Pada tanggal 26 Januari 2017, dalam blog-nya, Prof. A. Damodaran (Professor of Finance dari Stern School of Business New York University) memposting suatu tulisan berjudul “January 2017 Data Update 6: A Cost of Capital Update!”
Tulisan tersebut cukup menarik untuk dibaca mengingat bahwa ada kecenderungan analis valuasi menghabiskan cukup banyak waktu berupaya untuk mendapatkan discount rate atau cost of capital yang dirasakan akan dapat mewakili profil resiko dari arus kas bisnis atau proyek yang bersangkutan, sehingga besar kemungkinan justru tidak banyak waktu untuk arus kas (=Free Cash Flow) dan laba (EBITDA, EBIT). Pertimbangan bahwa cukup dengan menganalisa data-data historis dan pembanding, akan memadai untuk mempertahankan proyeksi arus kas bisnis/proyek yang bersangkutan.
Tulisan Prof. A. Damodaran tersebut secara khusus mengingatkan pentingnya analis untuk kembali ke focus Arus Kas. Tulisan tersebut disajikan dengan memberikan data-data terkini untuk awal tahun 2017 terkait valuasi dan cost of capital, termasuk tingkat imbal hasil historis, implied equity risk premiums, premi resiko negara.
Prof. A. Damodaran dalam kesimpulannya terkait Cost of Capital menyebutkan dalam
“When your valuations go awry, it is almost never because of the mistakes that you made on the discount rate and almost always because of errors in your estimates of cash flows (with growth, margins and reinvestment)”
Tiga key driver yang disebutkan yaitu growth, margins dan reinvestment, adalah yang penting untuk difokuskan untuk memastikan sejauh mungkin bisa diperoleh proyeksi arus kas yang “akurat”, dan telah menggambarkan atau mencakup seluruh resiko bisnis yang ada. Dengan demikian, analis diharapkan justru tidak terlalu terobsesi dengan hal-hal kecil terkait Discount Rate.
Yang menarik, bahkan Prof. A. Damodaran memberikan tip untuk penentuan Cost of Capital apabila analis tidak memiliki banyak waktu, yaitu untuk valuasi perusahaan dengan tingkat resiko rata-rata, maka Cost of Capital sebesar 8% dapat dipertimbangkan untuk digunakan, atau kalau masuk dalam kategori bisnis yang sangat beresiko, maka 10,68% dapat digunakan sebagai dasar.
“An approximation works well : When I am in a hurry to value a company, I use my distributional statistics (see graph above) to get started. Thus, if I am valuing an average risk company in US dollars, I will start off using an 8% cost of capital (the global median is 8.03%) and complete my valuation with that number, and if I still have time, I will come back and tweak the cost of capital. If it is very risky firm, I will start off with a 10.68% cost of capital (the 90th percentile) and gain revisit that number, if I have the time.”
Sebagai penutup tulisan, Prof. A. Damodaran menyebutkan:
“All in all, if your find yourself obsessing about the minutiae of discount rates in a valuation, it is perhaps because you want to avoid the big questions that make valuation interesting and challenging at the same time.”
Berk dan DeMarzo dari Stanford University menyampaikan nada yang sama dengan Prof. A. Damodaran di atas. Dalam buku teks Corporate Finance, dikutip bahwa
“Given the evidence for and against the efficiency of the market portfolio, what method do managers actually use to calculate the cost of capital? A survey of 392 CFOs conducted by John Graham and Campbell Harvey found that 73.5% of the firms that they questioned use the CAPM to calculate the cost of capital, as indicated in Figure 13.11. They also found that larger firms were more likely to use the CAPM than were smaller firms.”
“In short, there is no clear answer to the question of which technique is used to measure risk in practice—it very much depends on the organization and the sector. It is not difficult to see why there is so little consensus in practice about which technique to use. All the techniques we covered are imprecise. Financial economics has not yet reached the point where we can provide a theory of expected returns that gives a precise estimate of the cost of capital. Consider, too, that all techniques are not equally simple to implement. Because the trade-off between simplicity and precision varies across sectors, practitioners apply the techniques that best suit their particular circumstances.”
“When making a capital budgeting decision, the cost of capital is just one of several imprecise estimates that go into the NPV calculation. Indeed, in many cases, the imprecision in the cost of capital estimate is less important than the imprecision in the estimate of future cash flows. Often the least complicated models to implement are used most often. In this regard, the CAPM has the dual virtues of being both simple to implement and reasonably reliable.
Dikutip dari Jonathan Berk dan Peter DeMarzo. Corporate Finance. Edisi ketiga. MA (USA): Pearson Education, Inc. 2014. Bab 13 : Investor Behavior and Capital Market Efficiency. Halaman 466.
Menarik juga dikutip dari buku teks klasik Principles of Corporate Finance oleh Brealey dan Myers:
Profits that more than cover the opportunity cost of capital are known as economic rents. These rents may be either temporary (in the case of an industry that is not in long-run equilibrium) or persistent (in the case of a firm with some degree of monopoly or market power). The NPV of an investment is simply the discounted value of the economic rents that it will produce. Therefore when you are presented with a project that appears to have a positive NPV, don’t just accept the calculations at face value. They may reflect simple estimation errors in forecasting cash flows. Probe behind the cash-flow estimates [catatan penulis: tidak disebutkan untuk mengecek Cost of Capital atau Discount Rate yang digunakan dalam analisa tersebut, tapi pada key drivers di belakang pembentukan estimasi arus kas], and try to identify the source of economic rents. A positive NPV for a new project is believable only if you believe that your company has some special advantage.”
