運用營運資金推估模式評價營建財務公司之研究-以越南公司為例

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國立臺灣大學工學院土木工程學系碩士論文

Department of Civil Engineering College of Engineering National Taiwan University

Master Thesis

Cash Flow Valuation Using Capital Cash Flow Model for Vietnamese Construction Firms

阮友求 Nguyen Huu Cau

指導教授：曾惠斌教授 Advisor: Prof. Tserng, Hui-Ping

中華民國103年6月

June, 2014

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ACKNOWLEDGEMENT

I would like to express my deep appreciation and gratitude to all persons who gave me the necessary support during my postgraduate studies till completing this research successfully.

First, I would to sincerely gratitude to my advisor, Prof. Hui-Ping Tserng, whose expertise, understanding, enthusiasm and encouragement throughout the period of my thesis.

I owe sincere and earnest thankfulness to professors and staff members ò Civil Engineering Department, National Taiwan University especially Prof. Po-Han Chen, Prof. Liang-Jenq Leu, Prof. Sy Jye Guo, Prof. Shih-Ping Ho, Prof. Luh-Maan Chang for their supports during the time in Taiwan.

Also, I would like to thank all professors and staff members of National University of Civil Engineering in Vietnam, especially Prof. Huu-Thanh Do, Prof.

Tang-Kiem Dao. It is my pleasure to thank those who made this research possible.

Last but not least, I am truly indebted and thankful to my family. Their

unconditional love and support bring me overcome the challengers.

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ii

ABSTRACT

In recent years, Vietnam has been fallen in a terrible crisis for local economic because of bubble real estate and breaking bank credit fun which have made cash flow pouring into projects fluctuation continuously. Calculating cash flow and value for projects can be less exact easily coming from changing capital structure. Therefore, this study aimed to find a new methodology to calculate for projects which have risky cash flows.

This research introduces methods of valuing companies and projects: Capital Cash Flows, Capital Asset Pricing Model and Weighted Average Cost of Capital methods. Capital Cash Flows method develops the appropriated WACC and beta leveraging formulae appropriate for each valuation model, so that given a particular valuation model the correct CCF values can be determined from the WACC value.

In the next part, CCF will be used to calculate for Vietnamese companies listed on the market and compare with the common method is using to improve its efficiency in Vietnam market.

Those companies listed on Vietnam market were selected as sample and their financial information for three-year financial period from 2010-1012 were collected and analyzed by paired Student‟s t-test. Research results showed that using an appropriate discount rate will make the value calculated by Capital Cash Flow method will get the same result with common method Free Cash Flow.

Key words: Capital Cash Flow, Weight average Cost of Capital, Capital asset

pricing model, Expected asset return, Earnings before interest and tax, Value tax shield

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iii

LIST OF FIGURES

Fig.1.1The progress of research...4

Fig.3.1 Framework...15

Fig.3.2 Calculating Capital Cash Flow………...………...…………...…….17

Fig.3.3 Calculating CCF and FCF methods………...20

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vi

LIST OF TABLES

Table 3.1 CCF s‟ calculating assumption………....……...…….…....…….…..22

Table 4.1 List of construction contract companies………...…..….…...…...….24

Table 4.2 List of real estate companies. … ………....…….…….…….…...….25

Table 4.3 List of material supplier companies…...…………....……..….….…………26

Table 4.4 CCF and FCF calculating result………...……...……….…27

Table 4.5 Paired sample Test………...……..….….……...29

Table 4.6 Paired sample correlations………..….……….…..…....29

Table 1-39 Vietnamese firms‟ valuation……….…….…..…....…...35

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1

CHAPTER 1: INTRODUCTION 1.1 Background

In recent years, Vietnam is undergoing the greatest economic crisis in thirty years after opening. The crisis started from the hot development from 2006 to 2008, after 2008 the real estate bubble burst causing economic sectors in Vietnam are rapidly declining brought about the financial crisis banks.

All economic sectors are paralyzed because out of capital and other economic impacts. High inflation and ongoing each day in Vietnam ,"Asian Tigers" are familiar phrase that international investors dedicated to talking about Vietnam in 2006 - 2007, tied with the economy impressive growth prospects from the WTO opened the door. But, affect current crisis struck, the fracture to right in 2008.

The stock market, investment capital of more than 90% on VN economy has completely collapsed since 2008, the VN-Index fell down from 1,200 points in multiple vertical continuous trading of the past several days to just under 500 points.

Five years after a flood, water in Vietnam withdrawal seems slower. Until now, economic growth has yet to be restored, production and business activities of enterprises unrest as inflation and high interest rates, bad debt becomes sore, slow growth of income and people's lives difficulties

So far, the economy tends to stabilize, the most difficult period is over, and the

economy has hit bottom, but investors are still hesitate to put money into the market.

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2 1.2 Motivation

Cash flow is an important area of investors‟ making decisions, under which investors can know the profitability and value of the project in which they are investing.

Cash flows also show the risks which investors may face. Besides, the computational models in Vietnam have been using for a long time without improving, there is not much improvement in the calculation, minimizing risks. Thus, the motivation of the study is introduction new cash flow models to calculate for Vietnamese construction firms and compare from that showing the advantages and disadvantages of each model, in which the investors have more options to calculate and make investment decisions more accurately.

Although Capital Cash Flow method is not new method in financial area, this method is new in construction area, especially in Vietnam, there is no firm knowing about this model. Moreover, products of companies normally are manufacture, products of construction companies are projects-base. Those projects often relate in the long time and contain more risk than other kinds of product. Beside, CCF is a model which is suitable for risky cash flows. It will help construction companies calculating cash flow more exactly, from that, constructions companies will get money allocation plans rationally and reduce risk in the investing process.

In this research, Capital Cash Flow method will be showed and used to calculate

for Vietnamese construction companies, after that, compare with traditional model Free

Cash Flow to find pros and cons of each model, support for investors giving decisions.

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3 1.3 Research objectives

The objective of this research is to study firms‟ valuation and tax shield model, and using them to practice in Vietnamese market.

1) Find the simple way to calculate

2) Find down the model which can be used when the market has a high level risky.

