Pagina 1 van 41
Valuation management SV
BUILDING BLOCKS IN VALUATION......................................................... 3
INTRODUCTION.......................................................................................3
VALUATION PRINCIPLES................................................................................................. 3
PROBLEMS AND PRACTICALITIES...................................................................................... 4
BUILDING BLOCKS....................................................................................4
VALUATION......................................................................................... 6
BOOK VALUE..........................................................................................6
ADJUSTED BOOK VALUE................................................................................................. 6
Example................................................................................................................. 7
LIQUIDATION VALUE...................................................................................................... 7
RELATIVE VALUATION................................................................................7
ESSENCE................................................................................................................... 7
PERVASIVENESS.......................................................................................................... 8
MULTIPLES VALUATION.................................................................................................. 8
STEP 1: DEFINING A MULTIPLE........................................................................................ 9
Consistency............................................................................................................ 9
Uniformity............................................................................................................... 9
STEP 2: DESCRIBING A MULTIPLE.................................................................................... 9
Rules of thumb....................................................................................................... 9
Data distribution..................................................................................................... 9
STEP 3: ANALYZE A MULTIPLE....................................................................................... 10
Drivers of the multiples........................................................................................ 10
STEP 4: APPLY THE MULTIPLE....................................................................................... 11
3 components....................................................................................................... 11
VALUATION APPROACHES................................................................... 11
DCF APPROACHES.................................................................................11
BUILDING BLOCKS..................................................................................11
BLOCK 1: CASHFLOWS............................................................................................... 12
BLOCK 2: DISCOUNT RATE........................................................................................... 13
Cost of equity....................................................................................................... 13
BLOCK 3: GROWTH RATE AND TERMINAL VALUE...............................................................16
Fundamental growth............................................................................................. 16
COST OF DEBT AND COST OF CAPITAL..........................................................18
DEBT...................................................................................................................... 18
WACC.................................................................................................................... 18
DCF & APV........................................................................................ 19
FROM FIRM VALUE TO EQUITY VALUE...........................................................19
Valuation management SV DCF & APV
, Pagina 2 van 41
CASH...................................................................................................................... 19
Non-operational assets......................................................................................... 19
CROSS HOLDINGS...................................................................................................... 19
Example............................................................................................................... 20
COMPANIES IN DISTRESS..........................................................................21
EXAMPLE................................................................................................................. 21
THE VALUE OF CONTROL..........................................................................21
ADJUSTED PRESENT VALUE.......................................................................22
ADVANTAGES OF APV................................................................................................ 22
FRAMEWORK.................................................................................... 25
STEP 1: IDENTIFICATION OF THE DIFFERENT RISKS..........................................25
FINANCIAL RISKS....................................................................................................... 25
NON-FINANCIAL RISKS................................................................................................ 25
STEP 2: MEASUREMENT OF THE DIFFERENT RISKS...........................................26
SIMPLE MEASURES..................................................................................................... 26
RARORAC.............................................................................................................. 26
VALUE AT RISK.......................................................................................................... 26
STEP 3: FINANCIAL RISK STRATEGY & CONTROL..............................................26
RISK TOLERANCE....................................................................................................... 26
CONTROL ISSUES...................................................................................................... 26
STEP 4: MANAGEMENT............................................................................27
INTERNAL TECHNIQUES............................................................................................... 27
EXTERNAL TECHNIQUES.............................................................................................. 27
BUILDING BLOCKS IN INTEREST RISK MANAGEMENT............................ 28
SWAP.................................................................................................28
DEFINITION.............................................................................................................. 28
HOW TO USE IRS FOR HEDGING................................................................................... 28
PRICING/ VALUATION OF PVIRS.................................................................................... 29
FORWARDS/ FUTURES.............................................................................32
DEFINITIONS............................................................................................................. 32
Forwards............................................................................................................... 32
Futures................................................................................................................. 32
FORWARD RATE AGREEMENTS (FRA)............................................................................. 34
OPTIONS.............................................................................................35
DEFINITION.............................................................................................................. 35
CONDITIONS............................................................................................................. 36
PAY-OFF STRUCTURE OF OPTIONS................................................................................. 38
OPTION PREMIUM...................................................................................................... 38
CAP & FLOOR........................................................................................................... 38
COLLAR..............................................................................................40
Valuation management SV DCF & APV
, Pagina 3 van 41
Building blocks in valuation
Introduction
Ultimate goal in corporate finance = maximize the value of the company by
making 3 types of decisions:
1. Investment decisions
2. Financing decisions
3. Dividend decisions
All these decisions interact with each other. When you use money to pay out
dividends, you cannot use this money to invest.
When do we need valuation?
1. Decisions in the corporate finance domain
- Capital increase/ Initial public offering (IPO)
o In 2023 there were 0 IPO’s in Belgium
- Mergers and Acquisitions (M&A)
- Leverage buy out (LBO) / Management Buy-out (MBO)
2. Evaluation of corporate strategy
You can value a lot of things, valuation is everywhere BUT not every valuation
technique is as useful for everything (paintings are valuated differently than a
football player).
