Corporate Evaluation of the Audi AG

Term Paper (Advanced seminar), 2014

30 Pages


Table of Contents

Executive summary

List of Figures

List of Tables

List of Equations

List of Abbreviations

1 Introduction
1.1 Problem Definition
1.2 Methodology

2 Audi AG and the Automotive Industry

3 Corporate Evaluation of the Audi AG
3.1 Reasons for Business Evaluation
3.2 Methods of Business Evaluation
3.3 Cash Flow Analysis
3.4 Discounted Cash Flow Evaluation
3.4.1 Income Approach
3.4.2 Entity Approach: Explanation and Calculation
3.4.3 Equity Approach: Explanation and Calculation
3.5 Multiples Evaluation: Explanation and Calculation
3.6 Critical Consideration of Evaluation methods

4 Conclusion

List of References

ITM Checklist

Appendix 1 - Operating Figures Audi

Appendix 2 - Theoretical Approach Calculation

Appendix 3 - Historical Data Peer Group (and Audi) Stocks

Executive summary

To evaluate a company many methods can be used. This assignment focuses on the three important ones the discounted cash flow entity and equity method as well as the multipliers method. All of them are explained and calculated on the example of Audi AG. The different values which are resulting are discussed and compared to each other. After that a conclusion of the whole assignment is given by the author.

List of Figures

Figure 1: Methods of Business Evaluation

List of Tables

Table 1: Calculation of FCF Audi

Table 2: Calculation of FCF and FCF discounted

Table 3: Calculation of Equity capital value (Entity approach)

Table 4: Calculation Flow to Equity

Table 5: Calculation of FtE discounted

Table 6: Calculation of Equity capital value (Equity approach)

Table 7: Peer Group Selection

Table 8: Multipliers Peer Group Audi

Table 9: Operating Figures Audi

Table 10: Calculation Free Cash Flow (FCF)

Table 11: Calculation Flow to Equity (FtE)

Table 12: Calculation Flow to Equity (FtE) - Simplification

Table 13: Calculation EBIT

Table 14: Calculation EBT

Table 15: DCF equity value (Entity approach)

Table 16: DCF equity value (Equity approach)

Table 17: Historical Data Audi

Table 18: Historical Data Volkswagen

Table 19: Historical Data BMW

Table 20: Historical Data Toyota

Table 21: Historical Data Ford

Table 22: Historical Data Daimler

List of Equations

Formula 1: Calculation of WACC

Formula 2: Calculation of Company value

Formula 3: CAPM method - Calculation of costs of equity

Formula 4: Definition PSR

Formula 5: Definition PER

List of Abbreviations

illustration not visible in this excerpt

1 Introduction

There are many different reasons for valuating a company. The valuation is used for the sale or purchase of businesses, mergers and acquisitions, increasing equity or raising third party debt, initial public offerings, management buyouts or resulting from man- agement’s value-based concepts.1 For this evaluation I consider to buy shares of the Audi AG and so have to know the annual value for the decision to buy it or not.

1.1 Problem Definition

According to the Principles for the Performance of Business Valuations published by the IDW,

“ the reasons for business valuations can be related to entrepreneurial initia- tives, arise from external financial reporting requirements, from corporate law or other statutory requirements or contractual agreements, or for other rea- sons. ” 2

Business valuation is a complex theme and it is associated with risks, especially when it comes to the business valuation because of a change in ownership. Therefore there is a need for valuation principles to assure the quality.

Already in 1983 Moxter concluded that a true business valuation technique does not exist.3 The techniques should rather be chosen according to the purpose of valuation, meaning if a valuation is conducted because of a change in ownership, increasing equity or initial public offering.

1.2 Methodology

In the first part of this assignment the Audi AG will be introduced with the important figures, management, their vision and the newest investments in the recent past. After that in chapter three the different reasons and methods of business evaluation are given and additionally the reason why Audi was chosen by the author. After that a parallel explanation and calculation of the three different methods for valuation focused in this assignment, which are the DCF entity and equity approach and the multiplier approach, is given and additionally a critical analysis of the methods used here compared to their results. Following in chapter four is the conclusion of the Audi evaluation.