3) In the detail, this research is trying to improve the advantages of Capital cash flow model compare with Free Cash Flow

1.4 Limitations

Data statistical calculations only in 3 years do not reflect all lifecycle of the projects thus does not show extraordinary circumstances can occur when project activities.

Although Capital Cash Flow show that it have many advantages, but it is still incomplete cash flow.

There are many other cash flow calculation models have been given and applied at many locations in the world, but in the limitation of this research still does not compare to show advantages and disadvantages with them.

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4 1.5 Thesis structure

The remainder of this research is organized as follow:

Figure 1.1: The progress of research

Figure 1-1 shows procedure of this research. Base on the above steps, the framework of thesis is divided in five chapters as follows:

Chapter 1: Introduce the background, motivation, objectives, limitations, and thesis structure.

Chapter 2: Review the literature, regard to the previous cash flow calculation and interest tax shield models.

Chapter 3: Introduce the methodologies of cash flow, Capital Cash Flow and Free Cash Flow and the way to compare them together.

Chapter 4: Vietnamese companies information will be collected and analysis Chapter 5: Present the conclusions and suggestions.

Conclusion and Suggestions Data Analysis

Data Collection and Arrangement Methodologies

Literature Review

Introduction

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5

CHAPTER 2: LITERATURE

This part of research will give summary of cash flow and interest tax shield models.

2.1 Firms’ valuation model

Irving Fisher (1932)

Irving Fisher was the first person introduced is discounted cash flow analysis method. The researcher used method to value for a project, company, or asset by taking a payoff from investment in the future, and putting it in terms of today‟s money.

Discounted cash flow takes into a count the value of time. All future cash flows are estimated and discounted to give their present values. Present value may also be expressed as a number of years‟ purchase of the future undiscounted annual cash flows expected to arise.

After Irving Fisher, there are many researchers developing their studies by using this model such as: J. David Cummins (1990): Multi-period Discounted Cash flow Rate-making Models in property –Liability insurance; Jack Murrin (2000). Valuation:

Measuring and Managing the Value of Companies, Joshua Pearl (2009). Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisition, Chander Sawhney (2012): Discounted Cash Flow –The Prominent Income Approach to Valuation

To perform discounted cash flows, we need to determine a discount rate to use, type of cash flow to discount, use the appropriate formula to calculate:



A discount rate to use. This can be estimated using the capital asset

pricing model (CAPM) formula: risk-free rate + beta * (risk premium for

average risk investment)

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6



The type of cash flow to discount: A simple cash flow, an annuity, A growing annuity, A perpetuity, A growing perpetuity.



Formula:

DPV is the discounted present value of the future cash flow

: Cash flow in period n r = discount rate

1. Modigliani and Miller (1958)

Weight average cost of capital was presented the first time by Modigliani and Miller as a method is used to calculate the average rate of return from all different investors. The weights are the fraction of each financing source in the company‟s target capital structure.

It also is present as a financial metric used to measure the cost of capital to a firm. It is most usually used to provide a discount rate for a financed project, because the cost of financing the capital is a fairly logical price tag to put on the investment.

WACC is used to determine the discount rate used in a Discounted Cash Flow valuation model.

Where

D is the total debt

E is the total shareholder‟s equity

Ke is the cost of equity, and

Kd is the cost of debt

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7 2. Jack Treynor (1961)

Capital Asset Pricing Model was first introduced by Jack Treynor (1961), the study describes the relationship between risk and expected return and it is used to determine a theoretically appropriate required rate of return of an asset. The model takes into account the asset‟s sensitivity to non-diversifiable risk, often represented by the quantity beta in the financial industry, as well as the expected return of the market and expected return of theoretical risk-free asset.

3. David Hirshleifer (2008)

The researcher used this model and showed that the probability beliefs of active and potential shareholders match the true distribution of returns. A different possibility is that active and potential shareholders' expectations are biased, causing market prices to be informational inefficient.

Formula:

(2.3) Where:

is the expected return on the capital asset.

is the risk-free rate of interest such as interest arising from government bonds.

(the beta) is the sensitivity of the expected excess asset returns to the expected excess market returns.

is the expected return of the market.

the market premium 4. Myer (1974)

In 1974, Stewart Myer introduced the Adjusted Present Value (APV) method.

The method is to calculate the net present value (NPV) of the project as if it is all equity

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8 financed. Then the base-case NPV is adjusted for the benefits of financing. According to Myers, the value of the levered firms is equal to the value of the firm with no interest plus the present of the tax shield.

Technically, an APV valuation model looks similar to a standard Discounted Cash Flow model. However, instead of Weight average cost of capital, cash flows would be discounted at the unlevered cost of equity, and tax shields at either the cost of debt or following later academics also with the unlevered cost of equity. APV and the standard Discounted Cash Flow approaches should give the identical result if the capital structure remains stable.

Formula:

APV = Unlevered NPV of Free Cash Flows + NPV of Interest Tax Shield In detail:

EBIT- Taxes on EBIT = Net Operating Profit after Tax (NOPAT)

Net Operating Profit after Tax (NOPAT) + Non- cash items in EBIT- Working Capital changes- Capital Expenditures and Other Operating Investments

=Free Cash Flows

Take Present Value (PV) of FCFs discounted by Return on Assets % (also Return on Unlevered Equity %)+ PV of terminal value=Value of Unlevered Assets

Value of Unlevered Assets + Excess cash and other assets

=Value of Unlevered Firm

+ Present Value of Debt's Periodic Interest Tax Shield discounted by Cost of Debt financing %

=Value of Levered Firm - Value of Debt

=Value of Levered Equity or APV

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9 Follow this method value of tax shield is presented as:

∑

= expense interest of debt in time t =effective income tax rate.

5. Ruback (1995)

Ruback introduced Capital Cash Flow model as a simple approach to valuing risky cash flow. The researcher called this method the Capital Cash Flow because the cash flows include all the cash available to capital providers, including the interest tax shields. In a capital structure with only ordinary debt and common equity, Capital Cash Flows equal the flows available to equity – net income plus depreciation less capital expenditure and the increase in working capital-plus the interest paid to debt holders.

The interest tax shields decrease taxable income, decreasing taxes and thereby increase after-tax cash flow.

