Business Valuation: Modeling

Business Valuation Modeling
Corporate Finance Institute®

Course Objectives
Understand the difference Understand why comparable Understand why precedent

between equity and enterprise company analysis is performed, transaction analysis is
value and when to use each of the pros & cons of it, and how to performed, the pros & cons of it,
them calculate the various ratios and how to calculate the various
ratios
Understand what discounted Understand various factors Understand how to effectively

cash flow analysis is, how to impacting valuation that cannot present the results of valuation
calculate free cash flow, WACC be discretely modeled analysis
and NPV

CFI’s Approach
We design all our courses with the following objectives:
Teach you how finance Give you a solid understanding of

01. professionals actually perform 02. key concepts, methods and
valuation approaches
Guide you to perform world

03. class financial analysis 04. Advance your career

Introduction to Business Valuation Concepts

Why Perform Valuation
Selling a Impairment
Raising Money IPO Estate Planning Bankruptcy
Business Testing
Investment Internal Business Valuing Employee

Acquiring a Litigation
Recommendations Decisions Making Options and
Business
(Buy/ Sell/ Hold) Compensation

Valuation Is an Art and a Science
Valuation is based on expected future performance not past performance and involves:
Analyzing financial history Forecasting future Analyzing the industry

and prospects of the operations of the business,
business, project or asset project, or asset
There are various valuation

methodologies which may arrive at
Analyzing the economic Applying acceptable differing values for a business,
environment valuation methods project, or asset.

Valuation Is an Art and a Science
Science Art
01. Historical Financials 01. Management Team
02. Ratios 02. Culture and Strategy
03. Assets 03. Forecasting
04. Track Record 04. “Moat”
05. Statistical Analysis 05. Competition
06. Macroeconomic Factors
07. Cost of Capital
08. Game Theory

Overview of Financial Valuation Techniques
Valuing a Business
or Asset
Discounted Cash
Market Approach
Cost Approach Flow (Intrinsic
(Relative Value)
Value)
Public Company
Cost to Build
Comparables
Forecast Future
Cash Flows
Precedent
Replacement Cost
Transactions

Valuation Summary
Valuation Summary–- Equity Value
Equity Value Per Share
per Share ($) ($)
55.00
$49.21
50.00
$44.00
45.00
40.00 $38.08
$36.00
35.00
$36.00 $30.00
30.00
25.00 $28.00
$24.81
20.00 $22.40 $22.00
15.00
10.00
Comps Precedents DCF - base case DCF - blue sky 52 wk hi/lo
Relative Value Intrinsic Value

Techniques Techniques

Equity Value Vs. Enterprise Value

Enterprise Value Vs. Equity Value
Market Value
Debt Investors
of Net Debt
Enterprise Value Assets

Market Value of
Shareholders
Equity

House Example
1 2 3
Debt
$100k Debt
Debt $250k
$400k
House House House
Equity
$400k Equity
Equity $250k
$100k
Question: Answer:
In each case what is the house worth? $500,000. The funding mix for the house is
independent of the value of the house - this is
what enterprise value reflects for companies.

Terminology
Other names for enterprise value include:
01. Firm Value
02. Total Enterprise Value (TEV)
03. EV

Terminology
Other names for equity value include:
01. Market Capitalization
02. Market Cap

Net Debt Defined
Net Debt Defined ($MM)
Short-term Interest-bearing Debt 5,000
Long-term Interest-bearing Debt 35,000
Gross Debt 40,000
Less: Cash and Cash Equivalents 10,000
Net Debt 30,000
• It’s assumed the cash can be netted against any debt owed.
• Cash is not an operating asset that generates cash flow.

Negative Net Debt (Net Cash)
Net Debt Defined ($MM)
Short-term Interest-bearing Debt 5,000
Long-term Interest-bearing Debt 0
Gross Debt 5,000
Less: Cash and Cash Equivalents 20,000
Net Debt (15,000)
Net Cash 15,000

Equity Value & Enterprise Value Multiples

Valuation Using Equity and EV Multiples
Enable you to:
Calculate and analyze Appreciate the drivers of Value a company using:

valuation multiples equity and enterprise value • Equity multiples
multiples
• Enterprise value multiples

Relative Valuation – Multiples
The value of an asset is derived from the

pricing of comparable assets.

