This introductory Finance course focuses on Governance and M&A-related concepts. Beginning with Equity and Asset Valuation, the main part focuses on theories about Principal-Agent conflicts as well as corporate structures to prevent such adverse effects. The last two chapters focus on M&A activity ...
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
1. Need for positive FCF to evaluate its value
2. Early cash flows producing assets are worth more than equivalent assets with FCF later
Capital Cash Flow (enterprise value)
4 steps
a) Construct future cash flows
b) Calculate terminal value
c) Determine appropriate discount rate
d) Getting the equity value (~Enterprise value – Debt)
(CCF) Capital Cash Flow
E D
= Pre-tax WACC rU = (E+D) ∗ rE + (E+D) ∗ rD
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller mathiasm1. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $5.35. You're not tied to anything after your purchase.
