates after certain expenses |
| What does yield "mean"? | the amount of profit we can make on capital (5%, 10%) - (this is a personal explanation) |
| What is our yield target % with a Rule #1 Cap Rate? | 10% return (yield) on THE FIRST YEAR onwards |
| Why 10% return as of the first year is good and considered a "discount" price (2 points)? | 1) Because in real Estate a good yield is considered 5% and therefore 10% is twice faster return
2) Twice faster return could be seen as 50% discount |
| What is Cap Rate based on ? | Owner Earnings |
| What does Owner Earnings not include and why? | It does not include tax (paid or own) so we can compare companies fairly (some industry have different taxations than others) |
| When we use 10 Cap Valuation, what is our key 2 assumptions? | 1) That the company is running sub-optimally"
2) That a return to a optimal situation will allow for higher than 10% return "for sure: |
| What does the 10 Cap valuation is based on and exclude? | 1) Based on the business as is ONLY
2) EXCLUDE any special improvements (only normal maintenance)
Note: This is in contrast with Real Estate where property improvements / enhancement will improve the yield. but we do NOT DO that in 10 Cap valuation for business |
| What are the 6 steps to calculate the 10 Cap? | 1) Open Operating Cash Flow (OCF) from last fiscal or normal year
2) Subtract the CAPEX Portion required to MAINTAIN the business from the OCF number
3) Add Tax Provisions (from Income Statement)
4) Point 1 - 3 = Owners Earnings (OE)
5) Divide OE by total number of shares (Shares Outstandings) = OE per share
6) Multiply OE/share by 10 = The price we are willing to pay for this Company |
| What do we need to be careful of with CAPEX? | Capex is only 1 number but it should be "divided" into maintenance and growth of the company |
| Why is it so important for a 10 Cap valuation to find out the maintenance number from the total Capex number? | Because we need to know how much PROFIT the company make before anything is spent on growth |
| IF we really cannot find the split between maintenance and growth, then which number do we use? | 70% |
| What is an important question to ask to guess a Capex maintenance versus growth? | Is the company growthing fast? (then growth Capex will be higher) |
| Under which section can we find Capex? | Under Investing Cash Flow |
