Business valuation & corporate governance lecture notes
LECTURE 1 (9-2-2023) introduction to valuation and
financial statements
WHAT IS BUSINESS VALUATION?
You may need to know a current and reliable value as a company owner or investor for:
- Financing
- Selling /buying shares
- Acquisition by another company
- Harvesting (e.g., IPO)
The importance of valuation boils down to assessing the ability of the business to generate cash
flows from the point of sale, as well as assess the risk levels associated with these cash flows.
Buying/Selling shares
Fundamental analysis
- Valuation to understand the intrinsic (fundamental) value of a share
- Is the share overpriced, at par or underprices based on the fundamentals?
- Various static and forward-looking valuation techniques
Valuation is an art and not a science. There are several methods, none are wrong.
BUSINESS STRATEGY AND ECONOMIC FACTORS
1. Know the firm’s products and marketing mix
2. Know the technology required to bring products to market
3. Know the firm’s knowledge base
4. Know the competitiveness of the industry
5. Know the management team & corporate governance approach
6. Know the economic, political, legal, regulatory and ethical environment
Key questions: sustainability and competitive advantage
1. does the firm have a competitive advantage?
,2. How durable is this competitive advantage? (long-term growth perspective)
3. What protection does the firm have from competitors? (Patents, licenses, established market
share)
Competitive strategies
- Low-cost strategy
o The firm seeks to be the low-cost producer and hence the cost leader in the
industry.
o Cost advantages vary by industry and might include economies of scale,
proprietary technology, or preferential access to raw materials
- Differentiation strategy
o Firm positions itself as unique in the industry in an area that is important to
buyers.
o A company can attempt to differentiate itself based on its distribution systems or
some unique marketing approach.
- Defensive strategy: involves positioning the firm so that its capabilities provide the best
means to prevent the effect of competitive forces in the industry.
- Offensive strategy: involves using the company’s strength to affect the competitive
industry forces, thus improving the firm’s relative industry position.
SWOT analysis (Strength, weakness = internal, opportunity, threat)
External analysis
- Opportunities
o These are environmental factors that favor the
firm. They may include a growing market for the
firm’s products (both domestic and international),
shrinking competition, favorable exchange rate
shifts, or identification of a new market or product
segment.
- Threats
o They are environmental factors that can hinder
the firm in achieving its goals. For example,
additional government regulation, industry
competition or entry threats.
What is finance?
- Finance is the study of financial decision making
- Financial decision making is concerned with resource usage to meet targets
- For productive decision making (i.e., Wealth Maximization or Social Impact):
- Define the parameters of the decision
- Recognize the risks of financial
decisions
,The business cycle -->
Final decisions
Must be taken in three key areas which are all inter-related:
- Finance: from what sources should funds be raised?
- Investments: both long-term investments in non-current assets and short-term
investment in working capital
- Dividends: How could cash funds be allocated to shareholders and how will they value
of the business be affected by this?
Value maximization for shareholders
Two branches of accounting
1. financial accounting: performed for the owners and other external stakeholders. Used to
show them how much profit has been made and what the business is worth
2. management accounting: performed by/for managers of the business (internal
stakeholders). Used to help managers make decisions – plan future activities and enables them
to control the business.
Key financial Statements
Financial statements are the lens on the business. They translate economic factors and strategy
into accounting like assets, sales margins etc.
Financial statements analysis focuses on the lens. It organizes the financial statement in a way
that highlights these features in a business.
1. Balance sheets --> Assets and Liabilities + Equity. (Assets = Equity + liabilities). Fixed point in
time.
2. Income statement --> income – expenses = profit. Contains information on the profitability
of the firm during some period, in contrast to the balance sheet to a fixed point of time.
Indicates the flow of sales, expenses, and earnings during the time period.
3. Cash flow statement --> Cash inflows and Cash outflows.
- Cash inflows expected from cash receipts such as capital, loans, and revenue
- Cash outflows expected from cash payments made on purchases of inventory and
other expenditure
Different CFS
- Cash flows from operating activities: the sources and uses of cash that arise from the
normal operations of a firm.
