Corporate Valuation
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Massari Mario. Corporate Valuation
Preface
A ROADMAP FOR THIS BOOK
Acknowledgments
About the Author
Chapter 1. Introduction
1.1 WHAT WE SHOULD KNOW TO VALUE A COMPANY
1.2 VALUATION METHODS: AN OVERVIEW
1.2.1 Common Practices in the Accounting and Financial Communities
1.2.2 Approach of This Book
1.3 THE TIME VALUE OF MONEY
1.4 UNCERTAINTY IN COMPANY VALUATIONS
1.4.1 Organizing the Analysis
1.5 UNCERTAINTY AND MANAGERIAL FLEXIBILITY
1.5.1 Static versus Dynamic Assumption
1.5.2 Some Conclusions on Uncertainty and Managerial Flexibility
1.5.3 Valuing Companies Assuming a Dynamic Standpoint
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
2.2.1 Markets, Competitive Positioning, and Past Results
2.2.2 Definition of the Competitive Strategies
2.2.3 Definition of the Actions Needed to Implement the Competitive Strategy
2.2.4 The Formulation of the Quantitative Assumptions
2.2.5 Preparation of the Plan Forecasts
2.3 WHAT DRIVES THE PREPARATION OF A BUSINESS PLAN?
2.3.1 A Components Manufacturer
2.3.2 Commercial Companies Operating through a Network of Points of Sale
2.3.3 Companies Operating on Order
2.3.4 Companies Operating in Regulated Sectors
2.4 THE MAIN METHODOLOGICAL ISSUES
2.4.1 Time Horizon Covered by the Plan
2.4.2 Real Business Plans versus Nominal Business Plans
2.4.3 Aspects to Develop in the Phase of Business Plan Critical Analysis
2.4.4 Sensitivity Analysis
Chapter 3. Scenario Analysis8
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 CASES 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 Valuation10
4.1 INTRODUCING MONTE CARLO TECHNIQUES
4.2 MONTE CARLO AND CORPORATE VALUATION
4.3 A STEP-BY-STEP PROCEDURE
4.4 CASE STUDY: OUTDOOR INC. 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
5.2.1 Uses of Funds Related to Operating Activities
5.2.2 Sources of Financing
5.2.3 Reorganization of the Balance Sheet of Printing Co
5.3 RELATIONSHIP BETWEEN A COMPANY'S BALANCE SHEET AND INCOME STATEMENT
5.3.1 Reorganization of Printing Co.'s Income Statement
5.4 FROM THE ECONOMIC TO THE FINANCIAL STANDPOINT
5.4.1 Cash Flow from Operating Activities: Cash Generated from Current Operations
5.4.2 Cash Flow from Operating Activities: Investing Activities
5.4.3 Cash Flow from Financing Activities
5.4.4 Cash Flow from Surplus Assets
5.4.5 Uses and Sources of Funds
5.5 CASH FLOW DEFINITIONS AND VALUATION MODELS
5.6 BUSINESS PLAN AND CASH FLOW PROJECTIONS
5.6.1 The Basic Assumptions
5.6.2 Projecting Cash Flows for Printing Co
Chapter 6. Choosing the Valuation Standpoint
6.1 DEBT AND VALUE
6.2 FIRST PROBLEM: THE RELATIONSHIP BETWEEN LEVERAGE AND VALUE
6.2.1 Some Definitions
6.2.2 Relationship between Leverage and Discount Rates
6.2.3 The Law of Conservation of Value
6.2.4 Tax Advantages of Debt
6.3 SECOND PROBLEM: ALTERNATIVE VALUATION TECHNIQUES WHEN DEBT BENEFITS FROM A FISCAL ADVANTAGE
6.3.1 First Alternative: Adjusting the Unlevered Value (Adjusted Present Value, or APV)
6.3.2 Second Alternative: Adjusting Discount Rates for Leverage
6.4 THIRD PROBLEM: THE CHOICE BETWEEN AN ASSET-SIDE VERSUS AN EQUITY-SIDE PERSPECTIVE
6.5 FROM THE ASSET VALUE TO THE EQUITY VALUE
Chapter 7. Leverage and Value in Growth Scenarios
7.1 GROWTH, LEVERAGE, AND VALUE
7.2 NOMINAL AND REAL DISCOUNTING
