Corporate Valuation: Measuring the Value of Companies in Turbulent Times

How to Dial In Value Through the Lens of Risk

Corporate Valuation presents a more accurate and informed approach to valuing companies based on a variety of models and enhancements grounded in risk centrality and scenario analysis. Written by a standout authorial team bringing vast experience and analysis to the subject, this must–have guidebook is the first to approach valuation with both accounting and financial principles, along with corresponding tools for quick and effective implementation in actual practice. This immediately useful guide enables you to:

Gain a new understanding of where to find a company′s real value Master new valuation models and techniques not found anywhere else Examine a fresh approach to valuation for special circumstances, including rights issues, climate change risks, and more

Evolving your skillset for today′s volatile, fast–paced markets is about more than gaining an edge it′s about surviving, and only Corporate Valuation gives you a comprehensive resource of tools and know–how for valuing companies with the highest level of precision.

Preface

Acknowledgments

About the Authors

Chapter 1: Introduction

1.1 Fundamental Skills in Company Valuation

1.2 Valuation Methods: An Overview

1.3 The Time Value of Money

1.4 Uncertainty in Company Valuations

1.5 Uncertainty and Managerial Flexibility

1.6 Relationship between Value and Uncertainty

Chapter 2: Business Forecasting for Valuation

2.1 Introduction

2.2 Key phases of the business plan elaboration

2.3 What drives the preparation of a business plan

2.4 The main methodological issues

Chapter 3: Scenario Analysis

3.1 Introduction

3.2 What is scenario analysis?

3.3 Difference between scenario and sensitivity analysis

3.4 When to perform scenario analysis

3.5 Worst and best and what happens next

3.6 Multi–Scenario Analysis

3.7 Pros and Cons

3.8 How to perform scenario analysis in Excel

3.9 Conclusions

Chapter 4: Monte Carlo Valuation

4.1 Introducing Monte Carlo Techniques

4.2 Monte Carlo and Corporate Valuation

4.3 A STEP BY STEP PROCEDURE

4.4. Case study: DuEmme valuation

4.5. A step by step guide using Excel and Crystal Ball

Chapter 5: Determining Cash Flows for Company Valuation

5.1 Introduction

5.2 Reorganization of the Balance Sheet

5.3 Relationship Between a Company s Balance Sheet and Income Statement

5.4 From the Economic to the Financial Standpoint

5.5 Cash Flow Definitions and Valuation Models

5.6 Business Plan and Cash Flow Projections

Chapter 6: Choosing the Valuation Standpoint

6.1 Debt and Value

6.2 First Problem: The Relationship between Leverage and Value

6.3 Second Problem: alternative valuation techniques when debt benefits from a fiscal advantage

6.4 Third problem: the choice between an asset–side vs. an equity–side perspective

6.5 How to go from a company s asset value to its equity value

Chapter 7: Leverage and Value in Growth Scenarios

7.1 Growth, Leverage, and Value

7.2 Nominal and Real Discounting

7.3 Problems with the discount of tax benefit

7.4 Cost of Capital Formulas in Growth Scenarios

7.5 The WACC: some remarks

7.6 The Real Dimension of Tax Benefits

Appendix 7.1: Derivation of the Formulas to Calculate the Cost of Capital

Appendix 7.2

Chapter 8: Estimating the Cost of Capital

8.1 Defining the Opportunity Cost of Capital

8.2 A Few Comments on Risk

8.3 Practical Approaches to Estimate Keu

88.4 The Approach Based on Historical Returns

8.5 Analysis of Stock Returns

8.6 Analysis of Accounting Returns

8.7 Estimating Expected Returns from Current Stock Prices

8.8 Models Based on Returns Sensitivity to Risk Factors

8.9 The Capital Asset Pricing Model

Appendix 8.1: CAPM with personal taxes

Chapter 9: Cash Flow Profiles and Valuation Procedures

