Company Valuation Using Discounted Cash Flow
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This module explains how to use discounted cash flow (DCF) to value a company and explores different DCF approaches to valuation.
6 Topics in This Module
Introduction.
The introduction begins with the bestselling Harvard Business Review article “What’s It Worth? A General Manager’s Guide to Valuation." The article first describes the limitations of the standard WACC approach of the DCF valuation of companies. As an alternative, the article recommends the APV, real options, and equity cash flow methods as better suited for valuing operations, opportunities, and ownership claims, respectively. The first supplement, “Note on Cash Flow Valuation Methods: Comparison of WACC, FTE, CCF and APV Approaches,” covers the same material at greater length and uses a capstone example to compare and contrast the various methods. The second note, "Valuation Methods and Discount Rate Issues: A Comprehensive Example," reviews the various valuation methods and uses a simple example to demonstrate the consistency of each method's results under similar assumptions.
WACC-Based DCF and Market Multiples
This section compares DCF valuation using WACC to the market multiples approaches. Mercury Athletic: Valuing the Opportunity , a brief case, uses the potential acquisition of a footwear subsidiary to teach students DCF valuation using WACC and compares the results with those drawn from market multiples approaches. The alternative case, Healthineers: A Strategic IPO , covers the valuation of a subsidiary of Siemens. In addition to valuing the subsidiary by DCF and market multiple methods, students are also asked to do a sum-of-parts valuation of the diversified firm. The supplementary technical note, "Corporate Valuation and Market Multiples," reviews the market multiples method of valuation and its limitations.
Adjusted Present Value
In Valuation of AirThread Connections , students must value a potential acquisition, a regional cellular provider, with the WACC-based DCF method and with APV. They must choose which method to use when the capital structure is stable and when it is changing, and estimate the effect of capital structure changes on assumptions in determining beta and the cost of capital. The alternative case, Seagate Technology Buyout , is a two-session case that concerns a leveraged buyout (LBO) of the disk drive operations of Seagate. Students are asked to perform both WACC-based DCF and APV valuations of the target (including estimating the cost of capital from comparables) and address the impact of financing decisions on value. The supplementary article, “Using APV: A Better Tool for Valuing Operations,” describes an APV analysis using a hypothetical company.
Capital Cash Flow
In Berkshire Partners: Bidding for Carter’s , Berkshire Partners is making a bid and deciding on a financial structure for an LBO of a leading producer of children’s apparel. Berkshire’s financial team uses CCF to calculate the value of William Carter Co. The students are also asked to consider how value is created in the private equity world. "Note on Capital Cash Flow Valuation," the supplemental reading, walks students through the mechanics of the calculation.
Equity Cash Flow
In Acova Radiateurs , students must value a takeover candidate for an LBO in an international setting. The teaching note provides one- and two-day teaching plans, as well as ECF and CCF valuations of Acova. The alternative, The Hertz Corporation (A) , is a more difficult case, examining the LBO of Hertz in 2005. Students are asked to locate the sources of value in the deal, in operations, and in the financing and deal structures. While the case itself lacks detailed financial projections, both the teaching note and an electronic spreadsheet include sample projections. The supplement, "Note on Valuing Equity Cash Flows," is for advanced students. It teaches the mechanics and examines the biases and shortcomings of the ECF method.
Comprehensive Simulation
The following simulation can be used as a capstone for this module. It gives students the opportunity to use different valuation approaches. In Finance Simulation: M&A in Wine Country , students play the role of the CEO at one of three publicly traded wine producers, evaluating merger and acquisition opportunities among the three companies. WACC-based DCF, APV, and market multiples are some of the methods at their disposal to work up bids and negotiate deals.
1 hour, 30 minutes
About this module
Valuation is a key skill for managers. This module focuses on using DCF to value a company. The materials cover different approaches, including DCF using weighted average cost of capital (WACC), adjusted present value (APV), capital cash flow (CCF), and equity cash flow (ECF), as well as sum-of-the-parts valuation. Students can explore how valuations using DCF compare with valuations using market multiples. The module also includes comprehensive simulations that instructors can use as capstone exercises.
