Valuation

Question 1

Define valuation

Answer 1

valuation is an objective search for true fundamental value

All valuations are biased
The simpler, the better

Question 2

Name reasons for valuation

Answer 2

M&A
Partnerships (VC, IPO etc.)
Taxation
Valuation of investments
Performance measurement

Question 3

Enterprise value

Answer 3

Asset = Equity + Debt

Question 4

How do you calculate the enterprise value?

Answer 4

Estimate FCFF (Cash flow, as if 100% equity financed)
Calculate firms cost of capital and take Tax shield into account

WACC: Account for Tax shield in the CoC —> Discount FCFF with WACC
APV: Add PV(Tax shield) to the PV(all equity firm)

Question 5

What is important when using FCFF

Answer 5

100% equity
No sunk costs, but opportunity costs
Use expected cash flow

Use income statement and balance sheet information to derive FCFF

Question 6

FCFF Formula

Answer 6

FCFF = EBIT (1-t) + D&A + CAPX + ∆NWC

EBITDA = Sales - Cost of goods sold - Operating expenses

EBIT = EBITDA - D&A
EBIT = Net income + (real) taxes & interest expenses
EBIT = Revenues - cost - depreciation

∆NA = CAPX + ∆NWC - Depr.

Question 7

Terminal value

Answer 7

Assumed that the cash flow reaches a steady state with constant growth