- Cash flow from investing activities: change in gross plant and equipment plus the
change in the investment account.
- Cash flow from financing activities: financing sources minus financing uses
, Financial statement analysis
Financial statement analysis allows the company managers and prospective
investors to assess the overall ‘health’ of the company, by identifying its
strengths and weaknesses.
- Financial Ratio Analysis allows to gauge a firm’s ability to raise funds on reasonable
terms and to deploy them productively. It facilitates to identify areas of strengths and
weaknesses, where ratios between different periods can be compared, or a comparison
against an ‘industry standard’ can be made. (Activity, liquidity, profitability, or Solvency)
- Vertical analysis (aka common size analysis) is based on the comparison of
entities to a common reference point in the same statement, e.g., expression of each
figure on the income statement as a percentage of total sales, each figure on the
balance sheet as a percentage of total assets.
- Horizontal analysis (aka trend analysis) compares the ratios across two or more periods
or looks at the expression of current results relative to some base period.
Lecture 2 (10-2-2023)
Asset based valuation (NAV) --> measures the minimum value of a business
- Market/book value of assets: can be relevant for businesses that are ‘asset rich’ (Net
asset valuation).
- Cash flow-based value: value of the business as the present value of projected cash
flows.
- Other capitalization approaches: other major variables besides cash flows (dividends,
income, sales) can be capitalized.
- Valuation using comparable (market value financial ratios), such as P/E (price to
earnings) ratio, P/B (price to book) and other ratios of comparable public companies.
Forward looking and static valuation methods
- Asset based valuation is a static method, since it derives value from the VS data
measured in the moment
- Valuation using comparable is also a static method
- Forecasting financial performance involves forecasting of variables
These involve CFs and dividend forecasting methods
Terminology
- Enterprise value = market value of equity + value of (net) dept
- Market value = market Cap(italization) = number of shares * share price
- Book value = balance sheet.
Valuation methods: Net asset value models
- Monetary items --> book values
- Non-monetary items --> replacement cost or realizable value (e.g., bankruptcy). The
replacement cost is going to be higher than realizable value, but typically are valued as
realizable value.
LECTURE 1 (9-2-2023) introduction to valuation and
financial statements
WHAT IS BUSINESS VALUATION?
You may need to know a current and reliable value as a company owner or investor for:
- Financing
- Selling /buying shares
- Acquisition by another company
- Harvesting (e.g., IPO)
The importance of valuation boils down to assessing the ability of the business to generate cash
flows from the point of sale, as well as assess the risk levels associated with these cash flows.
Buying/Selling shares
Fundamental analysis
- Valuation to understand the intrinsic (fundamental) value of a share
- Is the share overpriced, at par or underprices based on the fundamentals?
- Various static and forward-looking valuation techniques
Valuation is an art and not a science. There are several methods, none are wrong.
BUSINESS STRATEGY AND ECONOMIC FACTORS
1. Know the firm’s products and marketing mix
2. Know the technology required to bring products to market
3. Know the firm’s knowledge base
4. Know the competitiveness of the industry
5. Know the management team & corporate governance approach
6. Know the economic, political, legal, regulatory and ethical environment
Key questions: sustainability and competitive advantage
1. does the firm have a competitive advantage?
,2. How durable is this competitive advantage? (long-term growth perspective)
3. What protection does the firm have from competitors? (Patents, licenses, established market
share)
Competitive strategies
- Low-cost strategy
o The firm seeks to be the low-cost producer and hence the cost leader in the
industry.
o Cost advantages vary by industry and might include economies of scale,
proprietary technology, or preferential access to raw materials
- Differentiation strategy
o Firm positions itself as unique in the industry in an area that is important to
buyers.
o A company can attempt to differentiate itself based on its distribution systems or
some unique marketing approach.
- Defensive strategy: involves positioning the firm so that its capabilities provide the best
means to prevent the effect of competitive forces in the industry.
- Offensive strategy: involves using the company’s strength to affect the competitive
industry forces, thus improving the firm’s relative industry position.