7.2.1 Nominal versus Real Terms
7.3 PROBLEMS WITH THE DISCOUNT OF TAX BENEFIT
7.4 COST OF CAPITAL FORMULAS IN GROWTH SCENARIOS
7.4.1 An Example
7.5 THE WACC: SOME REMARKS
7.6 REAL DIMENSION OF TAX BENEFITS
7.6.1 Personal Taxes
7.6.2 Uncertainty and Alternative Tax Shields
APPENDIX 7.1: DERIVATION OF THE FORMULAS TO CALCULATE THE COST OF CAPITAL
A. Using Kd as the Discount Rate for Tax Benefits
B. Using Keu as Discount Rate for Tax Shields
C. Discounting Tax Shields Linked to Actual Debt (D) with Kd and Tax Shields Linked to Growth with Keu
APPENDIX 7.2: PATTERN OF IN A GROWTH CONTEXT: SOME REMARKS
Chapter 8. Estimating the Cost of Capital
8.1 DEFINING THE OPPORTUNITY COST OF CAPITAL
8.2 A FEW COMMENTS ON RISK
8.2.1 Scenario Driven by Macroeconomic Factors
8.2.2 Innovative Initiatives
8.2.3 Presence of Specific Risks
8.3 PRACTICAL APPROACHES TO ESTIMATE Keu
8.4 APPROACH BASED ON HISTORICAL RETURNS
8.5 ANALYSIS OF STOCK RETURNS
8.5.1 The Effect of Leverage
8.6 ANALYSIS OF ACCOUNTING RETURNS
8.7 ESTIMATING EXPECTED RETURNS FROM CURRENT STOCK PRICES
8.7.1 Dividend Discount Model (DDM)
8.7.2 Two-Stage DDM
8.7.3 P/E Model
8.8 MODELS BASED ON RETURNS' SENSITIVITY TO RISK FACTORS
8.9 THE CAPITAL ASSET PRICING MODEL
8.9.1 CAPM with Taxes
8.1 °CALCULATING RF
8.11 CALCULATING RP
8.11.1 Historical Risk Premiums: Meaning and Calculation
8.11.2 From Historical Premia to Expected Risk Premia
8.12 ESTIMATING β
8.12.1 The Regression Parameters
8.12.2 Problems Arising Calculating Beta
8.12.3 Industry-Level β
8.13 DEALING WITH SPECIFIC RISKS
8.14 CONCLUSIONS ON THE ESTIMATION OF THE OPPORTUNITY COST OF CAPITAL
8.15 COST OF DEBT
8.15.1 Preliminary Questions
8.15.2 Components of the Cost of Debt
8.16 COST OF DIFFERENT TYPES OF DEBT
8.16.1 Medium- to Long-Term Debt and Bonds
8.16.2 Variable Rate Debt
8.16.3 Foreign Currency Debt
8.16.4 Leasing
8.16.5 Convertible Bonds
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 VERSUS 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
9.6.1 Debt Profile in the Business Plan Horizon Forecast
9.7 DEBT PROFILE BEYOND THE PLAN HORIZON FORECAST
9.8 THE VALUATION OF TAX ADVANTAGES: ALTERNATIVES
9.9 GUIDELINES FOR CHOOSING DEBT PATTERNS FOR DETERMINING VALUATIONS
9.10 SYNTHETIC AND ANALYTICAL PROCEDURES VALUATION
9.10.1 Synthetic Procedure
9.10.2 Analytical Procedure
9.11 THE STANDARD PROCEDURE
Chapter 10. A Steady State Cash Flow Model
10.1 VALUE AS A FUNCTION OF DISCOUNTED FUTURE RESULTS
10.2 CAPITALIZATION OF A NORMALIZED MONETARY FLOW
10.2.1 Steady-State Business under Inflationary Conditions
10.2.2 An Illustration of the Steady-State/Neutral Inflation Assumption
10.2.3 Discount Rate Adjustment Approach
10.2.4 Summary of Valuation Formulas Consistent with a Steady-State/Neutral Inflation Scenario
10.2.5 Valuing Hydroelectric Co
10.3 THE PERPETUAL GROWTH FORMULA
10.3.1 Perpetual Growth Model for Unlevered Companies
10.3.2 Constant Growth Model for Levered Companies (APV Approach)
10.3.3 Discount Rate Adjustment Methods
10.3.4 Steady-Growth Scenario: A Wrap-up
10.4 FORMULAS FOR LIMITED AND VARIABLE (MULTI-STAGE) GROWTH
10.5 CONCLUSIONS
Chapter 11. Discounting Cash Flows and Terminal Value
11.1 EXPLICIT PROJECTIONS
11.2 ESTIMATION OF THE TERMINAL VALUE
11.3 EVALUATION OF GAS SUPPLY CO
11.3.1 Main Assumptions Concerning the Industry
