Performance of Valuation Methods in Financial Transactions

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Группа авторов. Performance of Valuation Methods in Financial Transactions

Table of Contents

List of Illustrations

List of Tables

Guide

Pages

Performance of Valuation Methods in Financial Transactions

Introduction

1. Traditional Valuation Methods and Ways of Applying Them. 1.1. Introduction

1.2. The cost of financial structure

1.2.1. Financial asset valuation

1.2.2. Optimal capital structure

1.2.3. Theories of organizations

1.3. Valuation measures and follow-up measures

1.3.1. Evaluation by comparative approach

1.3.2. Flow assessment

1.3.2.1. Dividend discount model

1.3.2.2. Discounted cash flow model

1.3.3. Valuation through propriety and mixed approaches

1.3.3.1. Revalued net assets

1.3.3.2. Determining and justifying a difference in value

1.4. The perspectives of assessment: control operations

1.4.1. The shareholder

1.4.2. Control negotiations

1.4.2.1. Regulation of public offers

1.4.2.2. Analysis of the financial consequences of an acquisition

1.4.2.3. Share buybacks

1.4.3. Leveraged buyout operations

1.5. Conclusion

2. The Performance of the Assessment and the Creation of Value from Control Operations. 2.1. Introduction

2.2. Theoretical adjustments

2.2.1. Reconciliation of the traditional view with the Modigliani–Miller theorem

2.2.1.1. A general framework

2.2.1.2. The impact of personal taxation on optimal financial policy

2.2.1.2.1. Investor personal leverage and maximization of investor income after tax

2.2.1.2.2. Market valuation in a situation of uncertainty

2.2.1.3. Reconsidering the Modigliani-Miller theorem. 2.2.1.3.1. The dividend payment constraint

2.2.1.3.2. The effect of a debt issuance on enterprise value

2.2.2. Optimizing the valuation methods

2.2.2.1. Tax deductibility of interest charges and residual profits

2.2.2.2. Reliability of the parameters of the DCF method. 2.2.2.2.1. Measuring the variation in cash flow

2.2.2.2.2. The risk of bankruptcy: risk premium or adjusted growth rate

2.3. Contextual impacts and adjustments

2.3.1. Leverage transactions

2.3.2. Stock market multiples: from the impact of structures to anticipating profitability

2.3.3. Two delicate contexts for valuation: the bankruptcy situation and the start-up company

2.4. The creation of value resulting from control operations

2.4.1. The creation of value from the buyout of companies in bankruptcy

2.4.2. Abnormal returns resulting from control operations

2.4.3. The motivation of buyers to initiate control operations

2.5. Conclusion

Conclusion

Appendix. Demonstrating the Terminal Value (TV) of DCFs

References

Index

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Modern Finance, Management Innovation and Economic Growth Set

coordinated by

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David Heller

The target price of a company can be fixed according to its assets, its competitors or even how it is predicted to progress into the future. A business plan will encompass all of these aspects. In practice, business valuation is carried out by at least three types of professionals: Financial analysts, who determine target prices for listed companies and provide recommendations on whether to buy, sell or hold stock. Corporate and investment banks assess companies for mergers and acquisitions. In France, if the target company is listed, its valuation must be submitted to the AMF in order to justify that the offer price is satisfactory for all of the stakeholders involved. The evaluation is therefore incorporated into a specific document that is sent to the organization with the aim of obtaining a visa. Here, several valuation methods may come into play. The offer price is the result of an analysis informed by multiple criteria. If the company is not listed, a public offer for tender is usually initiated by the banks. In this case, the seller’s advisory bank sends a document that briefly describes the characteristics of the company to be sold to potential buyers. Questioned at the start about their possible interest in the company, the potential buyers formulate an indicative offer based on their own valuation of the target company and an informative note which contains past accounts and the business plan. Then, potential acquirers may put forward a binding offer, which may be significantly different from that conceived at the beginning, on the basis of receiving additional data from due diligence services following meetings with management. Corporate and investment banks also perform equity capital market valuations during initial public offerings, and more traditional issuances. Finally, the transactions, for which the private equity analysts are responsible, are carried out with leverage buy out (LBO). Their approach is different, as the value of the target company is a result of the resources (equity and debts) that can be raised by a holding company that is created ad hoc. Capital investors demand an internal rate of return of 20% over 3–5 years. The debt raised from banks has its own constraints: 80% of senior debt is absorbed on a linear basis over 7 years, and 20% is reimbursed in the end.

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