Business Valuation & Corporate Governance
For the exam:
- Articles (5x), Book Chapters, Lecture slides, Notes
Business Valuation
Lecture 1 (10/11) - Introduction to Valuation
For trading stocks, IPO and acquisition, we need to know the value of the company or its stock price.
Learning objectives
- Assess and analyze financial statement information
- Analyze business valuation using different theories and methods
Value introduction
- Value is the worth of an asset, company, product, or opportunity.
o Intrinsic value : true economic worth based on fundamentals
o Market value : the value the market is currently willing to pay
o Intrinsic value could be very different from market value.
- Valuation is the process of estimating the value.
o Intrinsic valuation or absolute valuation : valuation based on its fundamental
characteristics
o Relative valuation : valuation based on similar others in the market
The very specific valuation task for this course: enterprise valuation
- Value of the business to all investors (debt + equity)
We are also very interested in valuing the shares of a publicly traded firm
The setting: Investors, firms, securities, and capital markets
,Valuation methods
1. Income-based Valuation (Discounted Cash Flow – DCF)
o This method estimates the value of a business based on its expected future cash
flows, adjusted for the time value of money. The discounted cash flow model
considers the net present value (NPV) of future cash flows and is often used for
businesses with predictable and steady cash flows.
2. Market-based valuation (Comparable Company Analysis)
o This method values a business based on the market value of similar businesses in the
same industry. It’s often referred to as “comps” and involves comparing financial
ratios, such as price-to-earnings (P/E) or price-to-sales (P/S), with those of
comparable companies to estimate value.
3. Asset-based Valuation
o This method focuses on the value of a company’s assets such as property, equipment,
and intellectual property. It is typical used for companies with substantial tangible
assets or in liquidation scenarios. The business value is calculated by adding up the
net asset value (asset minus liabilities).
→ Market multiples approach = relative valuation
Methods:
- Discounted Cash Flow (DCF) Valuation
- Relative Valuation
- Analysts use a range of valuation models, from simple to complex.
- Different models may have different assumptions, and can yield different valuation results.
- Choosing the right model depends on asset characteristics and available data.
Discounted Cash Flow (DCF) valuation introduction
- This approach has its foundation in the present value rule, where the value of any asset is the
present value of expected future cash flows on it. It aims to estimate intrinsic value.
o With CFN = future cash flow in period N
- The cash flows (CF) will vary from asset to asset. E.g.,
o dividends for stocks
o coupons (interest) and the face value for bonds
- The discount rate (r) will be a function of the riskiness of the estimated cash flows, with
higher rates for riskier assets and lower rates for safer assets.
,DCF for firm valuation
- The value of the firm is obtained by discounting expected cash flows to the firm, i.e., the
residual cash flows after meeting all operating expenses, reinvestment needs, and taxes, but
prior to any payments to either debt or equity holders
- Weighted average cost of capital (WACC), which is the cost of the different components of
financing used by the firm, weighted by their proportions.
- DCF for firm valuation
o With CF to firm = cash flow to share holders, cash flow to debt holders etc.
DCF Valuation steps:
1. Forecast the amount and timing of future cash flows
2. Estimate a risk-appropriate discount rate
3. Discount the cash flows
Relative valuation introduction
- The values of most assets, from the house you buy to the stocks you invest in, are based on
how similar assets are priced in the marketplace.
- Valuation method based on market prices
- For example, you might use your neighbor’s recent sale price per size (i.e., Recent sale
price/size) to estimate the value of your own house.
- The value of a company is derived from the pricing of comparable companies (“comps”),
standardized using a common variable such as earnings, cash flows, book value, or revenues.
- These ratios are called multiples.
- Commonly used ratios (multiples) : Enterprise value/EBITDA and Price/Earnings.
- For example, the enterprise value of the focal company could be estimated as
Relative valuation steps
1. Identify comparable companies and recent market prices for each
2. Calculate a valuation metric for use in valuation
3. Calculate the estimate of value
Some myths about valuation
- Myth 1: Since valuation models are quantitative, valuation is objective.
o Valuation is an art but not a science.
o Inputs may be subjective judgments.
- Myth 2: A good valuation provides a precise estimate of value.
o Assumptions about future
o Give ourselves a reasonable margin for error
- Myth 3: The more quantitative a model, the better the valuation.
o More complex the model, more inputs, potential errors of inputs
o Models don’t value companies but you do.
- Myth 4: The product of valuation (i.e., the value) is what matters ; the process of valuation is
not important.
, o The process can tell us a great deal about the determinants of value.
Course roadmap
Financial statements introduction
What do financial statements look like ?
- Financial statements : a formal record of the financial activities and position of a business.
o Following standard accounting rules : Generally Accepted Accounting Principles
(GAAP) or International Financial Reporting Standards (IFRS)
- Where can you find them ?
o SEC EDGAR
o Company’s website
o Refinitiv Eikon
o Yahoo Finance
o Google Finance
Three main types of financial statements
1. Balance sheet
a. Assets
b. Liabilities + Equity
2. Income statement
a. Income
b. Expenses
3. Cash Flow Statement
a. Cash inflow
b. Cash outflow
Balance sheet
- It provides a snapshot (“picture”) of the firm’s financial position at a moment in time
- Balance Sheet Equation/Accounting Equation
o Assets = Liabilities + Shareholder’s equity
For the exam:
- Articles (5x), Book Chapters, Lecture slides, Notes
Business Valuation
Lecture 1 (10/11) - Introduction to Valuation
For trading stocks, IPO and acquisition, we need to know the value of the company or its stock price.