SWOT analysis (Strength, weakness = internal, opportunity, threat)
External analysis
- Opportunities
o These are environmental factors that favor the
firm. They may include a growing market for the
firm’s products (both domestic and international),
shrinking competition, favorable exchange rate
shifts, or identification of a new market or product
segment.
- Threats
o They are environmental factors that can hinder
the firm in achieving its goals. For example,
additional government regulation, industry
competition or entry threats.
What is finance?
- Finance is the study of financial decision making
- Financial decision making is concerned with resource usage to meet targets
- For productive decision making (i.e., Wealth Maximization or Social Impact):
- Define the parameters of the decision
- Recognize the risks of financial
decisions
,The business cycle -->
Final decisions
Must be taken in three key areas which are all inter-related:
- Finance: from what sources should funds be raised?
- Investments: both long-term investments in non-current assets and short-term
investment in working capital
- Dividends: How could cash funds be allocated to shareholders and how will they value
of the business be affected by this?
Value maximization for shareholders
Two branches of accounting
1. financial accounting: performed for the owners and other external stakeholders. Used to
show them how much profit has been made and what the business is worth
2. management accounting: performed by/for managers of the business (internal
stakeholders). Used to help managers make decisions – plan future activities and enables them
to control the business.
Key financial Statements
Financial statements are the lens on the business. They translate economic factors and strategy
into accounting like assets, sales margins etc.
Financial statements analysis focuses on the lens. It organizes the financial statement in a way
that highlights these features in a business.
1. Balance sheets --> Assets and Liabilities + Equity. (Assets = Equity + liabilities). Fixed point in
time.
2. Income statement --> income – expenses = profit. Contains information on the profitability
of the firm during some period, in contrast to the balance sheet to a fixed point of time.
Indicates the flow of sales, expenses, and earnings during the time period.
3. Cash flow statement --> Cash inflows and Cash outflows.
- Cash inflows expected from cash receipts such as capital, loans, and revenue
- Cash outflows expected from cash payments made on purchases of inventory and
other expenditure
Different CFS
- Cash flows from operating activities: the sources and uses of cash that arise from the
normal operations of a firm.
- Cash flow from investing activities: change in gross plant and equipment plus the
change in the investment account.
- Cash flow from financing activities: financing sources minus financing uses
, Financial statement analysis
Financial statement analysis allows the company managers and prospective
investors to assess the overall ‘health’ of the company, by identifying its
strengths and weaknesses.
- Financial Ratio Analysis allows to gauge a firm’s ability to raise funds on reasonable
terms and to deploy them productively. It facilitates to identify areas of strengths and
weaknesses, where ratios between different periods can be compared, or a comparison
against an ‘industry standard’ can be made. (Activity, liquidity, profitability, or Solvency)
- Vertical analysis (aka common size analysis) is based on the comparison of
entities to a common reference point in the same statement, e.g., expression of each
figure on the income statement as a percentage of total sales, each figure on the
balance sheet as a percentage of total assets.
- Horizontal analysis (aka trend analysis) compares the ratios across two or more periods
or looks at the expression of current results relative to some base period.
Lecture 2 (10-2-2023)
Asset based valuation (NAV) --> measures the minimum value of a business
- Market/book value of assets: can be relevant for businesses that are ‘asset rich’ (Net
asset valuation).
- Cash flow-based value: value of the business as the present value of projected cash
flows.
- Other capitalization approaches: other major variables besides cash flows (dividends,
income, sales) can be capitalized.
- Valuation using comparable (market value financial ratios), such as P/E (price to
earnings) ratio, P/B (price to book) and other ratios of comparable public companies.
Forward looking and static valuation methods
- Asset based valuation is a static method, since it derives value from the VS data
measured in the moment
- Valuation using comparable is also a static method
- Forecasting financial performance involves forecasting of variables
These involve CFs and dividend forecasting methods
Terminology
- Enterprise value = market value of equity + value of (net) dept
- Market value = market Cap(italization) = number of shares * share price
- Book value = balance sheet.
Valuation methods: Net asset value models
- Monetary items --> book values
- Non-monetary items --> replacement cost or realizable value (e.g., bankruptcy). The
replacement cost is going to be higher than realizable value, but typically are valued as
realizable value.
