This summary emphasizes corporate governance and M&A - related concepts. Equity and asset valuation serves as base for more advanced topics later on in the summary. M&A and takeovers build the main part as well as all theories revolving around the principal-agent conflict.
Economic value ~ what (current and future)
benefits assets have
Approaches to value a company
1) Net Asset Approach
Total Assets minus Total Liabilities
Problem: accounting-based values, often very different from market (or current) value
Solutions/Adjustments:
(1) Adjusted Book Value:
re-value tangible assets (compare purchase price and depreciation with current market value)
(2) Liquidation Value: (= Floor Value)
“what would I get if I liquidated everything today?” – this also considers costs of a quick sale
(3) Replacement Value:
Current costs of reproducing/rebuild the tangible assets from scratch right now
,2) Multiples (or Relatives) Approach
Multiple of earnings, EBIT, Sales or book values (industry-average or historic)
EBIT = earning power without effect of financing the company
i. Historical Earnings
ii. Future Earnings under Present Ownerships
iii. Future Earnings under New Ownerships
2 kinds of multiples
(1) Trading Multiples
a. P/E
b. Equity Value/Sales or Equity Value/EBITDA
c. Price/Book = market price per share / book value per share
(2) Transaction Multiples
Higher than trading multiples because it concerns acquisitions of similar companies
Limitations: static measures (every offer/acquisition is different)
Equity vs. Firm Valuation
Discount CF @
equity cost to find
Equity Value
Discount CF @ wacc
to find Enterprise
Value
3) Discounted Dividends Approach
PV of company = perpetuity of cash flows (dividends)
𝐶𝐹𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝑃𝑉(𝐶𝐹 𝑖𝑛 𝑝𝑒𝑟𝑝𝑒𝑡𝑢𝑖𝑡𝑦 ) =
𝑟
Changing growth rates (estimating cash flows for the first years and then constant (lower) growth perpetuity)
𝐶𝐹𝑡 𝐶𝐹𝑡
𝑃𝑉 = ∑ 𝑡
+ ( ) / (1 + 𝑟)𝑡
(1 + 𝑟) 𝑟 − 𝑔
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