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Class notes valuation and financial risk management
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Lecture notes of 14 pages for the course valuation and financial risk management at UGent (.)
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The typical assumption that we made is that we need to maximize the value of the business. Ifyou don’t care about environmental issues it will have an effect in the future. Maximize the
value of the business is easiest if you have one thing to focus on, more than if you have many.
The need for valuation emerges from:
̶ Decisions in the corporate finance domain
̶ Capital increase
̶ Mergers & Acquisitions (M&As), if you are planning to acquire a company you
need a valuation first
̶ Initial Public Offerings (IPOs)
̶ Management Buy-Outs (MBOs), for example a family firm where some.
members did not want to sell it
̶ Evaluation of corporate strategy à valuation of the strategy. If there are some options,
which one should I focus on; this requires a valuation
Basis valuation principles
1. Entity à we should evaluate the intangibles issues like the population of the firm. You
value everything. Or like an entity with a lot of cash or small firms where they own small
stuff so you have to see the whole picture
2. Equity
3. Subject dependence à if indicates of capital setting, even when both of them assume
they have the same expectations, both of those parties may have a different valuation.
Entrepreneur and saler, they have the same expectations but the valuation is not the
same, because they want the same cash flows but the evaluation that each one made
might not be the same maybe because the risk also is different
4. Future oriented à valuations should look for the future. Not all of them as it.
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, 5. Time dependence à when I do a valuation today right now and, in a few hours, they
are not going to be the same. An example is with the COVID, where there were quick
reactions
6. Going concern à the objective is that the company continue growing except if there is
a devaluation of it
VALUATION MYTHIS
Myth One: A valuation is an objective search for “true” value
Myth Two: A good valuation provides a precise estimate of value >> à that is not the case what
we are going to see in real life because a good. valuation will end up with a lot of. values
Myth Three: The more quantitative a model, the better the valuation à there is some people
working in fancy models but they did not understand what is inside of them so they do not do
good assumptions. Sometimes is better to go a little bit higher.
VALUATION IN PRACTICE – IPOS
IPOS are entrepreneurial companies, new ones… so what would happened in a Venture. capital
Model? they would use a lot of valuation models and more variety buy why? indeed the discount
models are fold down and the casual methods increase. When there is more uncertainty going
on, the track methods go down so we go to multiple methods. Every multiple is made with
components.
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