2 Audi AG and the Automotive Industry

Audi was founded by August Horch in 1899 and ten years later the Audi Automobil- werke in Zwickau was opened. In 1932 the four popular rings of Audi were born sym- bolising the fusion of four automotive companies and Audi became Germany’s second largest automotive firm. In 1949 the Auto Union GmbH was founded in Ingolstadt, the later hometown of Audi. In 1965 the name Audi came back into the company name. In addition, since then, the famous slogan of Audi has been implemented in advertising and has become a buzz slogan “Vorsprung durch Technik”.4 This slogan is so impor- tant, that even in other countries it is said in German language and not translated.5

The Audi management consists of the following six people. The number of years they have been in their jobs at Audi AG is given in brackets: Prof. Rupert Stadler (11 years), Luca de Meo (1,5 years), Dr. Frank Dreves (5 years), Dr. Ulrich Hackenberg (7 month), Dr. Bernd Martens (1,5 years), Prof.h.c. Thomas Sigi (3,5 years) and Axel Strothbek (6,5 years). With its new “strategy 2020” developed in 2010, Audi wants to orient itself to strong and sustainable company success.

Audi produces 14 different automobile models in the Audi sector as well as some dif- ferent brands in the automotive sector. For young people like apprentices or students Audi is a very attractive employer because they offer many possibilities. It is also active in the motorcycle field with its Dukati brand. Audi produces at international level and so the target group is very widespread. To comply with international standards and work at top level, Audi has its own top management consulting Team which operates inter- divisional and is able to help all employees in every project phase. In addition to that, Audi has another edge over their competitors; it has its own high-modern wind tunnel centre. Here the newest models are tested for their different reactions linked to safety, driving comfort, fuel consumption and environmental sustainability.6

As an example for their development can be seen, that last year they invested more than 25 million euros in the port of Duisburg in the CKD (Completely knocked down), their biggest distribution center in Europe for component parts. These components from Ingolstadt are exported to China, India and Mexico and assembled there in their on-site Audi assembly plants.7

3 Corporate Evaluation of the Audi AG

The Valuation of Economic Business Units can be seen as “purpose-oriented combina- tions of tangible and intangible assets that, by their interaction, are intended to produce cash flows.”8 This means, that the value of a business is not classified by their assets and liabilities, rather the interactions of all business unites involved need to be taken into account.

Additionally, it is important to decide on a particular point of time on which the busi- ness values are based, the so called valuation date.9 Only the information which has been obtained up to the valuation date should be considered. The best example for this are tax laws which are passed at the valuation date and have an effect on the future.10 The valuation date clarifies then which financial surpluses have to be included in the discounting.

3.1 Reasons for Business Evaluation

There are many different reasons why to evaluate a company. The reasons can be divided into four main areas. The first one is entrepreneurial initiative (buying or selling of companies, feeding of equity or debt capital, initial public offering, management buyout,, value based management, fairness opinion), the second one are governmental regulations (fair compensation, compensation in stocks, cash compensation, consolidation, split-up, split-off, squeeze-out), the third one is contractual basis or treatment of arbitration (leaving of shareholders, settlement of an estate, financial settlement in families, arbitration agreement) and the fourth one are financial occasions (commercial- or fiscal occasions to evaluate, international reporting).11 In this assignment I try to buy shares of Audi AG and that’s the reason why I will do the evaluation.

3.2 Methods of Business Evaluation

In general there are three methods for calculating the value of a business which are used according to the different purposes for valuating: the income approach, the asset-based approach and the market approach.12 In the following drawing are shown all methods of evaluating a company.

illustration not visible in this excerpt

Figure 1: Methods of Business Evaluation13

This assignment should only make use of the two equity and entity methods of DFC technique and additionally multiples valuation which will all be explained in the follow- ing chapters. An explanation of any other method will not be result of this assignment.

3.3 Cash Flow Analysis

In the following, the calculation of the Cash Flows will be discussed: The cash flow can be calculated either directly or indirectly, whereas only the direct method will be explained more in detail.

The direct method derives the cash flow as balance of operating cash inflows and cash outflows which arise directly from payments. The cash flow is defined as the balance of the cash operating income (= operating income) and cash operating expenses (= operating expenses) if the direct calculation is based on the data of accounting. When it comes to the indirect determination the Cash Flows are calculated by increasing retained earnings by cash expenses and decreasing cash income. In Germany a simplified method is usually used as it is hard for external analysts to differentiate between cash and non-cash success factors. In the following the free cash flow (FCF) is calculated with the first fomula seen in appendix 2:

illustration not visible in this excerpt14 15 16

Table 1: Calculation of FCF Audi

3.4 Discounted Cash Flow Evaluation

The DCF models are classified as total valuation methods, meaning they are based on owners’ or investors’ expected cash flows in the future. The purpose of DCF-Valuation is to determine the value of a company in terms of its future cash flows discounted by a respective rate to the risk level.17 As stated before, the DCF models belong to the income approach. In the recent years the DCF methods have gained more and more importance and they are also accepted as valuation standard of the IDW.18