Learning objectives
- Assess and analyze financial statement information
- Analyze business valuation using different theories and methods
Value introduction
- Value is the worth of an asset, company, product, or opportunity.
o Intrinsic value : true economic worth based on fundamentals
o Market value : the value the market is currently willing to pay
o Intrinsic value could be very different from market value.
- Valuation is the process of estimating the value.
o Intrinsic valuation or absolute valuation : valuation based on its fundamental
characteristics
o Relative valuation : valuation based on similar others in the market
The very specific valuation task for this course: enterprise valuation
- Value of the business to all investors (debt + equity)
We are also very interested in valuing the shares of a publicly traded firm
The setting: Investors, firms, securities, and capital markets
,Valuation methods
1. Income-based Valuation (Discounted Cash Flow – DCF)
o This method estimates the value of a business based on its expected future cash
flows, adjusted for the time value of money. The discounted cash flow model
considers the net present value (NPV) of future cash flows and is often used for
businesses with predictable and steady cash flows.
2. Market-based valuation (Comparable Company Analysis)
o This method values a business based on the market value of similar businesses in the
same industry. It’s often referred to as “comps” and involves comparing financial
ratios, such as price-to-earnings (P/E) or price-to-sales (P/S), with those of
comparable companies to estimate value.
3. Asset-based Valuation
o This method focuses on the value of a company’s assets such as property, equipment,
and intellectual property. It is typical used for companies with substantial tangible
assets or in liquidation scenarios. The business value is calculated by adding up the
net asset value (asset minus liabilities).
→ Market multiples approach = relative valuation
Methods:
- Discounted Cash Flow (DCF) Valuation
- Relative Valuation
- Analysts use a range of valuation models, from simple to complex.
- Different models may have different assumptions, and can yield different valuation results.
- Choosing the right model depends on asset characteristics and available data.
Discounted Cash Flow (DCF) valuation introduction
- This approach has its foundation in the present value rule, where the value of any asset is the
present value of expected future cash flows on it. It aims to estimate intrinsic value.
o With CFN = future cash flow in period N
- The cash flows (CF) will vary from asset to asset. E.g.,
o dividends for stocks
o coupons (interest) and the face value for bonds
- The discount rate (r) will be a function of the riskiness of the estimated cash flows, with
higher rates for riskier assets and lower rates for safer assets.
,DCF for firm valuation
- The value of the firm is obtained by discounting expected cash flows to the firm, i.e., the
residual cash flows after meeting all operating expenses, reinvestment needs, and taxes, but
prior to any payments to either debt or equity holders
- Weighted average cost of capital (WACC), which is the cost of the different components of
financing used by the firm, weighted by their proportions.
- DCF for firm valuation
o With CF to firm = cash flow to share holders, cash flow to debt holders etc.
DCF Valuation steps:
1. Forecast the amount and timing of future cash flows
2. Estimate a risk-appropriate discount rate
3. Discount the cash flows
Relative valuation introduction
- The values of most assets, from the house you buy to the stocks you invest in, are based on
how similar assets are priced in the marketplace.
- Valuation method based on market prices
- For example, you might use your neighbor’s recent sale price per size (i.e., Recent sale
price/size) to estimate the value of your own house.
- The value of a company is derived from the pricing of comparable companies (“comps”),
standardized using a common variable such as earnings, cash flows, book value, or revenues.
- These ratios are called multiples.
- Commonly used ratios (multiples) : Enterprise value/EBITDA and Price/Earnings.
- For example, the enterprise value of the focal company could be estimated as
Relative valuation steps
1. Identify comparable companies and recent market prices for each
2. Calculate a valuation metric for use in valuation
3. Calculate the estimate of value
Some myths about valuation
- Myth 1: Since valuation models are quantitative, valuation is objective.
o Valuation is an art but not a science.
o Inputs may be subjective judgments.
- Myth 2: A good valuation provides a precise estimate of value.
o Assumptions about future
o Give ourselves a reasonable margin for error
- Myth 3: The more quantitative a model, the better the valuation.
o More complex the model, more inputs, potential errors of inputs
o Models don’t value companies but you do.
- Myth 4: The product of valuation (i.e., the value) is what matters ; the process of valuation is
not important.
, o The process can tell us a great deal about the determinants of value.
Course roadmap
Financial statements introduction
What do financial statements look like ?
- Financial statements : a formal record of the financial activities and position of a business.
o Following standard accounting rules : Generally Accepted Accounting Principles
(GAAP) or International Financial Reporting Standards (IFRS)
- Where can you find them ?
o SEC EDGAR
o Company’s website
o Refinitiv Eikon
o Yahoo Finance
o Google Finance
Three main types of financial statements
1. Balance sheet
a. Assets
b. Liabilities + Equity
2. Income statement
a. Income
b. Expenses
3. Cash Flow Statement
a. Cash inflow
b. Cash outflow
Balance sheet
- It provides a snapshot (“picture”) of the firm’s financial position at a moment in time
- Balance Sheet Equation/Accounting Equation
o Assets = Liabilities + Shareholder’s equity