Capital Cash Flows include all of the cash flows that are paid or could be paid to any capital provider. By including cash flows to all security holders, CCFs measure all of the after-tax cash generated by the assets. Since CCFs measure the after-tax cash flows from the enterprise, the present value of these cash flows equals the value of the enterprise.

2.2 Value of tax shield

Following the definition, a taxes shield is the reduction in taxable income. Tax shield has been become the debate regarding firm valuation and the cost of capital in many decades recently. There for, there were many researches about this problem and they gave some model to solute this debating problem such as: Modigliani and Miller (1963) they studied the effect of leverage on the firm‟s value, Myers (1974) he

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10

introduced the adjusted present value method, Benninga and Sarig (1997) they claim that in the presence of personal taxes in calculation, Tax advantages of debt should be discounted at discount rate deduction of personal taxes.

1. Modigliani and Miller (1963)

Modigliani and Miller were the first people recognizing the importance of the existence of corporate taxes. They agree that the value of the firm will increase or the cost of capital will decrease with the use of debt due to tax deductibility of interest charges. In their research they studied the effect of leverage on the firm‟s value. The result of their study indicated that in absence of taxes, the firm‟s value is independent of its debts. But, in the presence of taxes, required return to equity will vary in proportion to the debt/capital ratio.

Moreover, their study also tells where to look for determinant of optimal capital structure and how those factors might affect optimal capital:

V

_L

= V

_U

+T

_C

D (2.4)

Where

V

_L

is the value of a levered firm.

V

U

is the value of an unlevered firm.

T

_C

D is the tax rate (T

_C

) x the value of debt (D) The term T

C

D assumes debt is perpetual

(2.5)

is the required rate of return on equity, or cost of levered equity = unlevered

equity + financing premium.

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11 is the company cost of equity capital with no leverage (unlevered cost of equity, or return on assets with D/E = 0).

is the required rate of return on borrowings, or cost of debt.

is the debt-to-equity ratio.

is the tax rate.

2. Miller (1977)

Miller supposed that the optimum debt structure of firms indicates the existence of such a structure for each of them individually. Thereafter, Miller introduces personal income tax and corporate income tax. According to Miller, firm‟s value when no debt is assumed is equal to:

In his research, firms‟ attempts made for making increase in their debts is not suitable with market balance. Increase in debts leads to changes in rate of return on debt and rate of return to equity and, thus, firm‟s value under such conditions is independent of rate of debts.

3. Miller & Scholes (1978)

When the rate of income tax is higher than rate of income on capital profit, most investors will have to pay taxes higher than their receivable dividend. Miller and Scholes conclude that if corporate repurchases its shares, it will make no preference between dividend and realized gain on capital. According to these researchers, firm‟

value is independent of the policy of firm‟s dividend payment.

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12 4. Miles & Ezell (1985)

According to Miles and Ezell, the correct rate for discounting the tax saving due to debt ( T D) of a firm with a fixed debt target

is for the tax saving in the firm year, and Ku for the tax saving following years.

In this respect, in firms with target debt ratio will be discounted at the following rate:

[

] 5. Chambers, Harris and Pringle (1982)

Chambers, Harris and Pringle compared valuation methods for discounted cash flows: equity cash flow discounted at the required return to levered equity ( ), Free Cash Flow discounted at WACC, Capital Cash Flow discounted at WACC before tax and Adjusted present value methods. They argue that in case of target debt the first three methods will give similar results. But, when there is no target debt, these methods will result in different values. Only the Adjusted present value will give the same results as other three methods under both conditions. Of course, firms are simply analyzed for one financial period. The reason of such result for their researches was a mistake: they had used book value instead of market value for the ratio of

6. Harris and Pringle (1985)

Harris and Pringle propose that the present value of the tax shield should be calculated by discounting the tax saving due to the debt at the required return to assets.

Their argument is that the interest tax shields have the same systematic risk as the firm‟s underlying cash flows and therefore, should be discounted at the required return to assets. Then, according to them, the value of tax shields is:

[ ]

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13 Also in their calculations they consider that WACC before tax is equal to the required return to equity. Thus, in their opinion:

(2.9) 7. Taggart (1991)

In 1991, Taggart gives a good summary of valuation formulars with or without concerning personal income tax. He proposes that Miles & Ezzell‟s formulas should be used when the company adjusts to its target debt ratio once a year and Harris &

Pringle‟s(1985) formulas when the company adjusts to its target debt ratio continuously.

8. Damodaran (1991)

If all the business risk is borne by the corporate, then the formula relating the levered beta ( ) with the asset beta ( ) will be as follows:

He suggested that the beta of the debt under situations where it has been dropped is not the same as when the beta of the debt is assumed zero.

When the beta of the debt is zero, the required return to debt should be the risk- free rate. The purpose of dropping of the beta of the debt is to obtain a higher levered beta. The relationship between levered beta and the asset beta can be written as:

He called this method the Practitioners‟ Method because is often used by

financial consultants and investment banks. It is obvious that according to this formula,

given the same value for βu, a higher βL is obtained than according to Fernandez (2004)

and according to Damodaran (1994).

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14 9. Inselbag and Kaufold (1997)

Inselbag and Kaufold argue that if a company targets the monetary value of debt outstanding, the value of tax shield (VTS) should be valued using the Myers‟ formula. If the firm targets a constant debt/value ratio, the value of tax shield (VTS) will be calculated through Miles and Ezell‟s.

In these researchers, present value of tax shield of firms planning based on amount of nominal debt is higher than firms emphasizing on debt ratio. This theory cannot be accepted for two reasons: firstly, no firm has output operating cash flow for having target debt ratio (instead of a target debt outstanding). And, secondly, as we know, the tax shield is the difference between two present values of taxes in levered and unlevered firms.

They believe that the risk of target debt ratio is higher than that the value of debt

is fixed. If so, the present value of taxes paid by levered firms should be higher than that

of firms with target debt and, in consequence, the present value of tax shield for the

second-group firms should be lower and this is opposed to the theory cited by above-

mentioned researchers.

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15

CHAPTER 3: METHODOLOGY

3.1 Framework

In this chapter, firms‟ valuation models are used to calculate and analysis for this research will be present in detail. After that, they will be compared with each other about theory and assumption. Continuously, the methodology analysis and compare the result of methods will be present.

