APPUNTI Business valuation Enterprise value: Fair/Market Value of operating assets. Cash Enterprise Value Surplus Assets Debt Equity The final objective of the valuation in estimating the equity value (plus sometimes even the stock price) You generally need an additional separate valuation for Surplus Assets (buildings, Tax Credits) and have to be added to the enterprise value; they somehow increase the value of the equity in the business valuation. Enterprise Value Surplus Assets Net Debt (Debt-Cash) Equity We have to differentiate the case in which we are evaluating a stake of the Equity (minority or majority) or the whole 100% of the Equity. There is a difference between the standalone value of a company (used in IPO evaluations) and the value of a company considering the synergies (used in M&A evaluations). Suppose we do not have complications as Surplus assets… Enterprise Value Net Debt (Debt-Cash) Equity Typically on Net Debt is calculated with the financial statement. First thing to decide is the Date which the evaluation refers to. We can have Equity side or Assets side evaluations. Equity side: we just evaluate and focus on shares (or Equity) (Examples: Dividend Discount Model, Flow to Equity). Assets side: using this method we calculate the Equity value as a residual (Enterprise value – Net Debt) (Example: Discounted Cash Flows discounting the FCFO using the WACC). These are Analytic Methods but are often combined with Synthetic Methods (multiples as P/E, P/B, EV/EBITDA, EV/EBIT, EV/Sales). Multiple taking into account expectations for the next year = forward multiple, on the other hand, a multiple taking recent price earnings = trailing multiple. PEG ratio =(P/E)/(g*100) P=EPS1*(g*100)*PEG ratio P=EPS*P/E EV0/EBITDA1 = (FCFO0/EBITDA1)/(wacc-g) BEST EV0/EBIT1 = (FCFO0/EBIT1)/(wacc-g) MIDDLE EV0/Rev1 = (FCFO0/Rev1)/(Wacc-g) WORST P/E is better than price to book ratio EV/EBITDA is better than EV/Sales COST OF CAPITAL Wacc=D/V * rd(1-Tax) + E/V * re re=rf + Beta*ERP (Equity Risk Premium) If we are evaluating a public company, we use debt from the bs and equity = market cap If we are evaluating a private company, we use debt from the bs and equity calculated with comparables We have a long-term objective, forward looking, using market values For the cost of debt you consider the yield to maturity of 10 years traded bonds issued by the company If the company doesn’t have traded bonds, we could use traded bonds issued by comparable companies You could use the yield curve of corporates with the same rating (we must have or calculate a rating of the company, i.e. B) or use the Damodaran Rd=rf + spread (function of interest coverage ratio (Damodaran)) About the Tax rate we should consider only taxes where interests are part of the basis for calculations (esempio italiano, tra ires e irap dobbiamo usare la quota ires come tax rate) EQUITY RISK PREMIUM ESTIMATION (ERP) Various ways to estimate the Equity Risk Premium: Surveys (to CFOs or Fund Managers) CON: no analytical approach, Historical approach (average premium across various markets in a long time series) good because with a long time series it manages to avoid biases caused by market trends and cycles CON: the past might not always be a good predictor of the future, Current Implied Risk Premium (using for example S&P 500) very good to know and consider the actual market conditions CON: expectations change quite easily over time. ERP Italy = ERP us + spread (bond) -> But here we want a spread for the stock market also… so: 𝛿𝐸 ERP Italy = ERP us + spread 𝛿𝐵 (that’s the spread adjusted for the volatility of the equity market over the risk-free bonds). Example with Italy’s cost of equity estimation: Re = Rgermany + Beta(ERPitaly) Re = Ritaly + Beta(ERPusa) -> here the spread is already counted in the Ritaly so we use the ERP of the USA BETA 𝐸 𝐷 Ba = Be * 𝐸+𝐷 + Bd * 𝐸+𝐷 But we assume that Bd = 0 because it has close to zero correlation with the market so: 𝐷 𝐷 Be = Ba * (1+𝐸 ) -> 1+𝐸 is the financial leverage Be is affected by Ba and Financial leverage Ba is affected by: Operating leverage (fixed costs increase Ba), Ciclicality of revenues (increase Ba) 𝐸 Beta unlevered = Delevering of the beta: Ba = Be * 𝐸+𝐷 Beta unlevered can be used to compare companies that don’t have the same financial structure 𝐷(1−𝑡)𝑥 𝐸 Relevering beta: Be = Ba*(1+ ) 𝐸 Delevering beta: Ba = 𝐷∗(1−𝑡)+𝐸*Be Present Value of Tax Shield: 𝑟𝑑∗(𝐷∗𝑇𝑎𝑥) 𝑟𝑑 = D*Tax Better to use the formulas with the tax shield if you are comparing firms in different countries (in terms of taxation). Otherwise, you can use both of them, it’s just important to be consistent. MODIGLIANI MILLER MM assume that cost of capital is fixed because it depends on the risks of the assets. The cost of equity and cost of debt are changing depend on the weight of Debt and Equity 𝐷 𝐸 In MM Ra is fixed: Ra=𝐷+𝐸*Rd + 𝐷+𝐸*Re Interest Tax Shield: 𝐼𝑇𝑆𝑡 =Rd*𝐷𝑡−1 *tax 𝐷 𝐸 If we include taxation: Ra=𝐷+𝐸*Rd*(1-tax) + 𝐷+𝐸*Re But how to calculate the optimal value of the firm (enterprise value)? 𝐹𝐶𝐹𝑂 𝑖 Wacc Method: 𝑉𝐿 = ∑(1+𝑊𝑎𝑐𝑐) 𝑖 𝐹𝐶𝐹𝑂 Adjusted present value: 𝑉𝐿 = 𝑉𝑈 + ∑(1+𝑅𝑢)𝑖 𝑖 𝐹𝐶𝐹𝐸𝑖 (1+𝑅𝑒)𝑖 Flow to equity: 𝑉𝐿 = ∑ We can have two behaviors concerning the D/E ratio: Rebalanced debt (adjusting debt to have a target D/E) or Predetermined debt (fixed level of debt without caring about D/E) MANCA ROBA A case study of valuation and financial modeling Private equity = Società di gestione risparmio Every investment (fund1, fund2, …) own equity stakes and they want to make money with that shares and selling them in future. The private equity investor is not passive but is involved in the management of the company to increase performance and revenues. They create value by: buying at a discount (if possible), increasing the operating performance of the company, using debt and increasing leverage. The typical life of a fund is 10 years so they don’t have much time (the investment period actually lasts around 3-5 years).
