Company Valuation (3 days)

Day 1 - Valuation Roadmap

The session lays the foundations to build a solid understanding of corporate valuation in the context of investment banking. The most common valuation methodologies are introduced, explaining the difference between a company's fundamental value, and how much an acquirer  would pay for the business. The concepts of enterprise value and equity value are explained, using simple but rigorous exercises. Finally, the basics of multiples valuation and discounted cash flow valuation are introduced. Exercises are used throughout the session.

Key topics:

• The importance of valuation in the investment banking industry
• Fundamental value versus how much an acquirer will pay
• Overview of the major valuation methods
  • Trading comparables analysis
  • Discounted cash flow analysis
  • Transaction comparables analysis
  • LBO analysis
• Enterprise versus equity value
• Book values versus market values
• How to calculate enterprise value using market values
• How to calculate enterprise value using a fundamental valuation approach

Day 1 - Trading Comparables

Participants are introduced to preparing multiples using real company data and a case study including a range of international companies.  We focus on how to select comparables, where to find data in published financial data and equity research reports, how to clean the raw data, and on documenting and checking the output. The most commonly-used multiples are explained and complexities such as normalizing for non-recurring expenses/income are also covered. The session ends with practical exercises on the application of multiple analysis to value a company.

Key topics:

• Screening companies to identify a suitable comparable set
• Calculating the company’s value
  • Number of shares and value of share options
  • Equity value
  • Net debt calculations
  • Minority interests and equity method investments
  • Enterprise value
• Calculating the earnings numbers
  • Cleaning non-recurring items from earnings and resulting tax adjustment
  • Calendarization issues
  • Last-twelve months analysis
• Calculating a range of forward looking and historical earnings multiples
  • Revenue
  • EBITDA
  • EBIT
  • PE
  • PEG
  • Industry-specific multiples
• Calculating and using operating and credit ratios
• Troubleshooting and checking the output
• Applying the results

Day 2 - Discounted Cash Flow (DCF) Valuation

During this session, participants learn how to build a discounted cash flow valuation model. The session starts with an overview of the valuation methodology, and the steps required in setting up a valuation model. We then focus on the calculation of free cash flow and a detailed ratio analysis is used to establish the reasonableness of the forecasts and to identify when the target company reaches steady state. We analyze the weighted average cost of capital, breaking it down into its components. We complete the valuation model by calculating terminal values, using both the exit multiple method and the perpetuity growth method, and discounting values to the present to calculate enterprise values and share prices. Once the valuation is complete participants perform several checks on the analysis using key ratios, and sensitivity and scenario analysis.

Key topics:

• Calculating unlevered free cash flows
  • Drivers of cash flow
  • Ratio analysis
• Weighted average cost of capital
  • Optimal capital structure using peer analysis
  • Establishing the company’s forward looking cost of debt
  • Cost of equity: understanding the risk free rate, the equity risk premium and Beta
  • Unlevering and relevering the beta
  • Calculating WACC for the case company
• Calculating the terminal value
  • Perpetuity growth (Gordon model) method
  • Exit multiple method
• Building a discounting model
• Mid-year adjustments
• Calculating enterprise and equity values
• Sanity checks
  • Reinvestment rate and ROIC
  • Implied multiples and growth rates
  • Percentage of value in the terminal period

Day 3 - Valuation Complexities

During this session, participants learn how to handle certain items that can generate complexities when valuing a firm. Leases, pensions, taxes (including tax losses), share option expenses, and provisions are covered; the related financial statements analysis issues are reviewed and the impact on the different valuation methodologies are analyzed. Both enterprise value and income statement adjustments are covered for these topics. At the end of the day participants apply the results to the target company.

Key topics:

• Leases
• Review of accounting
• Valuation issues and which industries lease adjustments are important for
• Calculating EBITDAR
• The present value method to capitalize operating leases
• The multiple method to capitalize operating leases
• Pensions and OPEBs
• Review of accounting
• Adjustments to debt
• Adjustments to operating profit
• Taxes
• Permanent and temporary differences
• Deferred taxes
• Tax loss carry forwards and carry backs
• Marginal and effective tax rates
• Share options expenses
• How share options impact the income statement and balance sheet
• Understanding their impact on trading comparables and DCF
• Frequent adjustments made to valuation methodologies
• Provisions
• Quasi-equity versus quasi-debt provisions
• Relevant earnings and debt adjustments
• Application to target company