Business Valuation - Appunti

3 main methodologies to value a company (or any asset) + 2:

Income approach:

1. the value equals to the The risk

present value of all the future bene ts.

factors are included (al denominatore) and it has a long term view. However it excludes past bene ts

and the present balance sheet.

The main approaches are: DCF Asset side (FCFO) & Equity Side (FCFE); APV (FCFO + TS)

Market approach:

2. the value of my assets equals to the value of comparable assets with respect

(multiple —> stock market (trading multiples) or M&A (deal multiples). It assumes there are

to a driver

market prices of comparable assets. It is a benchmarking approach.

Cost approach:

3. Each item is revalued at

value of all individual items on the balance sheet.

current conditions. It has limited applications: going concern or liquidation. It includes the Net Asset

Value (VAN), the Liquidation Value and the Sum of the parts (break-up analysis).

Economic pro t (hybrid) approach:

4. it includes the Economic Value Added (EVA) and the residual

income approaches. It is a mix between the Income approach (future cash ows) and the cost

approach (value of investments)

Other methods:

5. current market value (Market Cap)

Discounted Cash Flow: the value of an asset is the present value of the expected cash ows. The

model requires:

- cash ows (FCFE and FCFO) —> current and forecast

- A discount rate (Ke lev and WACC)

- A time horizon

An important step is to estimate when the rm will reach stable growth and what characteristics (risk and

cash ow) it will have when it does.

• The value of a company is the result of the sum of the business

value (surplus assets are valued separately).

unit’s

• The can be separated from the

value of the growth opportunities

value of existing businesses: the net present value of growth

opportunities.

• Standalone value di ers from the investment/acquisition value.

• When the company is nanced by and the capital structure

debt

changes over time, the enterprise value is better observed as the sum of the unlevered value and of the

value of tax bene ts (APV).

DCF valuation is based on asset’s fundamentals, therefore it should be less exposed to market

Pros:

moods and perceptions. What’s more it forces to think about the underlying characteristics of the rm and

understand its business.

it requires far more inputs and informations (di cult to estimate and that can be manipulated by

Cons:

analysts) than other valuation methods.

Market approach = Relative Valuation:

The value of an asset or a company can be estimated by looking at how the market prices similar of

comparable assets. The philosophical basis: the market is e cient and the value of an asset is whatever

the market is willing to pay for it.

It requires:

- A group of or similar assets

comparable

- A (by dividing the price by a common variable, such as earnings or

standardized measure of value

book values)

- If the assets are not perfectly comparable, it needs variables to o set the di erences.

Methods: and

market multiples deal multiples.

simple and to relate to, as it usually requires less informations than DCF. It is also able to

Pros: easy

better than the DCF and it can be an advantage when it is important to set a price

re ect market moods

that re ects these perceptions (as in the case of an IPO).

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multiples are easy to misuse and and given that no rms are exactly alike on terms of

Cons: manipulate

risk and growth, the de nition of comparable rms is What’s more: a

subjective. tendency to pro-

if a market overvalues a certain category of rms, using the average P/E ratio of these rms to

cyclicality:

value an IPO will lead to an overvaluation of the company going public.

Economic Pro t Model:

The value of a business is the (adjusted) of its invested capital as of today and

sum of the book value

the earnings beyond a base level, considering the cost of capital.

present value of the excess returns:

As the DCF it can be modeled:

- Asset-side: economic value added

- Equity-side: residual income

Asset-Based Methods (Cost Approach):

The value comes from a careful estimate of the value of each asset (tangible and intangible) and liability

that represent the invested capital of the rm.

It may lead to the same DCF value if the rm has no growth assets and the market assessment of value

re ect the expected cash ows.

It is mostly used for valuing real estate assets and holding companies (NAV).

Value and Uncertainty (risk):

Cash ow modeling is in uenced by di erent risks and uncertainties among companies.

A process to deal with risk:

1. Assess the business model (internal analysis)

2. Analyze competition and the market (Porter)

3. Analyze the risk factors

4. Build eventual di erent scenarios

5. Develop a cash ow model

The choice of the is divided in:

valuation standpoint

- Static stanpoint

- Dynamic standpoint (di erent scenarios)

The choice depends on:

- The level of uncertainty

- The managerial exibility to react to risk

Generally: D: moderate risk and moderate

managerial exibility —> tourism,

industries (moderate uncertainty

= single dominant likely

scenario

scenario = one business plan).

B: high uncertainty and low

managerial exibility —> fashion

industries that operate through

licenses (have small own brand +

big part of the revenue comes

from producing for other brands).

C: high managerial exibility and

low uncer tainty —> tech

companies or public utilities.

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Second case: we make

High uncertainty scenario;

two business plans (worst-case and

best-case) and then make an average

based on probability.

Third case: risks are embedded in the managerial strategy: (successful) or

Event decision tree:

base-case value in a

Value of a new venture:

standalone scenario + value generated by new

choices and opportunities.

Modigliani & Miller e DCF:

ROE = ROI + (ROI - i ) * payment * D/E M&M I without taxes:

The value of the company is not in uenced by the nancial structure of a company.

EV lev = EV unlev M&M II with taxes:

Assumptions:

- growth 0

- Maintenance investments (no Capex)

- Income (C.E.) and CF are constant and perpetual

- Interests are tax-deducible

The value of a company depends on its nancial structure and increases if the company increases its

nancial debts because of higher future tax shields.

EV lev = EV unlev + T * D

Wacc ovviamente rimane uguale a sopra.

fi fl fi fi Cash ow statement.

Adjusted Present Value (Valuation in perpetuity) without debt:

If we assume that the Income Statement (CE) = CF

Statement, then total CF = Net Income.

If the Cash Flows are constant and in nite, value is a

perpetuity. Keu = rf + Bu * MRP

KeL = rf + Blev * MRP

Adjusted Present Value (Valuation in perpetuity) with debt:

Using APV is more exible because you value

the taxation separately.

EV = EVu + Vts DCF Method:

Asset side: Ricorda!! Con il metodo del DCF, al posto di E

= FCFO / WACC —> market value of CE

EV devo usare EqV, calcolato quindi con il metodo

= EV - D

EqV APV oppure se è quotata uso la Market Cap.

Equity side:

= FCFE / KeL —> market value of equity

EqV

= EqV + D

EV Real life scenario:

In real life there is growth.

FCFE and FCFO will depend on a business plan for a few rst years and will be independently

discounted. Years beyond will be valued through a synthetic terminal value.

Generally WACC is constant across periods.

no growth investments, only inertial growth.

TV represents a steady state:

DCF:

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APV:

• = uso CF dell’anno 2026 (es), ma il TV è all’anno 2025 (precedente). (TV) Growth rate (g) cannot

TV

exceed the growth rate of the economy and could also be negative, if we assume that the rm will

disappear in time.

• to calculate the TV, should be normalized to represent a steady state (equilibrium). The steady

FCFO

state is when: no changes in WC, Capex = D&A—> FCFO = NOPAT.

• (maintenance investments only and xed assets) grows as much as the long term growth rate

CA