Firms‟ valuation methods are used and compare include Capital Cash Flow is a new model with Vietnamese finance market, and Free Cash Flow which has been using very common in Vietnam to calculate and compare the differences in calculation and showing on the advantage and disadvantage of each model.

After that, to make the advantage and disadvantage of each method becoming more detail, an assumption example will be analysis

Finally, the way to analysis the result by using statistic software SPSS will be present in detail.

Figure 3.1: Framework Summary Methodology Analysis

Comparison

Free Cash Flow

Capital Cash Flow

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16 3.2 Capital cash flow

Capital cash flows include all of the cash available to capital providers, including the interest tax shields. In a capital structure with only ordinary debt and common equity, Capital Cash Flows equal the flows available to equity-net income plus depreciation less capital expenditure and the increase in working capital plus the interest paid to debt holders. The interest tax shields decrease taxable income and thereby increase after-tax cash flows. In other words, Capital Cash Flows equal Free Cash Flows plus the interest tax shields. Because the interest tax shields are included in the cash flows, the appropriate discount rate is before-tax and corresponds to the riskiness of the assets.

3.2.1 Calculating Capital Cash Flow

Capital cash flow can be calculated follow figure:

1.

Calculate your earnings before interest and taxes (EBIT).

The EBIT is also referred to as operating income.

2.

Add depreciation expense and then subtract capital expenditures.

3.

Subtract investments in net working capital.

4.

Add the interest tax shield. This figure is your allowable deduction from taxable income. For example, debt interest and your depreciation expense are taxable deductions and, therefore, tax shields.

In accounting, these calculations are referred to in general terms as

making cash flow adjustments

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17 Figure 3.2: Calculating Capital Cash Flow

EBIT = Operating profit – Depreciation Pre- tax Income = EBIT – Expected interest Expected interest = Debt*Expected debt return

Net Income

Cash Flow Adjustment

Add Non-Cash Interest

Available Cash Flow

Add Cash Interest

Capital Cash Flow

Depreciation Amortization Capital Expenditures Change in Working Capital

Deferred Taxes

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18 3.2.2 Calculating Expected Asset Return

In Capital Cash Flow method, the pre-tax rate should correspond to the riskiness of cash flows. Therefore, the appropriate discounted rate is calculated base on the co- operation of two model Weight Averaged Cost of Capital and Capital Asset Pricing model. One such discount rate is the pre-tax WACC (Ruback, 2002):

Where:

D/V is the debt-to-value ratio;

E/V is the equity-to-value ratio

and are the respective expected debt and equity returns.

By using Capital Asset Pricing Model (CAPM) the expected returns in are determined:

Where

is the risk-free rate, is the risk premium,

and are the debt and equity betas Combine three equations together:

(3.4)

The beta of the assets is a weighted average of the debt and equity beta:

(3.5)

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19 From that equation a simple formula for the pre-tax WACC which is also labeled as the Expected Asset Return, KA:

. (3.6)

3.3 Free Cash Flow

Free Cash Flow is the basic method using to calculate value of the firm and project and it is a common method in Vietnam and many other countries. Free cash flow represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt.

This is calculated as follows:

FCF = earnings before interest and taxes + estimated taxes + cash adjustments.

Since tax shield arising from interest expense of debt has not been taken into account in the calculation of Free Cash Flow, it is necessary to use the weighted average cost of capital after tax deduction.

Where:

T: effective tax rate

: the respective expect equity return

: The respective expect debt return

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20 3.3 Comparison

The calculation of two methods can be compare in the figure:

Figure 3.3: Calculating CCF and FCF methods

(Richard S.Ruback, 2002: A simple approach to valuing risky cash flows)

On the left side, net income includes any tax benefit from debt financing because interest is deducted before computing taxes. Net income is therefore increased by the interest tax shields. Cash flow adjustments and noncash interest are added to net income to determine the available cash flow. Cash flow adjustments include those adjustments required to transform the accounting data into cash flow data. Typical adjustments include adding depreciation and amortization because these are noncash subtractions from net income.

Net Income

Cash Flow Adjustment

Add Non-Cash Interest

Available Cash Flow

Add Cash Interest

Capital Cash Flow Depreciation Amortization

Capital Expenditures

Change in Working Capital

Deferred Taxes

EBIT

Estimate of Corporate Tax

EBIAT

Cash Flow Adjustments

Free Cash Flow

Add Internet Tax

Shield

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21 Capital expenditures are subtracted from net income because these cash outflows do not appear on the income statement and thus are not deducted from net income.

Subtracting the increases in working capital transforms the recognized accounting revenues and costs into cash revenues and costs. Net income is net of noncash interest, if any. Because noncash interest is not a cash outflow, it is added to net income to compute the available cash flow. The label ‟available cash flow‟ often appears in projections and measures the funds available for debt repayments or other corporate uses. Capital Cash Flow is computed by adding cash interest to available cash flow so that cash flows represent the after-tax cash available to all cash providers.

On the right side, when cash flow forecasts present EBIT instead of net income, corporate taxes have to be estimated to calculate earnings before interest and after taxes (EBIAT). Typically the taxes are estimated by multiplying EBIT by a historical marginal tax rate. EBIAT is then adjusted using the cash flow adjustments that transform the accounting data into cash flow data. EBIAT plus cash flow adjustments equals Free Cash Flow, which is used to compute value using the after-tax weighted average cost of capital (WACC). Free Cash Flows equal Capital Cash Flows less the interest tax shields. Interest tax shields, therefore, have to be added to the Free Cash Flows to arrive at the Capital Cash Flows. The interest tax shields on both cash and noncash debt are added because both types of interest tax shields reduce taxes and thereby increase after-tax cash flow.

The EBIT path should yield the same Capital Cash Flows as the net income path.

In practice, however, the net income path is usually easier and more accurate than the

EBIT path. The primary advantage of the net income path is that it uses the corporate

forecast of taxes, which should include any special circumstances of the firm. Taxes are

rarely equal to the marginal tax rate times taxable income. The EBIT path involves

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22 estimating taxes, usually by assuming a constant average tax rate. This ignores the special circumstances of the firm and adds a likely source of error.

