Summary Business Valuation
Table of conten
Summary Business Valuation......................................................................................................................... 1
Chapter 1: Overview of valuation.........................................................................................................................3
Chapter 2: Forecasting and Valuing Cash flows...................................................................................................8
Chapter 3: Estimating a Firm’s cost of capital...................................................................................................14
Chapter 4: Forecasting financial performance...................................................................................................20
Chapter 5: Relative valuation using market comparables.................................................................................26
1 Introduction.....................................................................................................................................................26
2 Valuation using comparables..........................................................................................................................26
3 Enterprise Valuation Using EBITDA Multiples.................................................................................................31
4 Equity Valuation using the Price-Earnings Multiple (P/E) Ratio (P/E) RatioP/E) Ratio.....................................................................35
5 Pricing an Initial Public Offering......................................................................................................................40
6 Other practical considerations........................................................................................................................41
Chapter 6: Enterprise valuation.........................................................................................................................43
Article: Does governance travel around the world? Evidence from institutional investors.............................47
Article: CEO compensation and corporate governance in China....................................................................50
Article: Do women directors improve firm performance in China?................................................................65
Chapter 1: Overview of valuation......................................................................................................2
Chapter 2: Forecasting and Valuing Cash flows..................................................................................6
Chapter 3: Estimating a Firm’s cost of capital..................................................................................10
Chapter 4: Forecasting financial performance.................................................................................16
Chapter 5: Relative valuation using market comparables................................................................20
Chapter 6: Enterprise valuation.......................................................................................................36
Article: Does governance travel around the world? Evidence from institutional investors..................40
Article: CEO compensation and corporate governance in China..........................................................43
Article: Foreign and domestic ownership, business groups and firm performance: evidence from a
large emerging market.........................................................................................................................46
Article: Is the pay-performance relationship always positive? Evidence from the Netherlands..........49
Article: Large Shareholders, Board Independence, and Minority Shareholder Rights: Evidence from
Europe..................................................................................................................................................52
Article: Do women directors improve firm performance in China?......................................................56
,
, Chapter 1: Overview of valuation
Valuation is central to most of what we do in financial analysis: when firms
evaluate for example an investment project, one of the first steps in the
process is a valuation of the opportunity. Whether you are valuing an
ongoing business or an investment project, the procedure you follow is
essentially the same. In each case, you will need to:
1. Make estimates of the cash flows generated by the investment
2. Assess the riskiness of those cash flows and determine the
appropriate discount rate
3. Identify comparable investments that are either publicly traded or
have recently bought or sold
If you are valuing the shares of a publicly traded firm, the process is
relatively straightforward because you have historical information about
the firm (past cash flows and stock returns). Furthermore, you will have
access to information about other publicly traded firms that are
comparable. This information will prove to be very helpful in estimating
the value of the firm of interest. On the contrary, the valuation of an
investment project can be more challenging because you do not have the
benefit of historical data.
Firms grow and expand their operations in one of two ways:
- They acquire productive capacity by assembling the necessary
assets project valuation
- They acquire an existing business enterprise valuation
Throughout most of the book, we will assume that the firm’s objective is to
create wealth by initiating and managing investments that generate future
cash flows that are worth more than the costs of the investment. This may
seems quite simple: putting money in a project that generates more
money. The value that is generated through the project is called the net
present value (NPV).
However, investing is not always that simple: over half of all large
investments fail to achieve their hoped-for results. There are a few
explanations for failed investments:
- Firms invest in risky projects
- Analyzing capital expenditures can be complex and tedious
Table of conten
Summary Business Valuation......................................................................................................................... 1
Chapter 1: Overview of valuation.........................................................................................................................3
Chapter 2: Forecasting and Valuing Cash flows...................................................................................................8
Chapter 3: Estimating a Firm’s cost of capital...................................................................................................14
Chapter 4: Forecasting financial performance...................................................................................................20
Chapter 5: Relative valuation using market comparables.................................................................................26
1 Introduction.....................................................................................................................................................26
2 Valuation using comparables..........................................................................................................................26
3 Enterprise Valuation Using EBITDA Multiples.................................................................................................31
4 Equity Valuation using the Price-Earnings Multiple (P/E) Ratio (P/E) RatioP/E) Ratio.....................................................................35
5 Pricing an Initial Public Offering......................................................................................................................40
6 Other practical considerations........................................................................................................................41
Chapter 6: Enterprise valuation.........................................................................................................................43
Article: Does governance travel around the world? Evidence from institutional investors.............................47
Article: CEO compensation and corporate governance in China....................................................................50
Article: Do women directors improve firm performance in China?................................................................65
Chapter 1: Overview of valuation......................................................................................................2
Chapter 2: Forecasting and Valuing Cash flows..................................................................................6
Chapter 3: Estimating a Firm’s cost of capital..................................................................................10
Chapter 4: Forecasting financial performance.................................................................................16
Chapter 5: Relative valuation using market comparables................................................................20
Chapter 6: Enterprise valuation.......................................................................................................36
Article: Does governance travel around the world? Evidence from institutional investors..................40
Article: CEO compensation and corporate governance in China..........................................................43
Article: Foreign and domestic ownership, business groups and firm performance: evidence from a
large emerging market.........................................................................................................................46
Article: Is the pay-performance relationship always positive? Evidence from the Netherlands..........49
Article: Large Shareholders, Board Independence, and Minority Shareholder Rights: Evidence from
Europe..................................................................................................................................................52
Article: Do women directors improve firm performance in China?......................................................56
,
, Chapter 1: Overview of valuation
Valuation is central to most of what we do in financial analysis: when firms
evaluate for example an investment project, one of the first steps in the
process is a valuation of the opportunity. Whether you are valuing an
ongoing business or an investment project, the procedure you follow is
essentially the same. In each case, you will need to:
1. Make estimates of the cash flows generated by the investment
2. Assess the riskiness of those cash flows and determine the
appropriate discount rate
3. Identify comparable investments that are either publicly traded or
have recently bought or sold
If you are valuing the shares of a publicly traded firm, the process is
relatively straightforward because you have historical information about
the firm (past cash flows and stock returns). Furthermore, you will have
access to information about other publicly traded firms that are
comparable. This information will prove to be very helpful in estimating
the value of the firm of interest. On the contrary, the valuation of an
investment project can be more challenging because you do not have the
benefit of historical data.
Firms grow and expand their operations in one of two ways:
- They acquire productive capacity by assembling the necessary
assets project valuation
- They acquire an existing business enterprise valuation
Throughout most of the book, we will assume that the firm’s objective is to
create wealth by initiating and managing investments that generate future
cash flows that are worth more than the costs of the investment. This may
seems quite simple: putting money in a project that generates more
money. The value that is generated through the project is called the net
present value (NPV).
However, investing is not always that simple: over half of all large
investments fail to achieve their hoped-for results. There are a few
explanations for failed investments:
- Firms invest in risky projects
- Analyzing capital expenditures can be complex and tedious