11.3.2 Company's Strategies
11.3.3 Net Present Value of Cash Flow over the Plan Horizon
11.3.4 Assumptions to Determine Terminal Value
11.3.5 Calculating the TV
11.3.6 Overall Evaluation of Gas Supply Co. from an Unlevered Perspective
11.3.7 Estimating Present Value of Tax Shields
11.3.8 Estimating Gas Supply Co.'s Overall Value
Chapter 12. Multiples: An Overview
12.1 PRELIMINARY REMARKS
12.1.1 Multiples and Discounted Cash Flow
12.1.2 Stock Market and Deal Multiples
12.1.3 Financial and Business Multiples
12.2 THEORY OF MULTIPLES: BASIC ELEMENTS
12.2.1 Different Types of Multiples
12.2.2 Current, Trailing, and Leading Multiples
12.3 PRICE/EARNINGS RATIO (P/E)
12.3.1 P/E with No Growth
12.3.2 P/E in a Growth Context
12.3.3 Deepening the Analysis
12.4 THE EV/EBIT AND EV/EBITDA MULTIPLES
12.4.1 EV/EBIT with No Growth
12.4.2 The EV/EBIT Ratio in a Growth Scenario
12.5 OTHER MULTIPLES
12.5.1 EV/Sales
12.6 MULTIPLES AND LEVERAGE
12.6.1 P/E and the Financial Leverage
12.6.2 The EV/EBIT Ratio and Financial Leverage
12.6.3 The P/BV Ratio and Financial Leverage
12.7 UNLEVERED MULTIPLES
12.7.1 Limitations of This Method
12.7.2 A More Transparent Procedure
12.8 MULTIPLES AND GROWTH
12.8.1 Public Utilities Multiples
12.8.2 Multiples in the Technology Sector
12.9 RELATIONSHIP BETWEEN MULTIPLES AND GROWTH
12.10 PEG RATIO
12.11 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
13.1.1 Building the Panel of Comparables
13.1.2 Making a Short List of Comparable Companies
13.1.3 Cleaning the Sample
13.1.4 Checking the Validity of the Multiples
13.2 THE SIGNIFICANCE OF MULTIPLES
13.2.1 Extraordinary Items
13.2.2 Tax Credits
13.2.3 Positive Net Financial Position
13.2.4 Group Structures
13.2.5 Capital Increases
13.2.6 Convertible Bonds, Warrants, and Stock Options
13.3 THE COMPARABILITY OF MULTIPLES
13.3.1 Accounting Principles
13.3.2 Different Tax Systems
13.3.3 Different Degree of Leverage
13.3.4 Searching for Significant Relationships between Multiples, Business Models, and Value Drivers
13.4 MULTIPLES CHOICE IN VALUATION PROCESSES
13.4.1 Time Horizon
13.4.2 Selection of Multiples
13.4.3 Synthetic Value of the Selected Multiples
13.5 ESTIMATION OF “EXIT” MULTIPLES
13.5.1 Industry Multiples at tn
13.5.2 Differentiation Level
13.6 AN ANALYSIS OF DEAL MULTIPLES
13.6.1 Percentage of Acquired Capital
13.6.2 Characteristics of the Acquirer
13.6.3 Existence of Surplus Assets
13.6.4 Payment Methods
13.6.5 Earnouts
13.6.6 Trend of Deal Multiples over Time
13.7 THE COMPARABLE APPROACH: THE CASE OF WINE CO
13.7.1 The Logic of the Transaction
13.7.2 Relevant Information for the Valuation
13.7.3 The Selection of Comparable Companies
13.7.4 Analysis of Value Multiples
13.7.5 Tax Rate Adjustments for Multiples
13.7.6 Valuation of Wine Co. Based on Multiples
13.7.7 The Exit Multiples Estimate
APPENDIX 13.1: CAPITAL INCREASES AND THE P/E RATIO
Chapter 14. The Acquisition Value
14.1 DEFINITIONS OF VALUE: AN OVERVIEW
14.2 VALUE CREATED BY AN ACQUISITION
14.2.1 Differential Approach
14.2.2 Potential Benefits
14.3 VALUE-COMPONENTS MODEL
14.3.1 Application of the Model
14.4 FURTHER CONSIDERATIONS IN VALUING ACQUISITIONS
14.4.1 The Analysis Standpoint
14.4.2 Estimating the Cash Flow
14.4.3 Time Horizon of Explicit Cash Flow Projections
14.4.4 The Debt Profile
14.4.5 Asset-Side versus Equity-Side Valuation