Assumption example:

Table 3.1: CCFs‟ calculating assumption CCFs’ Assumption

Risk free Rate ( Rf) 10%

Risk Premium (Rp) 8%

Tax rate 25%

Year 1 Year 2 Year 3

Asset Beta 1 1 1

Debt beta 0.35 0.3 0.25

Equity beta

Expected Cash Flows:

Operating Profit 50,000 60,000 70,000 Less: Depreciation 33,333 33,333 33,333

Assumption analysis

EBIT 16,667 26,667 36,667 Less: Expected

Interest 12,800 6,200 2,400 Pre-tax Income 3,867 20,467 34,267 Less: Taxes 967 5,117 8,567 Net Income 2,900 15,350 25,700 Non-cash Adjustment 43,333 43,333 43,333 Cash Flow Available 46,233 58,683 69,033 Beginning Debt 100,000 50,000 20,000

Capital Cash Flow Valuation

Cash Flow Available 46,233 58,683 69,033 Plus: Expected Interest 12,800 6,200 2,400 Capital Cash Flow 59,033 64,883 71,433

Cost of Assets 18% 18% 18%

Present Value of CCFs (NPV) 50,028 46,598 43,476

Total Enterprise Value 140,103

Expected interest = Debt * Expected debt return (Kd)

Kd= Risk free rate + Risk premium*Debt beta

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23 3.4 Methodology analysis result

After calculated for Vietnamese firm by using two model CCF and FCF, the statistic software SPSS will be used to analysis. The hypothesis Ho of Pair sample T-test:

With the confidence level is 95%. Hypothesis Ho “There is no difference between mean of two methods”.

If Sig >= α (with α=0.05). The hypothesis Ho is accepted

If Sig < α (with α=0.05). The hypothesis Ho is rejected. The mean of two methods are totally difference.

3.5 Summary

Capital Cash flow method is calculated by following net income path, in that, expected interest and interest tax shield are reduced from the beginning and add back at the end.

The discounted rate of this method is defined by combining two models WACC and

CAPM. In contrast, Free Cash Flow go following EBIT path, in this way, tax was

estimated and reduce from EBIT. And the discounted rate is defined by using WACC

and basing on debt/equity ratio. When this ratio changes the value of FCF also will be

change and have to re-estimate again.

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24

CHAPTER 4: DATA COLLECTION

4.1 Data collection

The data information of 39 Vietnamese companies are collected in consecutive year from 2010 to 2012 among companies listed on Vietnamese stock market, will be used to calculate and analysis.

List of companies will include 3 areas in construction: Contractor, material supplier, real estate.

Table 4.1: List of construction contract companies List of companies

No Name

1 Bing Duong construction and civil engineering joint stock company 2 Chuongduong joint stock company

3 Construction and infrastructure development company 4 TASCO joint stock company

5 Petroleum equipment assembly and metal structure joint stock company 6 BINHDUONG trade and development joint stock company

7 TIENGIANG investment and construction joint stock company 8 VIMECO joint stock company

9 LAM DONG investment hydraulic construction joint stock company 10 Petro capital infrastructure investment joint stock company

11 IDICO – Petroleum trading construction investment joint stock company

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25 Table 4.2: List of real estate companies

Companies

No Name

1 Sao Mai construction corporation

2 Cotec investment land - House development joint stock company 3 HCM infrastructure investment join stock company

4 Hoabinh construction and real estate corporation

5 DATXANH real estate service and constructions corporation 6 KHANGAN investment real estate joint stock company 7 TANTAO investment industry corporation

8 HAGL joint stock company 9 HA DO joint stock company

10 HOANG QUAN consulting - service real estate corporation 11 KINHBAC city development share holding corporation

12 VUNG TAU real estate and construction joint stock company 13 VINGROUP joint stock company

14 NBB investment corporation

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26 Table 4.3: List of material supplier companies

List of companies

No Name

16 Construction and materials trading joint stock company 17 BECAMEX asphalt and concrete joint stock company 18 BIBICA corporation

19 CMC joint stock company 20 HOAAN joint stock company

21 MYXUAN brick title pottery and construction joint stock company 22 KIENGIANG brick title joint stock company

23 SAIGON paint corporation

24 VICEM cement trading joint stock company 25 DONGNAI paint corporation

26 DAITHIENLOC corporation

27 HOCHIMINH city metal corporation

28 MIENDONG joint stock company

29 POMINA steel corporation

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27 After collected and calculated by two methods, the results are showing in the table:

Table 4.4: CCF and FCF calculation results

List of companies

No Name Value

CCF FCF

1 Bing Duong construction and civil engineering joint stock company

202,322

2 Chuongduong joint stock company

777,136

777,136 3 Construction and infrastructure development

company

72,726

4 TASCO joint stock company

1,488,031

1,488,031 5 Petroleum equipment assembly and metal structure

joint stock company

330,308

330,308 6 BINHDUONG trade and development joint stock

company

1,407,280

1,407,280 7 TIENGIANG investment and construction joint stock

company

572,392

8 VIMECO joint stock company

1,760,769

1,760,769 9 LAM DONG investment hydraulic construction joint

stock company

134,493

134,493 10 Petro capital infrastructure investment joint stock

company

3,247,880

3,247,880 11 IDICO – Petroleum trading construction investment

joint stock company

269,816

12 Sao Mai construction corporation

188,705

188,705 13 Cotec investment land - House development joint

stock company

364,138

364,138 14 HCM infrastructure investment join stock company

1,108,924

1,108,924 15 Hoabinh construction and real estate corporation

1,317,709

1,317,709 16 DATXANH real estate service and constructions

corporation

975,555

975,555 17 KHANGAN investment real estate joint stock

company

534,639

18 TANTAO investment industry corporation

1,929,138

(35)

