Risk consideration is central to more accurate post-crisis valuation Corporate Valuation presents the most up-to-date tools and techniques for more accurate valuation in a highly volatile, globalized, and risky business environment. This insightful guide takes a multidisciplinary approach, considering both accounting and financial principles, with a practical focus that uses case studies and numerical examples to illustrate major concepts. Readers are walked through a map of the valuation approaches proven most effective post-crisis, with explicit guidance toward implementation and enhancement using advanced tools, while exploring new models, techniques, and perspectives on the new meaning of value. Risk centrality and scenario analysis are major themes among the techniques covered, and the companion website provides relevant spreadsheets, models, and instructor materials. Business is now done in a faster, more diverse, more interconnected environment, making valuation an increasingly more complex endeavor. New types of risks and competition are shaping operations and finance, redefining the importance of managing uncertainty as the key to success. This book brings that perspective to bear in valuation, providing new insight, new models, and practical techniques for the modern finance industry. * Gain a new understanding of the idea of "value," from both accounting and financial perspectives * Learn new valuation models and techniques, including scenario-based valuation, the Monte Carlo analysis, and other advanced tools * Understand valuation multiples as adjusted for risk and cycle, and the decomposition of deal multiples * Examine the approach to valuation for rights issues and hybrid securities, and more Traditional valuation models are inaccurate in that they hinge on the idea of ensured success and only minor adjustments to forecasts. These rules no longer apply, and accurate valuation demands a shift in the paradigm. Corporate Valuation describes that shift, and how it translates to more accurate methods.
Preface xi Acknowledgments xiii About the Author xv CHAPTER 1 Introduction 1 1.1 What We Should Know to Value a Company 1 1.2 Valuation Methods: An Overview 2 1.3 The Time Value of Money 4 1.4 Uncertainty in Company Valuations 5 1.5 Uncertainty and Managerial Flexibility 9 1.6 Relationship between Value and Uncertainty 15 CHAPTER 2 Business Forecasting for Valuation 18 2.1 Introduction 18 2.2 Key Phases of the Business Plan Elaboration 18 2.3 What Drives the Preparation of a Business Plan? 27 2.4 The Main Methodological Issues 49 CHAPTER 3 Scenario Analysis 54 3.1 Introduction 54 3.2 What Is Scenario Analysis? 56 3.3 Difference between Scenario and Sensitivity Analysis 56 3.4 When to Perform Scenario Analysis 57 3.5 Worst and Best Cases and What Happens Next 58 3.6 Multi-Scenario Analysis 59 3.7 Pros and Cons 61 3.8 How to Perform Scenario Analysis in Excel 62 3.9 Conclusions 71 CHAPTER 4 Monte Carlo Valuation 72 4.1 Introducing Monte Carlo Techniques 72 4.2 Monte Carlo and Corporate Valuation 74 4.3 A Step-by-Step Procedure 76 4.4 Case Study: Outdoor Inc. Valuation 80 4.5 A Step-by-Step Guide Using Excel and Crystal Ball 100 CHAPTER 5 Determining Cash Flows for Company Valuation 125 5.1 Introduction 125 5.2 Reorganization of the Balance Sheet 126 5.3 Relationship between a Company s Balance Sheet and Income Statement 134 5.4 From the Economic to the Financial Standpoint 137 5.5 Cash Flow Definitions and Valuation Models 141 5.6 Business Plan and Cash Flow Projections 142 CHAPTER 6 Choosing the Valuation Standpoint 151 6.1 Debt and Value 151 6.2 First Problem: The Relationship between Leverage and Value 152 6.3 Second Problem: Alternative Valuation Techniques When Debt Benefits from a Fiscal Advantage 162 6.4 Third Problem: The Choice between an Asset-Side versus an Equity-Side Perspective 165 6.5 From the Asset Value to the Equity Value 167 CHAPTER 7 Leverage and Value in Growth Scenarios 168 7.1 Growth, Leverage, and Value 168 7.2 Nominal and Real Discounting 169 7.3 Problems with the Discount of Tax Benefit 172 7.4 Cost of Capital Formulas in Growth Scenarios 173 7.5 The WACC: Some Remarks 178 7.6 Real Dimension of Tax Benefits 180 Appendix 7.1: Derivation of the Formulas to Calculate the Cost of Capital 183 Appendix 7.2: Pattern of K el in a Growth Context: Some Remarks 190 CHAPTER 8 Estimating