14.5 ACQUISITION VALUE OF PLASTIC MATERIALS CO
14.5.1 Assumptions for Estimating Stand-Alone Value
14.5.2 Estimating the Value of Synergies
14.5.3 ACQUISITION VALUE OF PLASTIC MATERIALS CO
14.6 ACQUISITION VALUE OF CONTROLLING INTERESTS
14.6.1 Private Benefits and Benefits Shared among All Shareholders
14.6.2 Determining the Acquisition Value
14.6.3 Application of the Model
14.7 OTHER DETERMINANTS OF CONTROL PREMIUM
14.8 ACQUISITION VALUE IN A MANDATORY TENDER OFFER
14.9 MAXIMUM AND MINIMUM EXCHANGE RATIOS IN MERGERS
14.9.1 Structuring Ratios in Mergers
14.10 EXCHANGE RATIO AND THIRD-PARTY PROTECTION
APPENDIX 14.1: OTHER VALUE DEFINITIONS
Value to the Seller
Public Offers Price
Liquidation Value
Chapter 15. Value and Prices in the Market for Corporate Control
15.1 PRICE FORMATION IN THE MARKET FOR CONTROL
15.1.1 Competitive Market for Acquisitions
15.1.2 Mechanism of Price Formation
15.2 BENEFITS ARISING FROM ACQUISITIONS
15.2.1 Benefits Related to an Elevated Number of Potential Acquirers
15.2.2 Benefits Based on Affinities with Other Firms
15.2.3 Benefits Related to Mergers or Advantages Not Perceived by Other Firms
15.2.4 Elements in Each Benefit That Influence Prices
15.3 FROM THE PRICING MODEL TO THE FAIR MARKET VALUE
15.3.1 Estimation Methods for Practitioners
15.4 FAIR MARKET VALUE ESTIMATED ADJUSTING STAND-ALONE CASH FLOWS
15.4.1 Endemic Synergies: Cutting Fixed Costs
15.4.2 Estimating the Break-Up Value
15.4.3 Endemic Synergies: Exploiting the Commercial Network
15.5 PREMIUMS AND DISCOUNTS IN VALUATION
15.5.1 A Practical Check
15.6 THE MOST COMMON PREMIUMS AND DISCOUNTS
15.6.1 Discounts at the Shareholder Level
15.6.2 Discounts at Company Level
15.7 VALUE LEVELS AND VALUE EXPRESSED BY STOCK PRICES
15.7.1 The Notion of Value Expressed through Market Prices
15.8 ESTIMATING CONTROL PREMIUMS
15.8.1 Role of Premiums in Valuation
15.8.2 Some Conclusions
15.9 ESTIMATING ACQUISITION PREMIUMS
15.10 ACQUISITION AND CONTROL PREMIUMS IN A PERFECT WORLD
15.11 ESTIMATING THE VALUE OF CONTROLLING STAKES: AN EXAMPLE
15.12 MINORITY DISCOUNT
15.13 DISCOUNT FOR THE LACK OF MARKETABILITY
15.14 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
16.2.1 TERP and Discount to TERP
16.2.2 Setting the Discount to TERP
16.3 VALUE OF PREEMPTIVE RIGHTS
16.3.1 Theoretical Value of Rights at Announcement of the Terms
16.3.2 Theoretical Value of Rights During the Subscription Period
ERP: Ex-Right Price
16.3.3 Impact of Pricing on Existing Shareholders
16.4 CONCLUSIONS
Chapter 17. Carbon Risk and Corporate Value121
17.1 WHY CARBON RISK MATTERS
17.2 FROM CARBON RISKS TO CARBON PRICING
17.2.1 Carbon Pricing in Practice
17.2.2 External versus Internal Carbon Prices
17.3 INCORPORATING CARBON RISKS IN CORPORATE VALUATION
17.3.1 Scenario-Based Valuation and Carbon
17.3.2 Stochastic Simulation Valuation and Carbon
17.4 CARBON BETA
17.4.1 What Is a Carbon Beta?
17.4.2 Carbon Beta: An Application
17.4.3 Conclusions on Carbon Beta
Index
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Exhibit 1.4 presents a graph that permits us to frame the context that drives the valuation with respect to the degree of uncertainty and management flexibility.
Exhibit 1.4 Valuation framework as a function of uncertainty and managerial flexibility
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