28 19 HAGL joint stock company

2,086,291

20 HA DO joint stock company

1,688,960

1,688,960 21 HOANG QUAN consulting - service real estate

corporation

3,866,550

3,866,550 22 KINHBAC city development share holding

corporation

12,038,275

12,038,275 23 VUNG TAU real estate and construction joint stock

company

618,804

24 VINGROUP joint stock company

33,532,019

25 NBB investment corporation

3,194,339

3,194,339 26 Construction and materials trading joint stock

company

1,286,864

1,286,864 27 BECAMEX asphalt and concrete joint stock

company

162,745

28 BIBICA corporation

485,815

29 CMC joint stock company

171,248

30 HOAAN joint stock company

231,131

231,131 31 MYXUAN brick title pottery and construction joint

stock company

91,233

91,233 32 KIENGIANG brick title joint stock company

16,948

33 SAIGON paint corporation

44,191

44,191 34 VICEM cement trading joint stock company

40,037

35 DONGNAI paint corporation

56,541

36 DAITHIENLOC corporation

1,633,734

37 HOCHIMINH city metal corporation

1,633,962

38 MIENDONG joint stock company

456,270

39 POMINA steel corporation

7,519,123

Unit: Billion Vnd ; 20,000Vnd = 1 USD

(36)

29 4.2 Data Analysis

Data, after collected and calculated, pair sample T-test is used to analysis, and the result:

Table 4.5: Paired Samples Test

Paired Differences

t df

Sig. (2- tailed) Mean

Std.

Deviation

Std.

Error Mean

95% Confidence Interval of the

Difference

Lower Upper

CCF-FCF 0.18 0.57 0.09 -0.17 0.20 0.19 38 0.85

Table 4.6: Paired Samples Correlations

N Correlation

Pair 1 CCF & FCF 39 0.99

4.3 Results Analysis

Results show that the significant relationship up to level sig =0.85 between two variables CCF and FCF > 0.05. Therefore, Hypothesis Ho is accepted. There is no difference between the mean of two methods.

On the other hand, correlation between two variable is 0.99 Indicating that two

methods above are fully convergent and when one of them increase the other will

certainly increase and vice versa.

(37)

30 Test results showed that by using appropriate discount rate and considering the value of tax shield in calculations, the application of CCF in firms‟ valuation would lead to the same results as FCF

4.4 Summary

The CCF method perform that this method is algebraically equivalent to the

popular method of discounting FCFs by the after-tax weight average cost of capital. In

many instances, the CCF method is substantially easier to apply. The ease of use occurs

because the CCF method puts the interest tax shields in the cash flows and discounts by

a before-tax cost of assets. The cash flow calculations can generally rely on the

projected taxes, and the cost of assets does not generally change through time even

when the amount of debt changes. In contrast, when applying the FCF method, taxes

need to be inferred, and the cost of capital changes as amount of debt changes.

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31

CHAPTER 5: CONCLUSION AND SUGGESTION

5.1. CONCLUSION

Being a developing country, Vietnamese„s economy will undergoing many fluctuations, therefore, it effects strongly to value and financial situation of Vietnamese‟s companies. While calculating tools has been using in Vietnam is traditional model which has been using long time in the world. Besides, economic calculating models also have many changing, there are many useful models being established and tested in the world. Therefore, finding and testing new models into Vietnamese‟s economy to choose suitable models are very important.

The objective of this study is introduction Capital Cash Flow method for firms‟

valuation in Vietnam, the survey base on information of 39 Vietnamese companies, the result show that by using accurate depreciation and value of tax shield CCF method will get the same result with FCF. Therefore, Vietnamese‟s firm can use CCF instead of FCF.

The advantage of this model is simple and suitable with fluctuated cash flow in Vietnam.

The capital cash flow calculation method increases after-tax cash flows by decreasing taxable income. To do this, CCF includes interest tax shields where a tax deduction is counted as a positive cash flow. The CCF method is often preferred when calculating high-risk cash flows such as investments. In these situations, forecasting debt levels is favored as opposed to forecasting debt percentages when determining business asset values.

In the early stages of projects when cash flows do not include the interest tax

shields and financing strategy, Free Cash Flow method show that it is easier to calculate

than Capital Cash Flow, the discount rate can be calculate in a straightforward manner

using prevailing capital market data. But, when cash flows of projects include detailed

(39)

32 information about the financing plan, the CCF method is generally more direct valuation approach and it also performs that it is more simple and less than error than Free Cash Flow.

5.2. SUGGESTION

Firms‟ valuation effect strongly to investors making decision, moreover, in the fluctuated economic, risk is difficult predicable, there for risky Firms‟ valuation with discounted cash flows is an effective and extensive topic in financial decision making and investment opportunities which has challenging aspects to be subject of further research.

In Vietnam, approaching and applying new economic model in the world is very limited. There are numerous methods and models concerning firms‟ valuation with using discounted cash flows which is still not practiced in Vietnam.

In this research, some theories about present value of tax shield are also cited in

brief. Determination of the value of tax shield on firms‟ valuation is a very important

issue to start for further researches.

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33

REFERENCES

Arzac, E. and Glosten, L., “A reconsideration of tax shield valuation”, European Financial Management,Vol. 11, no. 4, 2005, pp. 453–61.

Arzac, Enrique R., 1996, “Valuation of highly leveraged firms”, Financial Analysts Journal, 42-49.

Dastgir M., Khodadadi V., Ghayed M,2010. “Cash Flows Valuation Using

Capital Cash Flow Method Comparing it with Free Cash Flow Method and Adjusted Present Value Method in Companies Listed on Tehran Stock Exchange”, Business

Intelligence Journal, 45-58.

Laurence Booth, “Capital Cash Flow, APV and Valuation” European Financial Management, Vol.13, No 1, 2007, 29-48.

Modigliani, F. and M. Miller (1958), “The Cost of Capital, Corporation Finance

and the Theory of Investment”, American Economic Review, 48, pp. 261-297.

Miller, M.H. (1977), “Debt and Taxes”, Journal of Finance (May), pp. 261-276.

Miller, M. and M. Scholes (1978), “Dividend and Taxes”, Journal of Financial Economics (Dec.), pp. 333-364.

Miles, James A. and John R. Ezzell, 1980,”The weighted average cost of capital,

perfect capital markets, and project life: a clarification”, Journal of Financial and

Quantitative Analysis, 15, 3 (September), 719-730.

Miles, J.A. and J.R. Ezzell (1985), “Reformulating Tax Shield Valuation: A

Note”, Journal of Finance, Vol. XL, 5 (December), pp. 1485-1492.