9.1 From Business models to Cash Flow models

9.2 Cash Flow Profiles of Business Units vs Whole Entity

9.3 Examples of Cash Flow Profiles

9.4 Problems with the Identification of Cash Flow Models

9.5 Cash Flow Models In the Case of Restructuring

9.6 Debt Profile Analysis

9.2 Debt Profile beyond the Plan Horizon Forecast

9.7 The Valuation of Tax Advantages: Different Alternatives

Some Concluding Remarks

9.8 From Cash Flow Profiles to Valuation: Synthetic and Analytical Procedures

9.9 The Standard Procedure

Chapter 10: A Concise Cash Flow Model

10.1 Discussion of Formula–based Methods

10.2 The capitalization of a normalized monetary flow

10.3 The Perpetual Growth Formula

10.4 Formulas for Limited and Variable (Multi–Stage) Growth

10.5 Conclusions

Chapter 11: Discounting Explicit Cash Flow and Terminal Value (Explicit Method)

11.1 Explicit Projections

11.2 Estimation of the Terminal Value

11.3 Evaluation of Gas Supply Co.

Chapter 12: Multiples: an Overview

12.1 Preliminary Remarks

12.2 The Theory of Multiples: Basic Elements

12.3 The Price Earnings Ratio (P/E)

12.4 The EV/EBIT and EV/EBITDA Multiples

12.5 Other Multiples

12.6 Multiples and Leverage

12.7 Unlevered Multiples

12.8 Multiples and Growth

12.9 Relationship between Multiples and Growth

12.10 THE PEG RATIO

12.11 The Value Maps

Appendix 12.1: P/E with Growth

Chapter 13: Multiples in Practice

13.1 A Framework for the Use of Stock Market Multiples

13.2 The Significance of Multiples

13.3 The Comparability of Multiples

13.4 Multiples Choice in Valuation Processes

13.5 The Estimation of Exit Multiples

13.6 An Analysis of Deal Multiples

10.7 A Valuation Process Carried Out Using The Comparable Approach: The Wine CO. Transaction

Appendix 13.1 Capital Increases and the P/E Ratio

Chapter 14: The Acquisition Value

14.1 Acquisition Value Plays a Key Role

14.2 Definitions of Value: An Overview

14.3 The Value Created by an Acquisition

14.4 The Value–Components Model

14.5 Further Considerations in Valuing Acquisitions

14.6 Acquisition Value of Plastic Materials Co.

14.7 The Acquisition Value of Controlling Interests

14.8 Other Determinants of Control Premium

14.9 Acquisition Value in a Mandatory Tender Offer

14.10 Maximum and Minimum Exchange Ratios in Mergers

14.11 Exchange Ratio and Third Party Protection

Appendix 14.1: Other Value Definitions

Appendix 14.2: Notions of Value Developed by Italian Scholars

Chapter 15: Value and prices in the market for corporate control

15.1 Price Formation in the Market for Control

15.2 Different Kinds of Benefits Arising from Acquisitions

12.3 From the Pricing Model to the Fair Market Value

15.4 Fair Market Value Estimated Adjusting Stand Alone Cash Flows

15.5 Premiums and Discounts in Valuation

15.6 The Most Common Premiums and Discounts

15.7 Value–Levels and Value Expressed by Stock Prices

15.8 Estimating Control Premiums

15.9 Estimating Acquisition Premiums

15.10 Acquisition and Control Premiums in a Perfect World

15.10 Estimating Controlling Interest: An Example

15.11 Minority Discount

15.12 Discount for the Lack of Marketability

15.13 Definitions of Value and Estimation Procedures

Chapter 16: Valuation Considerations on Rights Issues

16.1 Introduction to Rights Issues

16.2 Setting the subscription price

16.3 Value of pre–emptive rights

16.4 Conclusions

Index

MARIO MASSARI is full professor of corporate finance and former head of the finance department at Bocconi University (Milan).

GIANFRANCO GIANFRATE is a Giorgio Ruffolo Fellow at the Kennedy School of Government at Harvard University (Cambridge, MA).

LAURA ZANETTI is associate professor of corporate finance at Bocconi University, academic director of the BSc in Economics and Finance, and a research fellow at the Centre for Applied Research in Finance.