Market Value 25% of Cash Flow

of Net Debt (Paid First)
100% of Cash Flow Assets

Market Value of 75% of Cash Flow
Equity (Paid Second)

XYZ Inc. Income Statement

Income Statement $Millions
Market Value Sales 1,000

of Net Debt Operating Expenses (350) Venders & Employees
EBITDA 650
Depreciation (400) Non-cash
Assets EBIT 250
Market Value of Interest (100) Debt Holders
Equity Earnings Before Tax 150
Tax (50) Government
Net Earnings 100 Shareholders
No. of Shares 100 Million
Share Price 20.00

If the denominator is before If the denominator is after

interest expense, it’s an interest expense, it’s an
enterprise value ratio. equity value ratio.
• EV/Revenue • P/E
• EV/EBITDA • P/B
• EV/EBIT • P/CF

XYZ Inc. Financial Statement Extracts
XYZ Inc. Balance Sheet XYZ Inc. Income Statement

Assets $Millions Income Statement $Millions
Cash 0 Sales 1,000

Other Current Assets 250 Operating Expenses (350)
PP&E 800 EBITDA 650
Total Assets 1,050 Depreciation (400)
EBIT 250
Liabilities
Interest (100)
Short-term Debt 50 Earnings Before Tax 150
Other Current Liabilities 100 Tax (50)
Long-term Debt 250 Earnings After Tax 100
Common Stock 250 Number of Shares 100 Million
Retained Earnings 400 Share Price 20.00
Total Equity 650
Total Liabilities 1,050

Calculating EV Multiples
Question:
What is the enterprise value of XYZ Inc.?
Answer:
100MM Shares x $20.00 Per Share = $2,000MM
Question:
+ $300MM in Net Debt = $2,300MM
What are the implied multiples?
• EV/Sales
• EV/EBITDA
• EV/EBIT
• EV/Capital Employed
• EV/Free Cash Flow

EV/Sales Multiple
Enterprise value to sales multiple:
EV Enterprise Value $2,300MM

2.3x
Sales Sales $1,000MM
EV EV EBIT or EBITDA
Sales EBIT or EBITDA Sales
$2,300MM
65% 2.3x
$650MM

EV/EBITDA and EV/EBIT Multiples
Enterprise value to EBITDA & EBIT multiples:

3.5x
EBITDA EBITDA $650MM

9.2x
EBIT EBIT $250MM
• EV/EBIT and EV/EBITDA are prolifically used in valuation.
• They are used more often than other EV multiples such as EV/Sales or EV/Free Cash Flow.

EV/Capital Employed Multiple
Enterprise value to capital employed multiple:

2.4x
CE BV of Debt + Equity $950MM
EV/Capital Employed is driven by return on capital employed:
EV EV EBIT or EBITDA
CE EBIT or EBITDA CE

Free Cash Flows to the Firm
XYZ Inc. free cash flows to the firm:
EBIT x (1-t) D&A Change in WC Capex
FCFF 167 + 400 – 300 – 150
117

EV to Free Cash Flow Multiple
Enterprise value to free cash flow multiple:

19.7x
FCFF Free Cash Flow to Firm $117MM
Reconciling free cash flow to equity and to the firm:
Free Cash Flow to Equity $50MM
Add: Interest $100MM
Deduct: Tax Shield on Interest ($33MM)
Free Cash Flow to the Firm $117MM

XYZ Inc. Financial Statement Extracts
XYZ Inc. Balance Sheet XYZ Inc. Income Statement

Assets $Millions Income Statement $Millions
Cash 0 Sales 1,000

Other Current Assets 250 Operating Expenses (350)
PP&E 800 EBITDA 650
Total Assets 1,050 Depreciation (400)
EBIT 250
Liabilities
Interest (100)
Short-term Debt 50 Earnings Before Tax 150
Other Current Liabilities 100 Tax (50)
Long-term Debt 250 Earnings After Tax 100
Common Stock 250 Number of Shares 100 Million
Retained Earnings 400 Share Price 20.00
Total Equity 650
Total Liabilities 1,050