Dikutip dari Principles of Corporate Finance. Richard A. Brealey dan Stewart C. Myers. Edisi keenam. USA: The McGraw-Hill Companies, Inc. 2000. Bab 11: Where Positive Net Present Values Come From. Halaman 297.
Respons dari Ignacio Velez-Pareja (Jan/Feb 2017)
That is why we care very much about the detailed financial model. Remember that my financial model captures investments and debt when needed. Once you have that model, the CF is crystal clear (because it comes from what I call the Cash Budget).
This part of the work is the most time consuming. Remember as well, that Cost of [financing] Capital (CofC) basically depends on one or two numbers: beta and equity risk premium. CFs depends on MANY input variables.
And finally, you end up sensitivizing ALL variables, including of course, beta and ERP!
This doesn’t mean that we consider CofC secondary, nevertheless. The issue is that many scholars devote LOT of time and effort to define with complex econometric models what beta and ERP should be and pay much less attention to the CFs. More, many still use the idea of plugs to check and match forecasted financial statements from where you derive CFs! This makes no sense at all.
We need to see whether the horizon is short-term or long-term. In long-term, CFs error is critical as interest rate historically quite in predictable range, we have 10-yr government bond being traded in market. Something similar for CFs that we can’t find. Most of valuation didn’t happen not because of discount rate, but the CF doesn’t show up in the first place. Discount rate is just needed because we apply time value of money and compare more than 1 project with different pattern of cash flows being generated.
I give here a very simplified example of the impact of the error we made for cash flow forecast vs discount rate/cost of capital both for short-term and long-term projects.
Short-term projects: Assuming a generated cash flow of IDR 100 mio next year with the discount rate of 10%.
10% cash flow estimation error: cash flow put as IDR 110mio next year
10% discount rate estimation error: discount rate used at 11%
PV correct = 100/10% = IDR 1,000
PV cf error (10%) = 110/10% = IDR 1,100 (=10% error from PV correct above)
PV dr error (10%) = 100/11% = IDR 909 (=9% error from PV correct above)
In this simplified short-term project, the error made in CF yields bigger impact to the PV).
Long-term projects: assuming the cash flow to be generated in 25 years, instead, next year.
PV correct = 100/[(1+10%)^25] = IDR 9.2
PV cf error (10%) = 110/[(1+10%)^25] = IDR 10.2 (=10.00% error from PV correct above)
PV dr error (10%) = 100/[(1+11%)^25] = IDR 13.6 (=20.25% error from PV correct above)
From the simplified long-term project example, the error being made from discount rate has much bigger impact to the PV, compared to that 10% estimate error on the cash flow.
Will this mean that for the long-term projects, estimating correct discount rate is more important than getting the a better estimation of cash flow forecast?
Not really, this could mislead us, since we are talking two things of estimation that are not apple-to-apple to compare.
Estimating cash flows into the next 25 years are quite challenging, and I could say 100%, we will totally be like a fortune-teller than a person coming out from valuation course. The uncertainty will be extremely high over longer horizons. On the other side, the uncertainty in estimating the cost of capital in the long-term tends be “predictable” in the sense, we could use 5-year, 10-year, 30-year bonds as a starting point to look at. Historically, the interest rate range is not that wide enough to make it too hard to predict that in the long-term.
Other thing error is not about what we put there in cash flow forecasting but the execution issue. Meaning forecasting error might not be the issue.
Ignacio Velez-Pareja’s response:
You are right. However, this is the most common approach to valuation: a point use of the tool. No. As you say, management is something dynamic. You should not use the tool to get a magical number and close a deal. My idea is that the valuation tool, the financial model, should be used permanently as a management tool to keep value in line with the goal.
The market is full of Value Management courses, seminars and workshops. However, they do that is on the thin air. How could you manage value without knowing it? The financial model to value the firm today should be used PERMANENTLY as a management tool to track and keep value in line with the goal! Follow?
It is crazy to think that forecasts will be achieved without the hand of management. It is a permanent fight between reality and plans. Of course that reality will deviate from plans and the manager should have the tools to CORRECT what reality makes on our plans. And here the financial model is the clue. Reality changed my plans and the calculated value. What should I do in order to “recover” the value lost this month or this year? How much should I change my strategies and which of them to keep value on track?
What I teach is that valuation should not be used to know the value today, close a deal and forget what is in the valuation model. It should be considered a management tool to manage by value! That is the clue of all this we do on valuation. It is beyond determining a value at a point in time. It is a dynamic process and the financial value model is the proper tool to manage Value.
This makes a lot of difference.
Back to Prof. A. Damodaran’s blog, I agree that we need to keep an open mind when we are building the projected cash flow and discount rate, and be aware of that the error behind cash flow might play a bigger role in yielding “veered so far from the mean”.
5 February 2017