Valuation principles
1. Entity principle: you need to valuate the company as a whole.
- Companies that have a lot of cash, with a popular brand
2. Equity principle: (next slide)
- When you buy an apartment of a total value of 300.000 and you can
put €100.000 out of your own account and your parents add another
50.000 apartment stays 300.000 but the equity values increases
from 0 to 100.000 to 150.000
3. Subject dependence: when 2 parties do a valuation, it is possible that they
come up with a different number.
- Buyers come up with a lower number (as cheap as possible), the seller
come up with a higher number (maximize profit).
- Risk influences the value of a company
4. Future oriented: first you look at the assets you already have, but typically
you have to take your future assumptions into account.
5. Time dependence: your valuation outcome might be different depending
on the time where you evaluate your company.
- Kinepolis would have had a lower value during the COVID pandemic
because it had to be closed down.
- In one year, the shares of Colruyt had doubled valuation would be
different at this point in time.
6. Going concern: we expect the company to continue in the future.
Valuation management SV DCF & APV
, Pagina 4 van 41
Problems and practicalities
Problems in valuation you need to be aware of:
1. Bias: there is no such thing as 1 number for the
valuation of the company (link with subject
dependence).
2. How will you tackle the fact that there is no 1 value
- Include next slide in group assignment.
- You do not take the mean of all values you find,
you make a valuation football field. That way
you can see what overlap there is between
different types of valuation.
3. Keep it simple. The value of cash is the real value of cash (€1=€1).
What valuation techniques are used in practice?
Valuation of IPO’s which valuation techniques are used?
- Discounted free CF
- Multiples
- Dividend discount model: you look at the expected future dividends
o Companies do not pay out everything they generate. You
calculate with the discount actually paid (too low).
Which method is most popular? Multiples! Specifically the price/earnings method.
Difference between companies different contexts:
- IPO’s are young firms
- VC’s are early stage firms they do not yet have a CF you cannot do a
DCF method.
o Multiples are more popular.
Rule of thumb: VC’s take into account things like the network of the entrepreneur,
patents…
The more uncertainty in the CF, the less interesting DCF model becomes.
Building blocks
Valuation is more than just doing analyses in Excel, you have to take the story
(news articles) into account!! (group assignment)
How can you build the story of a valuation? We mostly only have access to public
information, but for a thorough analysis, you need internal information (we do not
have to do this for the assignment).
Different building blocks:
1. Operations:
- Make a SWOT analysis to
valuate
Valuation management SV DCF & APV
Valuation management SV
BUILDING BLOCKS IN VALUATION......................................................... 3
INTRODUCTION.......................................................................................3
VALUATION PRINCIPLES................................................................................................. 3
PROBLEMS AND PRACTICALITIES...................................................................................... 4
BUILDING BLOCKS....................................................................................4
VALUATION......................................................................................... 6
BOOK VALUE..........................................................................................6
ADJUSTED BOOK VALUE................................................................................................. 6
Example................................................................................................................. 7
LIQUIDATION VALUE...................................................................................................... 7
RELATIVE VALUATION................................................................................7
ESSENCE................................................................................................................... 7
PERVASIVENESS.......................................................................................................... 8
MULTIPLES VALUATION.................................................................................................. 8
STEP 1: DEFINING A MULTIPLE........................................................................................ 9
Consistency............................................................................................................ 9
Uniformity............................................................................................................... 9
STEP 2: DESCRIBING A MULTIPLE.................................................................................... 9
Rules of thumb....................................................................................................... 9
Data distribution..................................................................................................... 9
STEP 3: ANALYZE A MULTIPLE....................................................................................... 10
Drivers of the multiples........................................................................................ 10
STEP 4: APPLY THE MULTIPLE....................................................................................... 11
3 components....................................................................................................... 11
VALUATION APPROACHES................................................................... 11
DCF APPROACHES.................................................................................11
BUILDING BLOCKS..................................................................................11
BLOCK 1: CASHFLOWS............................................................................................... 12
BLOCK 2: DISCOUNT RATE........................................................................................... 13
Cost of equity....................................................................................................... 13
BLOCK 3: GROWTH RATE AND TERMINAL VALUE...............................................................16
Fundamental growth............................................................................................. 16
COST OF DEBT AND COST OF CAPITAL..........................................................18
DEBT...................................................................................................................... 18
WACC.................................................................................................................... 18
DCF & APV........................................................................................ 19
FROM FIRM VALUE TO EQUITY VALUE...........................................................19
Valuation management SV DCF & APV
, Pagina 2 van 41
CASH...................................................................................................................... 19
Non-operational assets......................................................................................... 19
CROSS HOLDINGS...................................................................................................... 19
Example............................................................................................................... 20
COMPANIES IN DISTRESS..........................................................................21