Calculating Equity Multiples
Question:
What is the market capitalization of XYZ Inc.?
Answer:
100MM Shares x $20.00 Per Share = $2,000MM
Question:
What are the implied multiples?
• Price to earnings
• Price to book
• Price to cash flow

Price to Earnings Multiple
P/E Market Capitalization $2,000MM

20x
Multiple Net Earnings $100MM
Price to earnings multiples are driven by:
1. Growth Prospects 2. Shareholder Risk 3. Cash Flow Generation

Normalized earnings multiples should reflect the on-going performance of the company.
They should be adjusted for:
Non-recurring or Over- or Under- Profits/Loss on Significant

Exceptional Items Depreciation Sale of Property Provisions or Asset
Write Downs

Problems With
Price to Earnings
Problems with cyclical

Cannot cope with Earnings can be Earnings can be firms
negative earnings manipulated volatile • Trough of cycle - high P/E
• Peak of cycle - low P/E

Price to Book Multiple
The book value of equity is the total common shareholders’ equity excluding preference shares and
minority interest.
P/B Market Capitalization $2,000MM

3.1x
multiple Book Value of Equity $650MM
Price to book multiples are driven by:
Return on Equity (Earnings / Book Value of Equity)
P/E Drivers:
• Growth prospects
• Shareholder risk
• Cash flow generation

Free Cash Flow to Equity
Free cash flows are used to determine how much cash a company has left after satisfying its sustainable
obligations.
FCFE Cash Flows From Operations – Capital Expenditures + Net Debt Issued
Net Debt
New Debt Issued – Debt Repayments
Issued

XYZ Inc. Example – Free Cash Flow to Equity
XYZ Inc. Free Cash Flow to Equity ($Millions)
EBIT 250
Depreciation 400
EBITDA 650
Working Capital (150) • Accounts Receivable
Operating Cash Flow 500 • Inventory
• Accounts Payable
Interest (100)
Taxes (50)
Cash Flow Pre-investment 350
Capital Expenditure (350)

Issuance of Debt 50
Free Cash Flow to Equity 50

Price to Free Cash Flow Multiple
P/FCFE Market Capitalization $2,000MM

40x
Multiple Free Cash Flow to Equity $50MM
High P/FCFE Firm may be overvalued
Low P/FCFE Firm may be undervalued
Cash Conversion (Earnings / Free Cash Flows)
P/FCFE Drivers:
• Growth prospects
• Shareholder risk
• Cash flow generation

The Firm Life Cycle and Choosing Multiples
Early Sign Rapid Slowing Early Late Decline

Growth Growth Growth Maturity Maturity
Sales
Cash Flow
Profit
Inception

When Is a Multiple Appropriate
Multiple Characteristics Life Cycle Stage
• No cash or profit • Early sign growth

• Pattern of sales clear • Rapid growth
EV to Sales
• Ignores operating economics
• Ignores capital structure
• Operating cash flow positive • Rapid growth
• Incorporates profitability • Slowing growth
EV to EBITDA
• Ignores capital structure
• Ignores tax differences
• Operating profit • Slowing growth
EV to EBIT • Ignores capital structure • Maturity
• Ignores tax differences
• Stable operating economics • Early maturity
Price to Earnings • Stable capital structure • Late maturity
• Profit and cash flow similar

Summary
The key messages from this session are:
• The most commonly used equity values multiples are

Price to Earnings, Price to Book, and Price to Cash
Flow.
• The most commonly used enterprise value multiples

are EV to EBIT, EV to EBITDA, EV to sales, EV to capital
employed, and EV to free cash flow.
• Free cash flows to the firm are cash flows generated by

the business and exclude financing costs such as
interest.
• The relevance of different valuation multiples

changes over time as business models evolve.

