Advanced Valuation Review and Case Study Application & Presentation

This section serves as a refresher on the valuation techniques covered throughout the week. We will revisit DCF (Free Cash Flow to Firm (FCFF) and Free Cash Flow to Equity (FCFE) models), Relative Valuation (comparable company analysis, precedent transactions), and Asset-Based Valuation.

DCF: Remember the critical components: projecting future cash flows, determining the discount rate (Weighted Average Cost of Capital - WACC or Cost of Equity), and calculating the terminal value. Consider the importance of sensitivity analysis (e.g., using a data table function) and scenario planning.

Relative Valuation: Identify appropriate peer groups and select relevant multiples (e.g., P/E, EV/EBITDA, P/Sales). Critically evaluate the limitations and potential biases in these methods. (e.g., P/E ratio is easily affected by changes in accounting)

Asset-Based Valuation: Understand how to value assets and liabilities, and when this approach is most appropriate (e.g., in liquidations or for companies with significant tangible assets).

Example: Recap: How does each method handle risk differently? In DCF, it's captured in the discount rate and cash flow projections. In relative valuation, differences are considered through adjustments to the comparable company multiples. In asset-based valuation, it can be captured in discount rates when we calculate the net present value of assets.

You will now select a publicly traded company or a specific industry (e.g., a specific sector like Fintech) for your case study. The goal is to choose a company/industry with sufficient public information to perform a complete valuation. Consider the following:

• Data Availability: Ensure readily available financial statements, analyst reports, and market data.
• Complexity and Relevance: The company/industry should present valuation challenges, such as cyclicality, high growth, or regulatory changes.
• Your Interest: Choose a company/industry that sparks your interest; this will enhance engagement and learning.

Data Gathering: Gather financial statements (income statement, balance sheet, cash flow statement) for at least the past five years. Access industry reports, analyst forecasts, and economic data relevant to your chosen company/industry. Prepare a list of key assumptions and drivers (e.g., revenue growth, margins, cost of capital) to be used in your model.

This section guides you through the process of building your valuation model.

DCF Model:

1. Projecting Financial Statements: Project revenue growth, cost of goods sold (COGS), operating expenses, and other line items for the forecast period (typically 5-10 years). Use a combination of historical trends, industry forecasts, and management guidance.
2. Calculating FCFF/FCFE: Determine the appropriate method to use, depending on the availability of data and your objectives. (FCFF = Net Income + Net Interest Expense + Income Taxes + Depreciation & Amortization - Increase in Fixed Assets - Increase in Working Capital). (FCFE = Net Income + Net Interest Expense - Income Taxes + Depreciation & Amortization - Increase in Fixed Assets - Increase in Working Capital + Net Borrowing).
3. Determining the Discount Rate: Calculate the WACC (cost of equity, cost of debt, and capital structure). Consider the risk-free rate, beta, market risk premium, and debt spread.
4. Estimating the Terminal Value: Use the perpetuity growth model or exit multiple method. Be careful about your assumptions (e.g., terminal growth rate should be close to sustainable long-run GDP growth).
5. Calculate the Present Value.

Relative Valuation:

1. Identify Comparable Companies: Select a peer group based on industry, business model, and size. Ensure it’s similar to the subject company.
2. Calculate Multiples: Determine relevant multiples (P/E, EV/EBITDA, P/Sales) for both the comparable companies and your target company.
3. Apply Multiples: Derive a valuation range for the target company based on the median or average of the comparable companies.

Asset-Based Valuation: (If applicable)

1. Adjust the book values of the assets and liabilities to the market value.
2. Determine the value of the company based on the net asset value.

Model Sensitivity and Scenario Analysis: Explore the impact of changing key assumptions by conducting a sensitivity analysis. Build a scenario plan with different sets of assumptions (base case, optimistic case, pessimistic case). Perform a sensitivity analysis to assess the impact of changes in key drivers (e.g., revenue growth, discount rate) on the estimated valuation. Use the data table function of the spreadsheet to generate sensitivity tables and visualize the results.

Craft a concise and compelling presentation that summarizes your findings.

• Structure:

  • Executive Summary (Key findings & Conclusion)
  • Company Overview (Briefly describe the business and industry)
  • Macroeconomic Outlook (Relevant economic factors affecting the company)
  • Valuation Methodology (A summary of the methods used.)
  • Key Assumptions (Highlight critical assumptions and their rationale.)
  • Valuation Results (Present your valuation range, showing DCF, relative valuation, and asset-based if appropriate.)
  • Sensitivity Analysis (Show how the valuation changes under different scenarios and key assumption variations.)
  • Strengths, Weaknesses, Opportunities, and Threats (SWOT analysis)
  • Conclusion (Investment recommendation and supporting rationale)

• Presentation Style: Use clear, concise language, and use visuals to support your key points. Avoid technical jargon when possible. Prepare to answer questions from the audience (e.g., defend your assumptions).Practice the presentation thoroughly, paying close attention to timing, clarity, and persuasiveness.

• Defending your Valuation: Anticipate questions about your assumptions, methodologies, and findings. Be prepared to explain the rationale behind your valuation and respond to potential challenges.