1 Company Valuation Lecture 1 Three stages: Historical analysis Forecasting Valuation

2 Historical analysis Ch. 2. Framework of financial analysis Classification – Operating and financial items (2.1) – Core and unusual items (2.2) Changes in Shareholders Equity and comprehensive income (2.3) Segmental reporting (2.4) Ch.3. Historical profitability analysis Profitability analysis – Ratios relevant for forecasting – Operating profitability (3.2) – Financial performance (3.3) – Total profitability (3.4)

3 Short-term forecasting (Ch.4) Sales forecasting (4.1) – Forecast sales growth – Derive sales Forecasting of – operating profitability (4.2) – financial performance (4.3) – total profitability and end-of-period financial structure (4.4) – Forecast certain ratios – Derive other ratios, and absolute numbers of income and capital (aggregates of income statement and balance sheet)

4 Middle-term forecasting Forecasts of long-term growth and certain long-term ratios – Long-term profitability - preliminary Forecast a gradual development of these ratios to the horizon (end of year T) Derive other ratios, and absolute numbers of income and capital (up to year T+1) Derive certain cash flows Derive certain measures of “residual income”

5 Valuation (Ch. 6) Determine required rates of return (Ch. 7 “Cost of capital”) Final forecast of long-term profitability (Ch. 8) Obtain a value of the company by discounting with the required rate/rates of return – Cash flows (2 models) – Residual income (2 models) Divide by the number of shares to obtain an “intrinsic value” per share Compare with the stock-market share price

6 Classification Purpose: To find ratios useful for forecasting – Profit margins – Turnover ratios – Borrowing costs etc. Classify items in income statement and balance sheet – Operating and financial items – Core and unusual items

7 Official balance sheet Assets Fixed assets Current assets Equity and liabilities Shareholders’ equity (of majority shareholders) Minority interest Equity Long-term liabilities Current liabilities Liabilities

8 Reformulated balance sheet

9 Reformulated income statement

10 Operating and financial items General rule: Classify both the income/expense and the corresponding asset/liability in a consistent manner