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Corporate Finance (Subject) / Company Valuation (Lesson)
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- Purpose of Valuation - Asset Management = Investment Opportunities - Change of Control = Valuation of stakes ( non-traded companies) - M&A activities = Prining of target firms - Accounting = impairment test (Verschlechterung) - Management = shareholder value creation
- All in One Cash Flow Scheme Net Income + interest Payments + Tax Payments = EBIT - Tax Payments - Tax Shield (Tax savings trough debt) = Net Operating Earnings Less Adjusted Taxes + Depreciation - Capital Expenditures - Net Working Capital Increases = Free Cash Flow (FCF) + Tax Shield - Interest Payments + Change in Debt (- Debt Redemptions = Tilgungen + New Debt Issued) = Flow to Equity (FTE)
- Free Cash Flow Scheme Net Income + Interest Payments - Tax Shield + Depreciation - Capital Expenditures - Net Working Capital Increases = FREE CASH FLOW
- Dividend Discount Model = Method of valuing a company`s stock price Assumption: Stock is worth the sum of all future dividend payments (discounted back to present value)
- DDM - Approppiate Discount Rate valuate Cash Flow of an investment in Stock Rate of Return require = Required Rate of Return (RR)
- CAPM kL = Required Rate of Return, Minimum Rendite! kL = µi = rf +βi * (µm-rf) (µm = rm) rf = Risk free Rate = 10 years Bonds β = Beta Level, Stock Market = 1 µm = Market Portfolio
- Modiglaini Miller = kL = rEL = rEU + ( rEU - rf) * (1-s) * L
- Flow to Equity Model (FTE) Flow to Equity = Dividend Payments - How much cash can paid out? Net Income + Depreciation - Capital Expenditures (CapEX) - NWC Increase - Debt Redemption (+ New Debt Issued) = FTE
- AVP Model - calculates the enterprise value as sum of the net present value - financed only with equity!! Enterprise Value = Value of an all-equity firm + Value of Tax Shield - Free Cash Flow (FCF) Calculation
- WACC Model = Calculates the Enterprise Value as the present Value of company`s FCFs discounted at the WACC WACC= Weighted Cost of Capital (Equity and Debt)
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- CFFO = Cash Flow from Operating Activities Net Income + Depreciation - NWC increase - Deferred Items (change) + Provisions (change)
- CFFI Cash Flow from Investing activities Acquisition of fixed assets - sales of fixed assets + Depreciation
- CFFF Cash Flow from Financing Activities Dividends (Net Income x p) +/- issued Debt +/- equity issued/retired
- CFFO to FCF CFFO + INT - TS - CapEx = FCF
- P/E Ratio = Market Capitalization / Net Income (Earnings) -> gesamtes Unternehmen (U1) Für das Unternehmen ausrechnen: Ø P/E Ratio x Net Income U1 Share price = Market Capitalization / Number of Shares outstanding
- PEG Ratio = Price Earnings to Growth = P/E Ratio / Earnings Growth Rate Für das UnternehmenU1: Ø PEG x Growth Rate (U1) IMMER mit dem NENNER MULTIPLIZIEREN!!
- RIM Model = Residual Income Model = Net Income - EQ Charge (= EQ x kL)
- Growth Assumptions DDM DDM requires a “long-term” growth rate estimate However, “long-term” growth estimates from analysts have a forecast horizon of not more than 5 years (or in terms of a 2 phase DDM, just for the 1st period) Over the long-run, it is unlikely that a company’s earnings can grow substantially beyond the overall growth rate of the economy
- Requirements of same value (Entity and Equity approach) Correctly applied, all approaches must arrive at the same equity value, however is only the case if the models’ underlying assumptions are met: Constant cost of capital: valid only if leverage is constant Tax shields are riskless: valid only if future debt levels are non-stochastic
- Multiples Approach Definition In multiple valuation the value of an asset is compared relatively to the values by the market for similar or comparable assets. → Law of one price: “In an efficient market, all identical goods must have same price."
- Usage of Multiple Valuation Used frequently in an early stage of an acquisition (i.e. when not enough detailed / internal financial data is available to meet the data requirements of other methods) Comparison with DCF value (robustness check)
- Drawbacks Multiple Valuation It is difficulty to obtain comparable assets or peer groups Not meaningful for firms with negative or near-zero EBITs, earnings etc.
- Variants of Multiples Trading Multiples Multiples derived from current stock market prices (e.g. Market Price / Current Earnings) Stand-alone value (perspective of a minority stake acquirer) Transaction Multiples Multiples derived from prices paid in recent acquisitions (e.g. Takeover Price / Current Earnings) Value in a takeover situation (perspective of majority stake acquirer) May include control premium, synergy premium, ...
- Overiview Trading Multiples Enterprise Value Mulitples = available funds to pay debt and euqity holders EntV/Sales EntV/EBITDA EntV/EBIT Equity Value Multiples = available funds to pay equity holders Price/Earnings
- Unlevered Beta for corrected cash βucorrectedforcash = βu / 1- (excesscash / FirmValue)