the Cost of Capital 194 8.1 Defining the Opportunity Cost of Capital 194 8.2 A Few Comments on Risk 194 8.3 Practical Approaches to Estimate Keu 197 8.4 Approach Based on Historical Returns 197 8.5 Analysis of Stock Returns 198 8.6 Analysis of Accounting Returns 201 8.7 Estimating Expected Returns from Current Stock Prices 201 8.8 Models Based on Returns Sensitivity to Risk Factors 204 8.9 The Capital Asset Pricing Model 205 8.10 Calculating Rf 206 8.11 Calculating Rp 208 8.12 Estimating 212 8.13 Dealing with Specific Risks 218 8.14 Conclusions on the Estimation of the Opportunity Cost of Capital 221 8.15 Cost of Debt 222 8.16 Cost of Different Types of Debt 224 Appendix 8.1: CAPM with Personal Taxes 227 CHAPTER 9 Cash Flow Profiles and Valuation Procedures 229 9.1 From Business Models to Cash Flow Models 229 9.2 Cash Flow Profiles of Business Units versus Whole Entity 230 9.3 Examples of Cash Flow Profiles 231 9.4 Problems with the Identification of Cash Flow Models 236 9.5 Cash Flow Models in the Case of Restructuring 237 9.6 Debt Profile Analysis 237 9.7 Debt Profile beyond the Plan Horizon Forecast 239 9.8 The Valuation of Tax Advantages: Alternatives 239 9.9 Guidelines for Choosing Debt Patterns for Determining Valuations 245 9.10 Synthetic and Analytical Procedures Valuation 246 9.11 The Standard Procedure 247 CHAPTER 10 A Steady State Cash Flow Model 249 10.1 Value as a Function of Discounted Future Results 249 10.2 Capitalization of a Normalized Monetary Flow 250 10.3 The Perpetual Growth Formula 264 10.4 Formulas for Limited and Variable (Multi-Stage) Growth 275 10.5 Conclusions 279 CHAPTER 11 Discounting Cash Flows and Terminal Value 280 11.1 Explicit Projections 280 11.2 Estimation of the Terminal Value 281 11.3 Evaluation of Gas Supply Co. 283 CHAPTER 12 Multiples: An Overview 295 12.1 Preliminary Remarks 295 12.2 Theory of Multiples: Basic Elements 299 12.3 Price/Earnings Ratio (P/E) 303 12.4 The EV/EBIT and EV/EBITDA Multiples 307 12.5 Other Multiples 311 12.6 Multiples and Leverage 312 12.7 Unlevered Multiples 316 12.8 Multiples and Growth 320 12.9 Relationship between Multiples and Growth 325 12.10 PEG Ratio 326 12.11 Value Maps 327 Appendix 12.1: P/E with Growth 330 CHAPTER 13 Multiples in Practice 332 13.1 A Framework for the Use of Stock Market Multiples 332 13.2 The Significance of Multiples 335 13.3 The Comparability of Multiples 339 13.4 Multiples Choice in Valuation Processes 340 13.5 Estimation of Exit Multiples 343 13.6 An Analysis of Deal Multiples 344 13.7 The Comparable Approach: The Case of Wine Co. 349 Appendix 13.1: Capital Increases and the P/E Ratio 358 CHAPTER 14 The Acquisition Value 361 14.1 Definitions of Value: An Overview 361 14.2 Value Created by an Acquisition 364 14.3 Value-Components Model 367 14.4 Further Considerations in Valuing Acquisitions 372 14.5 Acquisition Value of Plastic Materials Co. 375 14.6 Acquisition Value of Controlling Interests 377 14.7 Other Determinants of Control Premium 382 14.8 Acquisition Value in a Mandatory Tender Offer 384 14.9 Maximum and Minimum Exchange Ratios in Mergers 386 14.10 Exchange Ratio and Third-Party Protection 389 Appendix 14.1: Other Value Definitions 390 CHAPTER 15 Value and Prices in the Market for Corporate Control 393 15.1 Price Formation in the Market for Control 393 15.2 Benefits Arising from Acquisitions 396 15.3 From the Pricing Model to the Fair Market Value 399 15.4 Fair Market Value Estimated Adjusting Stand-Alone Cash Flows 401 15.5 Premiums and Discounts in Valuation 408 15.6 The Most Common Premiums and Discounts 410 15.7 Value Levels and Value Expressed by Stock Prices 415 15.8 Estimating Control Premiums 417 15.9 Estimating Acquisition Premiums 420 15.10 Acquisition and Control Premiums in a Perfect World 422 15.11 Estimating the Value of Controlling Stakes: An Example 426 15.12 Minority Discount 427 15.13 Discount for the Lack of Marketability 429 15.14 Definitions of Value and Estimation Procedures 431 CHAPTER 16 Valuation Considerations on Rights Issues 432 16.1 Introduction to Rights Issues 432 16.2 Setting the Subscription Price 433 16.3 Value of Preemptive Rights 437 16.4 Conclusions 446 CHAPTER 17 Carbon Risk and Corporate Value 448 17.1 Why Carbon Risk Matters 448 17.2 From Carbon Risks to Carbon Pricing 450 17.3 Incorporating Carbon Risks in Corporate Valuation 453 17.4 Carbon Beta 466 Index 471