Depending on the assumptions about the capital structure and the tax gains, four differ- ent methods are distinguished: Weighted Average Costs of Capital, Adjusted Present Value Model, Total Cash Flow and the Flow to Equity Method (FTE). The methods are divided whether they refer to the value of equity or the value the company.19 In the fol- lowing chapters the author will concentrate on the Flow to Equity and the WACC method as they are important for the valuation of Audi AG. The FTE method is the only equity approach and it calculates the net distribution directly, whereas the entity approaches determine the net distributions in an indirect way as the difference between the enterprise value and the market value of debt.20

The DCF methods underlie an equation which separates the future of the business into two phases21 in order to reduce uncertainties and risks which will or may arise from future cash flows. In the first part of the equation a detailed forecast of Free Cash Flows for a specific time line is defined.22 According to Braun, this time line differs in terms of the plans, business strategy and competitive advantage of the company, but the frame should be three to ten years.23 The second part of the equation refers to the plan surplus of the last year of Free Cash Flow and is interpreted as perpetuity and will be capitalized accordingly. The capitalized value out of the last plan year is then discounted to the present time for a residual value of the company.24

3.4.1 Income Approach

The income approach is also known as direct valuation and is basically used for the valuation of a business as entity. It determines the value of the company on the basis of future Cash Flows that can be expected by investors. The underlying concept is the Net Present Value (NPV), which states that a company's value is equal to the sum of all ex- pected future risky financial benefits discounted with the opportunity cost of capital. The practical application of the income approach is widely used and can be found in different variants. The most commonly used variants in Germany are the internationally approved DCF-method and the German Ertragswertverfahren, which is also called capi- talized earnings method.25 As according to Dierkes et al. the Ertragswertverfahren is getting displaced by the DCF model, the authors will only explain the DCF model in the following and not concretize the Ertragswertverfahren any further.26

3.4.2 Entity Approach: Explanation and Calculation

Among the different variants of the DCF-methods, the WACC is the in valuation prac- tice - as well as in the literature on financial business valuation - popular concept. Ac- cording to the WACC approach "the gross company value is determined at the present value of future free cash flows to be discounted at the weighted average cost of capital of the company.”27 This DCF-method supposes basically an unlimited duration of the business activity, which is differentiated because of the uncertainty in planning for fu- ture success between the actual period and the period after the end of the planning hori- zon.

Therefore, the value of the company is composed of the present value of free cash flows within the planning period as well as the discounted to the valuation date residual value for the period after the end of the planning horizon.

In general, the length of the explicit planning period should match the planning horizon of the company which is usually recognized in the evaluation of companies for five to ten years.

The sum of the present value of free cash flows, the present value of the residual value and the market value of non-operating assets can be obtained according to the following formula to the gross value of the company:

illustration not visible in this excerpt

Formula 1: Calculation of WACC

As an entity approach, the DCF method firstly determines the gross corporate value, which represents the market value of the claims of equity and debt capital providers. The gross corporate value is then reduced by the market value of debt in order to deter- mine the net corporate value. The net value of the company is calculated as approximate size for the market value of equity, the target of shareholder value approaches. As value target and performance indicator for the strategic management the gross enter- prise value is of major interest because this quantifies the generated throughout the capi- tal investment value of the company.

To identify the different factors in the formula above they have been calculated.


1 Kuhner & Maltry 2006

2 IDW 2009

3 Moxter, 1983, p.6

4 Audi Homepage

5 Own knowledge

6 Audi Homepage

7 Duisport Homepage

8 IDW 2009, p.8

9 Matschke & Brösel 2006

10 IDW 2009

11 Ernst, D.; Schneider, S.; Thielen, B. (2012)

12 Koller et al. 2005

13 Own Creation acc. to Drukarczyk, J.; Schüler, A. 2007

14 Own calculation acc. to Annual Report 2010

15 Own calculation acc. to Annual Report 2011

16 Own calculation acc. to Annual Report 2012

17 Exler, 2010

18 IDW 2009

19 Stiefl, Westerholt 2008

20 IDW, 2009

21 Ballwieser, 2004

22 Peermöller, Kunokowski, 2004

23 Ballwieser, 2004

24 Olfert, Reichel 2009

25 Meitner 2006

26 Dierkes et al. 2009, p. 276.

27 Krause, G., Krause, B., 2011 p. 54

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Corporate Evaluation of the Audi AG
University of Applied Sciences Essen
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Julia Teigeler (Author), 2014, Corporate Evaluation of the Audi AG, Munich, GRIN Verlag,


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