Comparable Company Analysis

Valuing a Business
or Asset
Discounted Cash
Market Approach
(Relative Value)
Value)
Public Company
Cost to Build
Comparables
Forecast Future
Cash Flows
Precedent
Replacement Cost
Transactions

Why Comparable Analysis
Pros Cons
1. If investors are willing to pay X for our 1. No perfect comparable

competitors, they must be willing to pay
2. Hard to adjust for growth, management
Y for us
team, or other factors
2. Observable value for a company (what
3. Easy to fall into “value trap” or
investors are actually paying for the
“overvalued fallacy” (due to above)
business right now)
3. Readily available
4. Current
5. Large number of potential companies to
compare to

What Metrics Are Used
Industry Specific Lifecycle Specific
General Examples:
01. EV/Sales 04. P/E
02. EV/EBITDA 05. P/B

03. EV/EBIT 06. P/CF

Comparable Company Analysis Example
Market Data Financial Data (FY+1) Valuation (FY+1)
Price Shares Market Cap Net Debt EV Sales EBITDA Earnings EV/Sales EV/EBITDA P/E
Company name ($/Share) (MM) ($MM) ($M) ($MM) ($MM) ($MM) X X X
Micro Partners $9.45 100 $945 $125 $1,070 $268 $76 $47 4.0x 14.1x 20.1x
Junior Enterprises $5.68 1,250 $7,100 $2,00 $9,100 $4,136 $778 $412 2.2x 11.7x 17.2x
Minature Company $18.11 50 $906 $25 $931 $443 $96 $56 2.1x 9.7x 16.3x
Average Limited $12.27 630 $7,730 $350 $8,080 $1,949 $528 $294 4.1x 15.3x 26.3x
Bohemeth
$9.03 1,500 $13,545 $0 $13,545 $6,622 $795 $423 2.0x 17.0x 32.0x
Industries
Average 2.9x 13.6x 22.4x
Median 2.2x 14.1x 20.1x

How to Perform Comparable Company Analysis
01. 02. 03.

Use Bloomberg, Capital IQ, Go to EDGAR, SEDAR, or Download 3-5 years of
equity research reports, company website historical data
Google Finance, Yahoo • Revenue, Ggross profit, EBITDA,
Finance, or Hoovers to find EBIT, net income
comps
• Shares outstanding, share prices,
cash, debt, minority interest
04. 05. 06.

Obtain forecast metrics from Build a table and calculate Compare the adjusted
equity research, Bloomberg, market cap, EV, all ratios, growth average to the company you
company guidance, or Google rates, margins, etc. are trying to value
Finance
• Revenue, Gross profit, EBTIDA,
EBIT, net income

How to Select a Comparable Universe
Multiples valuation requires an in-depth understanding of the company being valued and its peers.
The relative valuation is only useful if the companies are a comparable peer group. We need to consider
companies that have similar:
Business Activities Geographical Location Size and Growth Profiles
Profitability Profiles Accounting Policies Similar Capital Structures

Precedent Transaction Analysis

Valuing a Business
or Asset
Discounted Cash
Market Approach
(Relative Value)
Value)
Public Company
Cost to Build
Comparables
Forecast Future
Cash Flows
Precedent
Replacement Cost
Transactions

Why M&A Precedent Transactions
Pros Cons
1. Show the value investors paid for the 1. Hard to find (few transactions)
entire company (not just one share)
2. Need access to a database like
2. Include takeover premium / control Bloomberg and Capital IQ
premium
3. Become stale dated quickly (valuations
3. Include synergy value from years ago are not relevant today)

What Metrics Are Used
Industry Specific Lifecycle Specific
General Examples:
01. EV/Sales 04. P/E
02. EV/EBITDA 05. P/B

03. EV/EBIT 06. P/CF

Precedent Transaction Analysis Example
Valuation
Transaction Value
Date Target Buyers EV/Sales EV/EBITDA EV/EBIT
($MM)
01/24/2017 Current Ltd 2,350 Average Limited 1.9x 9.4x 11.2x
04/19/2016 Recent lnc 6,500 Bohemeth Group 1.4x 8.0x 12.6x
04/19/2014 Past Co 2,150 Other Group 1.3x 8.7x 12.1x
11/07/2014 Historical LLP 450 Junior Enterprises 2.3x 11.1x 13.6x

11/01/2012 Old Group 325 Minature Company 5.1x 18.8x 21.5x
11/07/2011 Dated Enterprises 150 Micro Partners 2.1x 9.3x 13.2x
Average 2.3x 10.9x 14.0x
Median 2.0x 9.4x 12.9x

How to Perform Precedent M&A Transaction Analysis
01. 02. 03.

