Corporate Valuation Methods

Study Notes

Summary of Financial Modeling and Valuation

Comprehensive approach to valuing a company, encompassing various methods
Importance of understanding the specific context
Consideration of risks and different scenarios for accurate valuations
Factors influencing valuation: business characteristics, sector, assets
Different valuation methodologies: DCF, multiples, ANAV, DDM
Importance of quality inputs, model accuracy, and clear communication
Key aspects of building a relevant business plan
Importance of understanding profitability and growth trends.
Calculation of intrinsic value (DCF method), consideration of future cash flows
Role of risk and discount rates in Valuation
Different types of cash flows: FCFF and FCFE
Critical role of terminal value and how it's calculated.
Importance of assessing company cost of capital and various approaches, including WACC and Cost of Equity.
How to make appropriate adjustments while calculating the cost of debt and equity
Detailed consideration of company characteristics, including its performance, capital structure, and risk profile
Importance and complexities of building an EBIT bridge for different companies
Consideration of hedging strategies for mitigating FX exposure and protection of business
Importance of assessing the impact of currency translations and possible transaction effects
Detailed focus on the considerations relating to valuation based on different multiples, with different methodologies and practical applications.
Value of different types of financial assets and companies
Essential for developing and presenting investment recommendations by using several criteria with a good track record.
Important consideration of market conditions, including currency exchange rate fluctuations, and how to adjust in various scenarios.

Introduction to Market-Based Valuation: Multiples & Comparables

Valuation based on multiples of similar companies (or transactions)
Law of one price: identical assets should sell for the same price
Different types of multiples: PE ratio, EV/Sales, EV/EBITDA, EV/EBIT.
Factors to consider for selecting comparable companies: size, growth, profitability, cost structure, geography.

Focus on PE Ratio

PE ratio = Share price / Earnings per share (EPS)
Useful for quick valuation, widely used, but depends on accounting methodologies and can be affected by market conditions.

Focus on Enterprise Value (EV) multiples

EV multiples consider the company's overall value, including equity and debt.
Different metrics: EV/Sales, EV/EBITDA, EV/EBIT.
More comprehensive valuation than PE ratios, but calculation can get more complex.
Importance of comparing to industry averages and previous periods.

Other Valuation Methodologies

Discounted Cash Flow (DCF): estimates the value of an asset by discounting future cash flows.
Adjusted Net Asset Value (ANAV): value assets and liabilities based on fair market values within a given sector and adjusting for important aspects to get an accurate market value.
Dividend Discount Model (DDM): values a company by discounting the stream of future dividends.