Ruback, Richard S., 1986, "Calculating the market value of riskless cash flows,"

Journal of Financial Economics, Volume 15, No. 3 (March 1986), pp. 323-339.

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34 Ruback, Richard S., 1995a, “Technical Note for Capital Cash Flow Valuation

“,Harvard Business School Case No. 295-069.

Ruback, Richard S. (2002), “Capital Cash Flows: A Simple Approach to Valuing

Risky Cash Flows”, Financial Management, summer, pp. 85-103.

Taggart, R., „Capital budgeting and the financing decision: an exposition‟,

Financial Management, Vol. 6, no. 2, 1977, pp. 59–64.

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35

APPENDIX

Table 1: Bing Duong construction and civil engineering joint stock company

Risk free Rate ( Rf) 9% 11% 12%

Risk Premium (Rp) 7.5% 8.5% 10%

Tax rate 25%

2010 2011 2012

Asset Beta 1 1.1 1.2

Debt beta 0.35 0.3 0.25

Equity beta

Year 2010 1011 2012

Operating Profit 79,535 103,874 126,260 Less: Depreciation 35,613 35,613 35,613

EBIT 43,922 68,261 90,647

Less: Expected Interest 12,420 9,500 8,847

Pre-tax Income 31,502 58,760 81,800

Less: Taxes 7,875 14,690 20,450

Net Income 23,626 44,070 61,350

Non-cash Adjustment 39,760 44,192 47,201 Cash Flow Available 63,386 88,262 108,551

Beginning Debt 106,838 70,114 61,015

Capital Cash Flow Valuation

Cash Flow Available 63,386 88,262 108,551 Plus: Expected Interest 12,420 9,500 8,847 Capital Cash Flow 75,806 97,762 117,398

Cost of Assets 17% 20% 24%

Present Value of CCFs (NPV) 65,070 69,727 67,525

Total Enterprise Value 202,322

Free Cash Flow Valuation

EBIT 43,922 68,261 90,647

Less: Tax on EBIT 10,980 17,065 22,662

EBIAT 32,941 51,196 67,986

Non-cash Adjustment 39,760 44,192 47,201

Free Cash Flow 72,701 95,387 115,186

Capitalization:

Enterprise Value remain 202,322 159,899 94,676

Debt 106,838 70,114 61,015

WACC Calculation

Debt Percent 52.8% 43.8% 64.4%

After-Tax Cost 8.7% 10.2% 10.9%

Contribution 4.6% 4.5% 7.0%

Equity

Percent 47.2% 56.2% 35.6%

Equity Beta 1.73 1.72 2.92

Cost 22.0% 25.7% 41.2%

WACC 15.0% 18.9% 21.7%

Present value of FCFs 63,237 69,803 69,282

(43)

36

Table 2: Chuong Duong joint stock company

Tax rate 25%

2010 2011 2012

Debt beta 0.35 0.3 0.25

Equity beta

Year 2010 1011 2012

Operating Profit 469,905 348,480 421,614

Less: Depreciation 122,147 122,147 122,147

EBIT 347,758 226,333 299,467

Pre-tax Income 305,159 197,165 273,701

Less: Taxes 76,290 49,291 68,425

Net Income 228,870 147,874 205,276

Beginning Debt 366,441 215,264 177,694

Cash Flow Available 355,533 285,429 341,095 Plus: Expected Interest 42,599 29,168 25,766

Capital Cash Flow 398,132 314,597 366,861

EBIT 347,758 226,333 299,467

Less: Tax on EBIT 86,940 56,583 74,867

EBIAT 260,819 169,750 224,600

Free Cash Flow 387,482 307,305 360,419

Capitalization:

Debt 366,441 215,264 177,694

WACC Calculation

Debt Percent 47.2% 42.4% 60.1%

After-Tax Cost 8.7% 10.2% 10.9%

Equity

Percent 52.8% 57.6% 39.9%

Equity Beta 1.58 1.69 2.63

Cost 20.8% 25.4% 38.3%

WACC 15.1% 18.9% 21.8%

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37

Table 3:Construction and infrastructure development company

Tax rate 25%

2010 2011 2012

Debt beta 0.35 0.3 0.25

Equity beta

Year 2010 1011 2012

EBIT 46,930 24,418 20,924

Pre-tax Income 43,824 21,891 19,576

Less: Taxes 10,956 5,473 4,894

Net Income 32,868 16,418 14,682

Cash Flow Available 41,773 25,322 23,587

Beginning Debt 26,713 18,650 9,291

Plus: Expected Interest 3,105 2,527 1,347

EBIT 46,930 24,418 20,924

Less: Tax on EBIT 11,732 6,104 5,231

EBIAT 35,197 18,313 15,693

Free Cash Flow 44,102 27,218 24,597

Capitalization:

Debt 26,713 18,650 9,291

WACC Calculation

Debt Percent 36.7% 46.8% 46.2%

After-Tax Cost 8.7% 10.2% 10.9%

Equity

Percent 63.3% 53.2% 53.8%

Equity Beta 1.38 1.80 2.02

Cost 19.3% 26.3% 32.2%

WACC 15.4% 18.8% 22.3%

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38

Table 4: TASCO JOINT STOCK COMPANY

Tax rate 25%

2010 2011 2012

Debt beta 0.35 0.3 0.25

Equity beta

Year 2010 1011 2012

Operating Profit 774,486 754,128 901,664 Less: Depreciation 223,712 223,712 223,712

EBIT 550,774 530,416 677,952

Pre-tax Income 472,755 457,393 628,244

Less: Taxes 118,189 114,348 157,061

Net Income 354,566 343,044 471,183

Beginning Debt 671,135 538,921 342,819

Cash Flow Available 600,920 590,852 700,931 Plus: Expected Interest 78,019 73,024 49,709 Capital Cash Flow 678,939 663,876 750,640

Total Enterprise Value 1,488,031

EBIT 550,774 530,416 677,952

Less: Tax on EBIT 137,694 132,604 169,488

EBIAT 413,081 397,812 508,464

Non-cash Adjustment 246,354 247,808 229,749 Free Cash Flow 659,434 645,620 738,213

Capitalization:

Enterprise Value remain 1,488,031 1,054,616 605,355

Debt 671,135 538,921 342,819

WACC Calculation

Debt Percent 45.1% 51.1% 56.6%

After-Tax Cost 8.7% 10.2% 10.9%

Equity

Percent 54.9% 48.9% 43.4%

Equity Beta 1.53 1.94 2.44

Cost 20.5% 27.5% 36.4%

WACC 15.2% 18.6% 21.9%

Total Enterprise Value 1,488,031

(46)

39

Table 5:PETROLEUM EQUIPMENT ASSEMBLY AND METAL STRUCTURE

JOINSTOCK COMPANY

Tax rate 25%

2010 2011 2012

Debt beta 0.35 0.3 0.25

Equity beta

Year 2010 1011 2012

EBIT 175,762 89,039 32,457

Pre-tax Income 155,279 70,647 22,924

Less: Taxes 38,820 17,662 5,731

Net Income 116,459 52,986 17,193

Beginning Debt 176,198 135,728 65,742

Plus: Expected Interest 20,483 18,391 9,533

EBIT 175,762 89,039 32,457

Less: Tax on EBIT 43,940 22,260 8,114

EBIAT 131,821 66,779 24,342

Free Cash Flow 144,301 151,585 155,227

Capitalization:

Debt 176,198 135,728 65,742

WACC Calculation

Debt Percent 53.3% 57.7% 51.7%

After-Tax Cost 8.7% 10.2% 10.9%

Equity

Percent 46.7% 42.3% 48.3%

Equity Beta 1.74 2.19 2.22

Cost 22.1% 29.6% 34.2%

WACC 14.9% 18.4% 22.1%

運用營運資金推估模式評價營建財務公司之研究-以越南公司為例

Department of Civil Engineering College of Engineering National Taiwan University

Master Thesis

中華民國103年6月

June, 2014

ACKNOWLEDGEMENT

I would like to express my deep appreciation and gratitude to all persons who gave me the necessary support during my postgraduate studies till completing this research successfully.

First, I would to sincerely gratitude to my advisor, Prof. Hui-Ping Tserng, whose expertise, understanding, enthusiasm and encouragement throughout the period of my thesis.

I owe sincere and earnest thankfulness to professors and staff members ò Civil Engineering Department, National Taiwan University especially Prof. Po-Han Chen, Prof. Liang-Jenq Leu, Prof. Sy Jye Guo, Prof. Shih-Ping Ho, Prof. Luh-Maan Chang for their supports during the time in Taiwan.

Also, I would like to thank all professors and staff members of National University of Civil Engineering in Vietnam, especially Prof. Huu-Thanh Do, Prof.

Tang-Kiem Dao. It is my pleasure to thank those who made this research possible.

Last but not least, I am truly indebted and thankful to my family. Their

unconditional love and support bring me overcome the challengers.

ii

ABSTRACT

In the next part, CCF will be used to calculate for Vietnamese companies listed on the market and compare with the common method is using to improve its efficiency in Vietnam market.

Key words: Capital Cash Flow, Weight average Cost of Capital, Capital asset

pricing model, Expected asset return, Earnings before interest and tax, Value tax shield

iii

TABLE OF CONTENTS

ACKNOWLEDGEMENT ... i

ABSTRACT ... ii

TABLE OF CONTENTS ... iii

LIST OF FIGURES ... vii

LIST OF TABLES ... viii

CHAPTER 1:INTRODUCTION ...1

1.1 Background ...1

1.2 Motivation ...2

1.3 Research Objective ...3

1.4 Limitation ...3

1.5 Thesis Structure ...4

CHAPTER 2 : LITERATURE REVIEW ...5

2.1 Firms’ Valuation Models ...5

2.2 Interest tax shields ...9

CHAPTER 3:METHODOLOGY ...15

3.1 Framework ...15

iv

3.2 Capital Cash Flow ...16

3.1.1 Calculating Capital Cash Flow ...16

3.1.2 Calculating Expected Asset Return ...18

3.3 Free Cash Flow………...……….…..19

3.4 Comparison ...20

3.5 Analysis result methodology ...23

3.6 Summary ...23

CHAPTER 4:DATA COLLECTION AND ANALYSIS ...24

4.1 Data Colection ...24

4.2 Data Analysis ...29

4.3 Result analysis ...29

4.6 Summary ...30

CHAPTER 6:CONCLUSIONS AND SUGGETIONS ...31

5.1 Conclusions ...31

5.2 Suggetions ...32

REFERENCES………..………33

APPENDICES………35

v

LIST OF FIGURES

Fig.1.1The progress of research...4

Fig.3.1 Framework...15

Fig.3.2 Calculating Capital Cash Flow………...………...…………...…….17

Fig.3.3 Calculating CCF and FCF methods………...20

vi

LIST OF TABLES

Table 3.1 CCF s‟ calculating assumption………....……...…….…....…….…..22

Table 4.1 List of construction contract companies………...…..….…...…...….24

Table 4.2 List of real estate companies. … ………....…….…….…….…...….25

Table 4.3 List of material supplier companies…...…………....……..….….…………26

Table 4.4 CCF and FCF calculating result………...……...……….…27

Table 4.5 Paired sample Test………...……..….….……...29

Table 4.6 Paired sample correlations………..….……….…..…....29

Table 1-39 Vietnamese firms‟ valuation……….…….…..…....…...35

1

CHAPTER 1: INTRODUCTION 1.1 Background

The stock market, investment capital of more than 90% on VN economy has completely collapsed since 2008, the VN-Index fell down from 1,200 points in multiple vertical continuous trading of the past several days to just under 500 points.

Five years after a flood, water in Vietnam withdrawal seems slower. Until now, economic growth has yet to be restored, production and business activities of enterprises unrest as inflation and high interest rates, bad debt becomes sore, slow growth of income and people's lives difficulties

So far, the economy tends to stabilize, the most difficult period is over, and the

economy has hit bottom, but investors are still hesitate to put money into the market.

2 1.2 Motivation

Cash flow is an important area of investors‟ making decisions, under which investors can know the profitability and value of the project in which they are investing.

In this research, Capital Cash Flow method will be showed and used to calculate

for Vietnamese construction companies, after that, compare with traditional model Free