corp valuation 2013 v2vnm

- Christian Maupetit 1


Valuation concepts

Valuating an ongoing company is neither easy

nor exact.

The field of finance, however, has developed

methods for getting close to the value.


Valuation concepts

The true value of a business is never “knowable”

with certainty.

The lack of certainty is the result of two

problems


Valuation concepts

First, alternative valuation methods consistently

fail to produce the same outcome

Second, the product of valuation methods is only

good as the data and the estimates we bring to

them, are often incomplete or unreliable.


Valuation concepts

Methods used to value a company.

Asset-based valuation

Multiple approach valuation

Discounted cash flow method

Dividend discount model

Other models


Asset-based valuations

One way to value a company is to determine the

value of its assets.

Four approaches :

• Equity book value

• Adjusted book value

• Liquidation value

• Replacement value



Equity book value

Equity book value is the simplest valuation approach

and uses the balance sheet as its primary source of

information.

Equity book value = Total assets - total liabilities

but assets are placed on the balance sheet at their historical costs,

which may not be their value today



Adjusted book value

Adjusted book value attempts to restate the value of

the balance sheet assets to realistic market levels.

When adjusting asset values, it is important to

determine the real value of any listed intangibles, such

as goodwill and patents.


Adjusted assets (market value)



The various assets-based valuation approaches share

some strengths and weaknesses:

+ easy and inexpensive to calculate

- fail to reflect the actual market value of assets


Earning-based valuations

Another approach to valuing a company is to capitalize

its earnings.

This involves multiplying one or another income

statement earnings by some multiple.

For a publicly traded company, the current share price multiplied by

the number of outstanding shares indicates the market value of the

company’s equity.


Earning-based valuations

In the multiple approach, we assume the ratio of

value of some firm-specific variable is the same

across firms.

We call this ratio the multiple.

The firm-specific variable is the driver.

Common multiples include PE ratio, market to

book value ratio (MB)


Earning-based valuations Earnings multiple

P/E ratio

The price earning ratio (market price/EPS) is a

multiple approach to pricing the equity on a

company.

Here is the formula :

Equity value = Net income (earnings) * P/E

driver multiplier


Earning-based valuations EBIT multiple

Selected adjusted multiple

for example :TIC*/EBIT

Equity value = EBITDA * multiple

*TIC = CS+Debts+PS-cash


Dividend based value

The dividend discount model is based on the

idea that the value of any security is the present

value of the security’s expected future cash

flows discounted at the rate of return demanded

by stockholders

Return (expected or required)


Dividend Discount Model

The Gordon Growth Model,

Common Equity :

Dividend/(cost of equity-growth)




3 assumptions:

Initial dividend

Cost of equity

Dividend growth rate




The initial dividend has to be determined

(annual report, public sources…)

The cost of equity has to be estimated.




Example

A company is paying a dividend of 3 €/share

The cost of equity is 12%

The growth (indefinitely) 5%/year

What is the firm’s value ?




Firm’s value:

Dividend / k-g




Firm’s value:

3 €/12%-5% = 42.86€ * # shares


The CAPM formula is: Expected Security Return =

Riskless Return + Beta x (Expected Market Risk

Premium)or:

r = Rf + Beta x (RM - Rf)

where:

- r is the expected return rate on a security;

- Rf is the rate of a "risk-free" investment, i.e. cash;

- RM is the return rate of the appropriate asset class.


Beta is the overall risk in investing in a large market, like the New York Stock Exchange.

Each company also has a Beta. A company's Beta is that company's risk compared to the Beta (Risk) of the overall market.

If the company has a Beta of 3.0, then it is said to be 3 times more risky than the overall market.

Beta measures the volatility of the security, relative to the asset class.


The beta, measures stock price volatility relative

to the overall stock market. We use the S&P 500

as a proxy for the market and we automatically

define it's Beta as being 1.00.

A higher beta indicates that a stock is more

volatile while a lower beta indicates more

stability.


A stock with a Beta of 0.90 would, on average,

be expected to rise or fall only 90% as much as

the market.

So if the market dropped 1.0%, such a stock

might rise or fall .90%

How do we value a firm with no dividend ?


Cost of capital

The assets of a company are financed by either

Debts Equity

or


+

Cost of capital

Cost


Cost of capital

Definition

The cost of capital is the sum of the cost of

equity plus the cost of debt.


Definition

Cost of Debt is the required rate of return

on investment of the lenders of a

company.

Cost of Debt


Definition

Cost of common Stock is the required rate

of return on investment of the

shareholders of the company.

Cost of Equity


Definition

The weighted average of the cost of equity

and the cost of debt are determined by the

relative proportions of equity and debt in a

firm's capital structure.

WACC


Discounting cash flows means converting future

earning to today’s money.

The future cash flows have to be discounted in

order to express present value in order to

properly determine the value of the company.

Free cash flows


Free cash flow looks at the cash the company's

operations actually generated in a given year,

and subtracts important "non-operating" cash

outlays; capital spending and dividend

payments.

Free cash flows


Key indicators

Free cash flows (definition)

Cash not required for operations or for

reinvestment.

Often defined as earnings before interest (often

obtained from the operating income line on the

income statement) less capital expenditures less

the change in working capital.

Free cash flows


Free cash flows (formula)

Sales (Revenues from operations)

- COGS (Cost of goods sold-labor, material, book depreciation)

- SG&A (Selling, general administrative costs)

EBIT (Earnings before interest and taxes or Operating Earnings)

- Taxes (Cash taxes)

EBIAT (Earnings before interest after taxes)

+ DEP (Book depreciation)

- CAPX (Capital expenditures)

- ChgWC (Change in working capital)

C (Free cash flows)

Free cash flows


Example 1


WACC

Weighted cost of Debts 2.59 %

Weighted cost of Equity 6.47%

Weighted Average cost of capital 9.07 %

2,59%

6,47%

9,07%

Weighted Cost

of Debt +

Weighted Cost

of Equity =

Weighted Average

Cost Of Capital

Example 2


Discounted Free Cash Flows

19 0 0

2 0 0 0

2 10 0

2 2 0 0

2 3 0 0

2 4 0 0

2 50 0

2 6 0 0

2 0 12 2 0 13 2 0 14 2 0 15 2 0 16 2 0 17 2 0 18 2 0 19

FC Fs

2033.45

1938.57

1831.98

1729.90

1634.42

1557.37

1484.56

12 209.45

Cash

flow

Example 3


Growth rate (activity)

2012 2014 = 3% per year

2014 2017 = 2% per year

2017 2019 = 3% per year

Discount rates

9% for cash flows and 10% for terminal

value

Σ FCFs

64%

TV

36%

Example 4

corp valuation 2013 v2vnm

Education

christian maupetit

ratio of value

firms value

present value

true value

real value

ebit equity value

adjusted assets market