Use Bloomberg, Capital IQ, Find press release for each Obtain relevant data from
equity research reports, transaction press release (may be very
Google Finance to find past limited)
transactions • Price paid
• Form of consideration (cash /

shares)
• Takeover premium (implied or

04. 05. explicit)
• Synergies announced (if available)

Build a table and calculate Compare the adjusted
• Another other terms/conditions
ratios paid at the time, where average to the company you
interesting to note
possible are trying to value

How to Select Relevant Transactions
We need to consider companies that have similar:
Business Activities Geographical Location Size and Growth Profiles
Recent Time Period Type of Transaction/Buyer

Intrinsic Valuation – Discounted Cash Flow (DCF)

Valuing a Business
or Asset
Discounted Cash
Market Approach
(Relative Value)
Value)
Public Company
Cost to Build
Comparables
Forecast Future
Cash Flows
Precedent
Replacement Cost
Transactions

DCF Valuation Techniques
Value a business Calculate free Outline the main Identify what

using a two-stage cash flows to the drivers of free discount rate to
DCF valuation firm and to equity cash flows use
model

A Four-step Approach
Step 1: Step 2: Step 3: Step 4:
Gather critical Undertake a Determine the key Build your

information about comprehensive assumptions that valuation model
the company company analysis will drive your from scratch
valuation

Step 1: Gather Critical Information About the Company
At a minimum you should:
01. 02. 03. 04.

Review the latest Listen to the most Review Review research
annual report in recent quarterly available sell on the industry
detail earnings webcast / side research
conference call

The Public Information Book
What is in a public information book (PIB)?
News Releases SEC Filings Research

• Last 6-12 months • 10Q, 10K, non-financial (ownership • Industry, comps, and your client
changes, key events) in last 3-5 years (especially your own bank’s research)
• Familiarize yourself with the various SEC

Filings (e.g. proxy, 8K, 13D)
Corporate / Investor Presentations Credit Ratings Conference Call Transcripts
• Industry conferences, investor calls (e.g. • 2 to 3 rating agency reports • Pay particular attention to the Q&A by
quarterly conference calls) analysts

Step 2: Undertake a Comprehensive Company Analysis
At a minimum you should undertake:
01. 02. 03.

A thorough assessment and An assessment of the A robust review of a
critique of a company’s stated management team and its company’s financial
strategy supported by ability to deliver against its statements
evidence stated strategy
04. 05.
A detailed and quantified An assessment of industry
assessment of a company’s dynamics as well as general
competitive advantages/ economic and demographic
disadvantages trends

Valuation Starts With…
Assessing future sustainable cash flows requires an analysis of the company, industry, and external
environment.
Company
Industry
External
Environment

Tools for Analyzing the External Environment
PEST analysis is a useful framework for analyzing the external environment.
Political Social
Forecasting Forecasting
Identify
Anticipate Opportunities React
and Threats
Economic Technological
Forecasting Forecasting

Tools for Analyzing Industry Dynamics
Porter’s 5 forces is a powerful tool for assessing industry attractiveness. Michael Porter identified five
forces driving industry competition:
Potential New
Entrants and
Barriers to Entry
Suppliers and
Rivalry Amongst Buyers and Their
Their Bargaining
Firms in Industry Bargaining Power
Power
Threat of
Substitutes

Tools for Assessing Competitive Advantage
Michael Porter identified the following strategies for gaining competitive advantage in an industry.
Broad Target
1. 2.
Cost Leadership Differentiation
Competitive Scope
Narrow Target
3a. 3b.
Cost Focus Differentiation
Focus
Lower Cost Differentiation

Competitive Advantage

Tools for Assessing the Business Lifecycle
Problem Child Rising Star Cash Cow Dog
$ Launch Growth Shake-out Maturity Decline
Lifecycle
Extension
Sales
Cash
Profit
Time (Years)

Tools for Assessing Management
Question:
When assessing a management team’s character, which particular aspects / traits should you consider?
01. 02. 03.

