Valuation Notes Tom Nelson

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Presentation transcript:

Valuation Notes Tom Nelson Valuation uses Valuation techniques Cash flow proxies Timing of cash flows Discount Rate Issues 12/26/2018 Valuation notes

Valuation Uses Bonds Stocks (private, IPO, public) Real Estate Capital budgeting projects Divisions within companies Companies for acquisition 12/26/2018 Valuation notes

Valuation Techniques Breakeven-payback of cash flows (consideration in time) IRR between CF in and CF out (consideration in %) Premium to share price (publicly traded) Multiples (Industry Specific!) Price to free cash flows Price to net earnings Price to ops earnings Price to book Price to sales 12/26/2018 Valuation notes

Valuation Techniques (con’t) PV of future cash flows discounted appropriately for risk/uncertainty (NPV: PV cash inflows less PV cash outflows) Inputs needed: Cash flow proxy (CF) Timing of cash flows or cash flow growth assumptions (g) Discount rate (k) 12/26/2018 Valuation notes

Cash flow proxies (CF) Dividends EBITDA Marginal after tax cash inflows and outflows Net Income or EPS Free cash flow (best) From ops: ops CF less ops cash investments Discount by WACC; values entire firm (enterprise value) To equity: net CF less all cash investments Discount by cost of equity; values stock only 12/26/2018 Valuation notes

Growth Estimates (g) Constant growth-DDM (usually too variable) Non-constant growth period followed by constant growth horizon value (terminal value) Year to year pro-forma estimation of cash flows followed by a constant growth horizon value Estimates of growth rate Past trends or regression of CF, dividends, EPS 12/26/2018 Valuation notes

Discount rate (k) Based on expectations and uncertainties surrounding future cash flows-to provide adequate return for risk taken over time Opportunity cost (returns of similar alternatives WACC (use for FCF from ops) Cost of equity (use for FCF to equity) CAPM 12/26/2018 Valuation notes

Issues Valuation is subject to great uncertainty—sensitivity analysis can be critical to define a range of values Remember, in the end, value translates to price a willing seller and buyer agree to 12/26/2018 Valuation notes