https://corporatefinanceinstitute.com/course/intro-business-valuation/

Certificate

https://www.credential.net/6424b711-a689-4088-b6f7-4e389cedff20

The examples and spreadsheets included in the course are super useful! All also available here: https://learn.corporatefinanceinstitute.com/resources/templates/

General Corporate Finance

Asset valuation technique (based on replacement cost, liquidation value) isn’t used much so not in this course

Enterprise value (assets) = equity value (market cap = shares * price) + net debt (debt - cash)

Capital structure = debt to equity ratio

Payment order: vendors/employees (COGS) → debt holders (interest) → government (tax) → shareholders (net earnings)

Enterprise value and equity value both have pros and cons for valuation

If metric is pre-interest, use enterprise value multiple (as unaffected by capital structure): EV/sales, EV/EBIDTA, EV/EBIT

If metric is post-interest, use equity value multiple (affected by capital structure due to interest payments): P/E, P/B

DCF Valuation

Pros and Cons

ProsCons
Theoretically most correctOnly as good as the inputs (of which there are many)
Opportunity to learn about the company/industryEasier to manipulate (by adjusting inputs)
Less prone to market conditionsComplex doesn’t necessarily mean precise

Free Cash Flow

Unlevered free cash flow (UFCF)

  • A.k.a. free cash flow to the firm
  • Before paying debt
  • More common
  • DCF derives EV
  • Use WACC

Levered free cash flow (LFCF)

  • After met debt obligations

Difficulties

  • Hard to estimate discount rate for private company
  • Hard for young or financially distressed companies

Stage 1: forecast; stage 2: terminal value

UFCF =

  • EBIT * (1 - tax rate) + depreciation and amortisation - capital expenditures - net increase in working capital
    • Note: EBIT (aka operating income) * (1-tax rate) = net operating profit after tax (NOPAT)
  • Net income + after-tax interest expense (interest expense * (1 - tax)) + depreciation and amortisation - capital expenditures - net increase in working capital
  • EBITDA - unlevered cash tax (note: harder to get) - capital expenditures - net increase in working capital

WACC

  • Yield not coupon
  • Yield * (1 - tax rate)

Capital Asset Pricing Model (CAPM)

  • Risk-free rate (e.g. yield of long-term govt bond) + premium (beta [change in stock return vs overall market] * equity risk premium)
  • Alpha = firm-specific risk
    • Diversification of stocks removes alpha within a portfolio
  • Beta = market risk (beta of market = 1)
    • If company has beta of 1.25 then it is riskier than the market → market +/- 1%, stock +/- 1.25%
  • Return vs risk graph shows risk premium
  • R-squared correlates stock and market → if too low, better to use industry beta
  • Industry beta → unlever beta (levered beta / (1+(1-tax rate) * (debt/equity)) → average → relever beta (unlevered beta * (1+(1-tax rate)*(debt/equity))

Terminal Value

Note: Both must discounted back to present value

Note: Assume last day of fiscal year

Perpetuity Growth Method

TV = Last forecast UFCF * (1 + g) / (WACC - g)

Note: g is often market growth rate

Terminal Multiple Method

TV = Last forecast EBITDA * EV/EBIDTA

Note: Not always EBITDA, but commonly

NPV

=NPV(rate,values_1,value_n)

Assumptions

  • Discounts all cash flows
  • Occur at regular intervals
  • Occur at end of the period/year

For cash flow occurring in middle of period/year: =NPV(rate,values_1,value_n)*(1+rate)^0.5

XNPV

=XNPV(rate,value,dates)

Assumptions

  • Initial cash flow is not discounted
  • Occur at regular intervals
  • On a daily basis

Slightly more accurate because of leap years

IRR

Discount rate when NPV = 0 (hurdle rate)

IRR > CoC, profitable → invest!

=IRR(values,[guess])

Assumptions

  • At least one positive and one negative value

XIRR

=XIRR(values,dates,[guess])

Assumptions

  • First value is usually negative
  • Values in chronological order
  • Dates correspond to the periodic cash flows

Slightly more accurate because of leap years

Relative Valuation

Comparable Companies or Precedent Deals

Pros and Cons

ProsCons
SimpleCan be too simplistic
Observable dataAll companies are different
Reflects current market conditions
For M&A, can show premium

Multiples

Multiples affected by

  • Growth rates
  • Management team
  • Mispricing
  • Accounting policies
  • For precendents:
    • Age of deal
    • Lack of deals
MultipleProsCons
EV/RevenueYounger companies haven’t reached profitabilityDoesn’t account for costs

Revenue is an incomplete measure of performance
EV/EBITDACommonly used

Used for industries with large amounts of long-term assets		Net income is the bottom line

EBITDA doesn’t include reinvestment
P/EUsed for mature, publicly traded companiesDemoniator based on accrual accounting which can be manipulated
P/BUsed for banksLimited usefulness for non-banks

Multiples over time

Process

  1. Select companies for similar:

    1. Industry
    2. Geographical location
    3. Size and growth profiles
    4. Profitability
    5. Accounting policies
    6. Capital structure
    7. Extra for precendents
      1. Recent deals
      2. Buyer
        1. Strategic buyer will pay more to benefit from synergies
        2. PE buyer will pay less as no synergies to be gained

    Capital IQ can provide this data

  2. Enter data

    1. Note: Purchase price is effectively EV for precedent valuation

  3. Value using multiples

Football Field Chart

x = valuation techniques, y = value

  1. Create table: min, midpoint, max for each valuation method
  2. Create stacked column
    1. No fill for max and min
    2. Data labels for max and min
    3. Average valuation = manually drawn line
    4. Textbox with formula (TEXT function for formatting)