Past Performance Reputation Planning
• What does their track record look • What do the press, customers, Is there a clear and consistent
like? suppliers, and the competition say business strategy? What is
about management? management’s approach to
growth?
04. 05.
Experience/Stability Attitude Towards Risk
• Qualifications, business and • Have risks been identified? Are

financial acumen, time in business, there mitigation strategies in
etc. place?

Putting It All Together – SWOT
Strengths Weaknesses
Internal factors which already exist and have contributed to the current position and may
continue to exist.
Opportunities Threats
External factors which are contingent events. Assess their importance based on the
likelihood of them happening and their impact on the company. Also consider whether
management have the intention and ability to take advantage of the opportunity/avoid
the threat.

Step 3: Determine the Key Assumptions That Will Drive Your Valuation
From your analysis to date, determine the key assumptions that will drive your valuation. In particular, you
must determine what will drive the following:
01. 02. 03.

Revenues Gross Margins EBIT(DA) Margins
04. 05. 06.

Working Capital Capital Expenditure Capital Structure
(Debt Versus Equity)

Step 4: Build Your Valuation Model from Scratch
Value of the future cash flows generated by the company

Company
discounted at the required rate of return demanded by the
Value
investors

Two Stage DCF Valuation Model
1 2
Value of the Cash Flows for Terminal

Firm Forecastable Period Value
The two-stage approach to DCF valuations is a common solution to the problem of how we forecast the
cash flow of a company because of issues of uncertainty:
We do not know how long the company will Forecasting is estimation. The further we
exist and hence how many years to include predict into the future, the more prone to
in our cash flow forecast. error our estimates become.

Free cash flows to the firm are the cash flows EBIT
available to all funding providers such as:
• Debt holders
(1 – Tax Rate)
• Preferred stockholders
• Common stockholders Depreciation and Amortization

• Convertible holders
Changes in Working Capital
(Deduct net increase in working capital)
Capital Expenditure

Forecasting Free Cash Flows
Forecast Drivers:
Revenue
• Market Size
• Sales Mix
• Volume/Price
Operating EBIT x (1 – T)
• Materials Price Margin (NOPAT)
• Staffing Levels
• Wage Rates
Taxes
• Tax Effective Structures Free
Cash Flow
• A/R, Inventory, A/P
Working
• Terms Capital
• Plant Life Total Capital
• Maintenance Capital
• Scale Expenditures

Weighted Average Cost of Capital (WACC)

Estimating the Cost of Capital
The discount rate used in DCF valuations is based on the cost of capital.
There are two main sources of capital funding – debt funding and equity funding.
What is the cost of

Debt
debt?
Assets
Equity What is the cost of

equity?

Calculating the WACC
Equity Risk
Premium
Cost of
Beta Cost of Equity
Equity
Weighted
Average Weighted
Cost of Risk Free Rate
Average Cost of
Capital Capital
Average Yield
on Debt
Cost of Cost of Debt
Debt (After-tax)
Tax Shield

Factors Affecting Cost of Equity
Question:
What factors affect share prices?
Beta Alpha
01. Market Risk 01. Firm-specific Risk
02. Interest Rates 02. Management
03. Business/Economic Cycle 03. Profits
04. Inflation 04. Operations
05. Political/Legislation 05. Projects
06. Socio-economic 06. Products

CAPM Risk / Reward Model
Return %
Risk premium
between 3% and 9%
Risk free rate is normally taken as the yield on

Risk Free Rate a long-term government bond in the country
where the project/company is based.
Beta of the Market Risk (Market)

 =1

Beta
Beta can be understood as the slope (gradient) of the line of best fit.
+
Beta = Slope of the Line
x x
x x x
x x
x x
x Market (% Change)
– x +
x x x
x
x x
–
Share (% Change)

Weighted Average Cost of Capital (WACC) Formula
Equity Debt
WACC Ke Kd
Debt + Equity Debt + Equity
Where:
Ke = Cost of equity = RFR + (Beta x MRP)
Equity = Market value of equity
Debt = Market value of debt
Kd = After tax cost of debt

CAPM Cost of Equity Example
Internet Co. CAPM calculation:
You have been provided with the following information for Internet Co:
5.0% 4.0% 2.38

Risk Free Rate Equity Market Premium Beta
Calculate the equity return required by Internet Co. shareholders.

