Business Valuation - Appunti

FCFOstate is when:

no changes in WC, Capex = D&A → FCFO = NOPAT.

(maintenance investments only and fixed assets) grows as much as the long term growth rate CAPEX (obviously if we take as an assumption that CAPEX > D&A).

grows as much as the long term growth rate.

WCGrowth can be set between 0% and the country's economy growth rate.

Growth and Value:

The relationship between growth and reinvestment needs. ROI, EBITUnder constant returns, which is reasonable in the long term, the growth rate in EBIT (g) should be equal to CRR (capital reinvestment rate) * ROI (product of the reinvestments into the business. CE = invested capital.

What's more, in the long term, if the ROI converges to WACC, the terminal value no longer depends on long term growth.

Esercizio 12, previsioni degli FCFO:

Nopat = RO = 100

ROI = 20%

CRR (amount to reinvest) = 50%

Stage 1 = 3 years

g long term = 2%

WACC = 10%

ROI long term = 10%

Short term g = ROI * CRR = 10%

FCFO = Nopat * (1 - CRR)

PV =

Starting from year 4, the growth slows (2%), Nopat becomes 135,8

FCFO = Nopat * (1 - (g / ROI)) = 108,6

TV = FCFO / WACC - g = 108,6 / 0,1 - 0,02 = 1020

EV = PV + TV fi fi

Cost of Capital:

Historical financial performance generates accounting returns to D and E holders, both have their own required return to compensate for their taken risk.

These returns can be used as a risk-adjusted discount rate to calculate the PV of future benefits belonging to debt holders, shareholders or for the whole company.

Comes from differences between the actual return and the expected return on an investment. It is measured by volatility (standard deviation). It is divided in two risks:

- Diversifiable risk

- Specific market risk

Systematic:

Cost of Equity (Ke):

1. Implied return:
2. Dividend discount model return

These first two models can be only used for listed companies (quotate)

3. Accounting return
4. (Quello che usiamo): Capital asset pricing model

Beta: it is a volatility / risk coefficient that

determines the relationship between the security whose kE is estimated and the reference stock market (sensitivity of the return of a security i to changes in the return of the market portfolio M). If the company is not listed, as Equity I can use:

• Medium leverage of comparable companies.
• “Goal” leverage of the company.
• Accounting leverage: PFN/Patrimonio Netto

Beta Adjusted = Beta Raw * 0,67 + Beta Mercato * 0,33

ARP (Additional Risk Premium): Va dallo 0 al 5% e consiste in un aumento del rischio che aumenta il Ke. Si utilizza in casi particolari come:

• Downsizing: se prendo come comparabili all’azienda (generalmente PMI), aziende molto più grandi ma con la stessa business strategy, quindi comparabili.fi fi fi fi ff ffi fi
• Azienda distressed: in di coltà/crisi
• Fattori esogeni: Covid, elezioni politiche—> it has actual return = expected return, which means zero variance and therefore no default riskRf and no reinvestment risk. It is

• Approccio del premio di rischio storico: differenza mediana tra il rischio di mercato storico e il tasso privo di rischio.
• Approccio del premio di rischio implicito (Rm come implicito nelle stime dei flussi di cassa restituiti a tutti gli azionisti nell'indice, come crescita di consenso)
• Damodaran

1. Media ponderata del tasso di interesse contrattuale su ciascun prestito o titolo.
2. Costo contabile del debito: Debito finanziario lordo - Debito finanziario netto.
3. Costo di mercato del debito: YTM sui bond quotati del target (media ponderata) - YTM sui bond quotati dei pari con una valutazione simile (non dell'industria).
4. (forse è il secondo punto di mercato, non si capiva bene dalle slides) Costo del debito basato sulla valutazione.

applied to EBT (no ebit): e ective tax rate: income taxes/EBT.

The country tax rate is di erent.

If we have an enterprise that operates in we can consider taxes, when evaluating, in many countries di erent ways:

1. based on sales. Dominating country:
2. based on % sales Weighted average rate,
3. Ideally, have to discount with separate beta separate CF Debt and Equity: If D/E is negative —> D/E = 0.

Step di questo capitolo:

• Comparabili
• Beta lev delle comparabili
• Beta adjusted
• Beta unlevered (Hamada)
• Beta medio di settore
• Beta levered azienda target

Reorganization of the Financial Statement:

As-reported nancial statements are not organized for forecasting future activity.

Financial for valuation should show separately:

• Operational items
• Financing items
• Surplus (non-operating) items

Important:

Analyze and base the valuation inputs on consolidated nancials.

Neutralize accounting standard di erences: performance analysis and valuation should transcend the adopted GAAP

(generally accepted accounting principles).The as-reported balance sheet: The restated balance sheet (used one):represents the cumulative amount the business has invested in its operations.

Capital employed: represents all the financing sources of the company.

Sources of financing: Items can be dragged across sides (change sign)

1. Fixed assets:
   • tangible assets
   • Intangibles (patents, brands)
   • Capitalized leasing assets
   • Goodwill
2. includes the "Noncash" working capital: assets and liabilities with an operating nature generated by the ordinary execution of the business model:
   • (Current assets - cash) - (Current liabilities - short term financial debt)
3. Surplus assets & other non-operating liabilities: Assets and liabilities that are not strictly related with daily core operations or that also resemble a financial nature.
4. Equity: Most of the time it matches: share capital, reserves, minority interest.

Past transactions (past multiples), limited number of operators

Deal market (M&A): and transactions, and information not well spread + premia. For equity-side multiples, the equity value (numerator) is their market capitalization.

For asset-side multiples, the numerator is EV: Market cap + minorities + net debt - surplus assets.

Industry-specific multiples: Can be used when there's a strong and clear connection between the industry and the enterprise. For example: EV/beds for hospitals.

The multiples can be:

- Denominator: last historical metric (ex. 31/12)

- Actual: first forecast metric or following (ex. 31/12 next year)

- Forward (expected): last four historical quarters.

Trailing: You have to be coherent, because the num. is up to date, it never changes (there's no future EV or EqV)

Equity-Side Multiples: From a theoretical standpoint, multiples can be derived from a DCF valuation. Multiples, in fact, embed the same 3

drivers of a DCF:

• Growth (+)
• Reinvestment (-)
• Risk (-)

If growth is 0%, then the payout is 100%

P/E:

Analysis on growth:

If ROE > Ke, if growth increases, then the P/E multiples is higher than a steady state enterprise and grows as growth increases. However, if ROE < Ke, the company is destroying value, therefore P/E is lower (we need an higher growth rate to increase the multiple).

Elements that can differentiate the companies with respect to their risk profile:

1. Duration of growth
2. Strategies and objectives disclosed by management in terms of returns in the short and long term.
3. Consistency between the firms' growth forecasts and their resources

Price / Book Value:

is strongly influenced by the ROE both directly (formula) and indirectly (as a component of growth).

P/BV

It is also influenced by the Ke: the higher the Ke, the lower the P/BV.

This multiple varies across firms in the same industry as payout ratios, risk and return on equity vary.

Therefore, the definition of a

1. A matrix approach
2. Regression approach

• EV/EBIT: if growth in capital employed and EBIT is 0%, the reinvestment needed (the CRR) is 0%, therefore:

• EV/EBITDA- only a few rms show negative EBITDA
• It is unaffected by depreciation policies
• Frequently, potential acquirers consider an EV multiple because debt will be refinanced after a takeover
• It can be compared more easily among rms with different leverage

• tax rate (+)
• D&A (-): if I have a great D&A, EBITDA multiple is lower
• Reinvestment (-)
• WACC (-)
• Growth (+)