Learning Objectives
Understand why managers use DCF to value companies
Learn how to construct a discounted cash flow valuation
Appreciate the issues that arise in determining an appropriate discount rate
Explore different approaches to discounted cash flow valuations, including WACC-based DCF, APV, capital cash flow, and equity cash flow
Understand how a valuation using DCF compares to a valuation using market multiples
Practice valuations using the appropriate DCF methodology
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BUSINESS ANALYSIS AND VALUATION -CASE STUDY OF FPT COMPANY IN VIETNAM
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Objective. Standardise the various principles, practices and procedures followed by Registered Valuer and other valuation professionals in valuation of assets, liabilities or a business. Set out concepts, principles and procedures which are generally. accepted internationally having regard to legal framework and practices prevalent in India.
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The object of this valuation report is to estimate the fair market value of 100% of the common stock in LEGGO Construction, Inc. (LEGGO or the Company), on a nonmarketable, control interest basis, as of December 31, 1999, for management purposes and internal planning. EXERCISE 1: The purpose of the valuation of LEGGO is to assist manage-ment in ...
PDF | This case is designed to learn equity valuation of a large manufacturing firm using discounted cash flow method. ... Case Study on DCF Valuation, Financial Forecasting. ... The company ...
A CASE STUDY OF TESLA By Dilshod Davronov Submitted to Central European University ... There are three ways of discounting cash flow valuations in general: valuing equity value of a company, valuing the entire firm, i.e. enterprise value, and valuing a firm in pieces, i.e. adjusted present value (valuing a company starting from its operations ...
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The case study of this paper focuses on valuing Zoom on October 2020 using several valuation methodologies. The outcome of the case study provides a share value of between $344.5 and $440.6, which is aligned with the estimations made by several investment banks in that period of time.
Table 4. Case Study: Calculation of the enterprise value Table 5. Case Study: Sensitivity Analysis WACC, perpetual growth rate Table 6. Case Study: Sensitivity analysis perpetual growth rate, sales CAGR Table 7. Case Study: Income statement estimates Table 8. Case Study: Liabilities structure Table 9. Case Study: WACC calculation Table 10.
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The result of this is that the value of the company at time T will reach 110. At maturity the shareholders are left with 10. If the present value of debt is 100, then at a 10% risk free rate of return, the value of debt will reach 100e-10%= 90.48, and the value of equity is 9.52. 82 2.
Discount Rate - Long-term Growth = Cap Rate. Income/Cap Rate = Fair Value. The value of a business is the present value of all the "income" it can reasonably be expressed to generate in the future. Frequently in the context of multi-period methods of valuation, the "income" utilized is net equity cash flow.
This is one of the most popular methods of this type used in practice, namely, Discounted Cash Flows (DCF). For the calculation, the available econometric software used in business valuation practice in the market was applied. Table 5. Example of valuation with the method of income (Discounted Cash Flows). XYZ S.A.
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The second one is the portion of the profits from batik businesses go to the middlemen and store-owners rather than artisans which impacted the average income for a batik worker, currently their income is as low as SGD $1 - SGD $3 per day despite their products being valued at SGD $20 - SGD $500/piece.
critical in making valuation assumptions. Regardless of the valuation purpose, a company's value is always based on the expectation of future uncertain payments - usually in the form of distributions or exit proceeds. Founders and investors expect adequate future remuneration for their invested capital, and start-ups are no exception.
BUSINESS ANALYSIS AND VALUATION -CASE STUDY OF FPT COMPANY IN VIETNAM- By LE An Phuong # 52110603 Independent Report Submitted to Professor NAKAYAMA Haruo of Ritsumeikan Asia Pacific University in Partial Fulfillment of the Requirements for the Degree of Master of Business Administration Japan, September 2012 Acknowledgements From the beginning to the end of this long and sometimes strenuous ...
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