CAPM Cost of Equity Example Solution
Internet Co. CAPM calculation:
Risk Free + (β X Equity Market Premium)
5.0% + (2.38 x 4.0%)

Return Required by
Shareholder
5.0% + 9.52%
14.52%

WACC Example
Consider the following information for Brick and Mortar Co:
10% 15% 30% $10MM $40MM

Cost of Debt Cost of Equity Tax Rate Market Value Market Value
of Debt of Equity
Question:
What is the WACC of Brick and Mortar Co?

WACC Example Solution
40 10
15.0% + 10.0% (1 – 30.0%)
40 + 10 40 + 10
(80.0% x 15.0%) + (20.0% x 7.0%)

WACC
12.0% + 1.4%
13.4%

Analysis and Presentation

Valuing a Business
or Asset
Discounted Cash
Market Approach
(Relative Value)
Value)
Public Company
Cost to Build
Comparables
Forecast Future
Cash Flows
Precedent
Replacement Cost
Transactions

Valuation Summary
Valuation Summary–- Equity Value
Equity Value Per Share
per Share ($) ($)
55.00
$49.21
50.00
$44.00
45.00
40.00 $38.08
$36.00
35.00
$36.00 $30.00
30.00
25.00 $28.00
$24.81
20.00 $22.40 $22.00
15.00
10.00
Comps Precedents DCF - base case DCF - blue sky 52 wk hi/lo
Relative Value Intrinsic Value

Techniques Techniques

Conclusion

Recap of Course Objectives
Understand the difference Understand why comparable Understand why precedent

between equity and enterprise company analysis is performed, transaction analysis is
value and when to use each of the pros & cons of it, and how to performed, the pros & cons of it,
them calculate the various ratios and how to calculate the various
ratios
Understand what discounted Understand various factors Understand how to effectively

cash flow analysis is, how to impacting valuation that cannot present the results of valuation
calculate free cash flow, WACC be discretely modeled analysis
and NPV

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Business Valuation Modeling

Corporate Finance Institute®

Understand the difference Understand why comparable Understand why precedent

Understand what discounted Understand various factors Understand how to effectively

Corporate Finance Institute®

We design all our courses with the following objectives:

Teach you how finance Give you a solid understanding of

Guide you to perform world

Corporate Finance Institute®

Corporate Finance Institute®

Investment Internal Business Valuing Employee

Corporate Finance Institute®

Analyzing financial history Forecasting future Analyzing the industry

There are various valuation

Corporate Finance Institute®

01. Historical Financials 01. Management Team

02. Ratios 02. Culture and Strategy

03. Assets 03. Forecasting

04. Track Record 04. “Moat”

05. Statistical Analysis 05. Competition

06. Macroeconomic Factors

07. Cost of Capital

08. Game Theory

Corporate Finance Institute®

Corporate Finance Institute®

Relative Value Intrinsic Value

Corporate Finance Institute®

Corporate Finance Institute®

Enterprise Value Assets

Corporate Finance Institute®

Corporate Finance Institute®

Other names for enterprise value include:

01. Firm Value

02. Total Enterprise Value (TEV)

Corporate Finance Institute®

Other names for equity value include:

01. Market Capitalization

02. Market Cap

Corporate Finance Institute®

Net Debt Defined ($MM)

Short-term Interest-bearing Debt 5,000

Long-term Interest-bearing Debt 35,000

Gross Debt 40,000

Less: Cash and Cash Equivalents 10,000

Net Debt 30,000

• Cash is not an operating asset that generates cash flow.

Corporate Finance Institute®

Net Debt Defined ($MM)

Short-term Interest-bearing Debt 5,000

Long-term Interest-bearing Debt 0

Gross Debt 5,000

Less: Cash and Cash Equivalents 20,000

Net Debt (15,000)

Net Cash 15,000

Corporate Finance Institute®

Corporate Finance Institute®

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Calculate and analyze Appreciate the drivers of Value a company using:

Corporate Finance Institute®