EXAMPLE................................................................................................................. 21
THE VALUE OF CONTROL..........................................................................21
ADJUSTED PRESENT VALUE.......................................................................22
ADVANTAGES OF APV................................................................................................ 22
FRAMEWORK.................................................................................... 25
STEP 1: IDENTIFICATION OF THE DIFFERENT RISKS..........................................25
FINANCIAL RISKS....................................................................................................... 25
NON-FINANCIAL RISKS................................................................................................ 25
STEP 2: MEASUREMENT OF THE DIFFERENT RISKS...........................................26
SIMPLE MEASURES..................................................................................................... 26
RARORAC.............................................................................................................. 26
VALUE AT RISK.......................................................................................................... 26
STEP 3: FINANCIAL RISK STRATEGY & CONTROL..............................................26
RISK TOLERANCE....................................................................................................... 26
CONTROL ISSUES...................................................................................................... 26
STEP 4: MANAGEMENT............................................................................27
INTERNAL TECHNIQUES............................................................................................... 27
EXTERNAL TECHNIQUES.............................................................................................. 27
BUILDING BLOCKS IN INTEREST RISK MANAGEMENT............................ 28
SWAP.................................................................................................28
DEFINITION.............................................................................................................. 28
HOW TO USE IRS FOR HEDGING................................................................................... 28
PRICING/ VALUATION OF PVIRS.................................................................................... 29
FORWARDS/ FUTURES.............................................................................32
DEFINITIONS............................................................................................................. 32
Forwards............................................................................................................... 32
Futures................................................................................................................. 32
FORWARD RATE AGREEMENTS (FRA)............................................................................. 34
OPTIONS.............................................................................................35
DEFINITION.............................................................................................................. 35
CONDITIONS............................................................................................................. 36
PAY-OFF STRUCTURE OF OPTIONS................................................................................. 38
OPTION PREMIUM...................................................................................................... 38
CAP & FLOOR........................................................................................................... 38
COLLAR..............................................................................................40
Valuation management SV DCF & APV
, Pagina 3 van 41
Building blocks in valuation
Introduction
Ultimate goal in corporate finance = maximize the value of the company by
making 3 types of decisions:
1. Investment decisions
2. Financing decisions
3. Dividend decisions
All these decisions interact with each other. When you use money to pay out
dividends, you cannot use this money to invest.
When do we need valuation?
1. Decisions in the corporate finance domain
- Capital increase/ Initial public offering (IPO)
o In 2023 there were 0 IPO’s in Belgium
- Mergers and Acquisitions (M&A)
- Leverage buy out (LBO) / Management Buy-out (MBO)
2. Evaluation of corporate strategy
You can value a lot of things, valuation is everywhere BUT not every valuation
technique is as useful for everything (paintings are valuated differently than a
football player).
Valuation principles
1. Entity principle: you need to valuate the company as a whole.
- Companies that have a lot of cash, with a popular brand
2. Equity principle: (next slide)
- When you buy an apartment of a total value of 300.000 and you can
put €100.000 out of your own account and your parents add another
50.000 apartment stays 300.000 but the equity values increases
from 0 to 100.000 to 150.000
3. Subject dependence: when 2 parties do a valuation, it is possible that they
come up with a different number.
- Buyers come up with a lower number (as cheap as possible), the seller
come up with a higher number (maximize profit).
- Risk influences the value of a company
4. Future oriented: first you look at the assets you already have, but typically
you have to take your future assumptions into account.
5. Time dependence: your valuation outcome might be different depending
on the time where you evaluate your company.
- Kinepolis would have had a lower value during the COVID pandemic
because it had to be closed down.
- In one year, the shares of Colruyt had doubled valuation would be
different at this point in time.
6. Going concern: we expect the company to continue in the future.
Valuation management SV DCF & APV
, Pagina 4 van 41
Problems and practicalities
Problems in valuation you need to be aware of:
1. Bias: there is no such thing as 1 number for the
valuation of the company (link with subject
dependence).
2. How will you tackle the fact that there is no 1 value
- Include next slide in group assignment.
- You do not take the mean of all values you find,
you make a valuation football field. That way
you can see what overlap there is between
different types of valuation.
3. Keep it simple. The value of cash is the real value of cash (€1=€1).
What valuation techniques are used in practice?
Valuation of IPO’s which valuation techniques are used?
- Discounted free CF
- Multiples
- Dividend discount model: you look at the expected future dividends
o Companies do not pay out everything they generate. You
calculate with the discount actually paid (too low).
Which method is most popular? Multiples! Specifically the price/earnings method.
Difference between companies different contexts:
- IPO’s are young firms
- VC’s are early stage firms they do not yet have a CF you cannot do a
DCF method.
o Multiples are more popular.
Rule of thumb: VC’s take into account things like the network of the entrepreneur,
patents…
The more uncertainty in the CF, the less interesting DCF model becomes.
Building blocks
Valuation is more than just doing analyses in Excel, you have to take the story
(news articles) into account!! (group assignment)
How can you build the story of a valuation? We mostly only have access to public
information, but for a thorough analysis, you need internal information (we do not
have to do this for the assignment).
Different building blocks:
1. Operations:
- Make a SWOT analysis to
valuate
Valuation management SV DCF & APV
