Offered to: Securities & Commodities Authority
Trainer: Dr. Anis Samet, American University of Sharjah
Day 1
1.
Workshop pre-assessment (5 mn.)
2.
Session 1: Introduction to values (90 mn)
3.
Session 2: Discounted cash flow 1(135 mn)
4.
Session 3: Discounted cash flow 2 (60 mn)
5.
Day-1-assessment (10 mn)
6.
Case study, part 1 (45 mn)
 Day 2
1.
Session 1: Multiples 1 (90 mn)
2.
Session 2: Multiples 2 (135 mn)
3.
Alternatives and latest methodologies (60 mn)
4.
Final-assessment (5 mn)
5.
Case study, part 2 (45 mn)

Anis Samet, Ph.D., American
University of Sharjah
2
Day 1
Anis Samet, Ph.D., American
University of Sharjah
3
Please answer the pre-assessment questions!
Anis Samet, Ph.D., American
University of Sharjah
4
Financial Statements: A review
Anis Samet, Ph.D., American
University of Sharjah
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‫‪ Balance sheet‬الميزانية العمومية‬
‫)‪ Asset (balance sheet‬أصل‪/‬موجودة(الميزانية العمومية)‬
‫‪ Equity‬حقوق الملكية‪/‬استثمار رأس المال‬
‫‪ Liabilities‬مطلوبات‪ /‬خصوم ‪ /‬التزامات‪ /‬ديون‬
‫)‪ Income statement (US‬بيان‪ /‬قائمة الدخل‬
‫‪ Revenues‬اإليرادات‬
‫‪ Expense‬مصروف‬
‫‪ Cash flow statement‬بيان‪ /‬قائمة التدفق النقدي‬
‫‪ Cash inflow‬التدفق النقدي الوارد (النقد الوارد‪ /‬المقبوض)‬
‫‪ Cash outflow‬النقد الصادر‪ /‬المدفوع‬
‫‪ Consolidated financial statement‬بيانات‪ /‬قوائم مالية موحدة‪ /‬مدمجة‬
‫‪ Financial statements‬القوائم المالية‬
‫‪ Note to financial statements‬مالحظات (إيضاحات) ملحقة بالقوائم المالية‬
‫‪ Shareholder’s capital, shareholder’s‬رأس مال المساهمين‪ ،‬حقوق ملكية‬
‫‪ equity‬المساهمين‬
‫)‪ Initial Public Offerings (IPO‬الكتتاب العام‬
‫‪6‬‬
‫‪Anis Samet, Ph.D., American‬‬
‫‪University of Sharjah‬‬
Businesses report information in the form of
financial statements issued on a periodic basis.
GAAP requires the following four financial
statements:
1. Balance Sheet - statement of financial position
at a given point in time
2. Income Statement - revenues minus expenses
for a given time period
3. Statement of Owner's Equity - also known as
Statement of Retained Earnings or Equity
Statement
4. Statement of Cash Flows - summarizes sources
and uses of cash

Anis Samet, Ph.D., American
University of Sharjah
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



The balance sheet is based on the following
fundamental accounting model:
Assets = Liabilities + Equity
Assets can be classed as either current assets or
fixed assets.
Liabilities (current & long term) represent the
portion of a firm's assets that are owed to
creditors
Equity is referred to as owner's equity in a sole
proprietorship
or
a
partnership,
and
stockholders' equity or shareholders' equity in a
corporation
Anis Samet, Ph.D., American
University of Sharjah
8
Anis Samet, Ph.D., American
University of Sharjah
9


The income statement presents the results of
the entity's operations during a period of
time
Net Income = Revenue - Expenses
Revenue refers to inflows from the delivery of
a product/service and expenses are outflows
incurred to produce revenue
Anis Samet, Ph.D., American
University of Sharjah
10
Anis Samet, Ph.D., American
University of Sharjah
11



The equity statement explains the changes in
retained earnings.
The statement of retained earnings uses
information from the Income Statement and
provides information to the Balance Sheet
The following equation describes the equity
statement for a sole proprietorship:
Ending Equity = Beginning
Equity + Investments - (Withdrawals/Paid
Dividends) + Income
Anis Samet, Ph.D., American
University of Sharjah
12
The statement of cash flows is useful in
evaluating a company's ability to pay its bills. For
a given period, the cash flow statement provides
the following information:
 Sources of cash
 Uses of cash
 Change in cash balance
 The cash flow statement breaks the sources and
uses of cash into the following categories:
1. Operating activities
2. Investing activities
3. Financing activities

Anis Samet, Ph.D., American
University of Sharjah
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Anis Samet, Ph.D., American
University of Sharjah
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


Refer to the financial statements of Tabreed
in Arabic and English
Arabic
English
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University of Sharjah
15
Session 1: Introduction to Values
Anis Samet, Ph.D., American
University of Sharjah
16



Valuation may be done by the seller prior to
entertaining prospective buyers, by the buyer who
identifies a specific target or by both parties
during negotiations to resolve a dispute over price
Company valuation is not an exact science. There
are numerous acceptable valuation methods and,
in most situations, each will yield a different result
The formal mathematical valuation should only
play one part in the overall pricing of the deal and
in determining the transaction's true value to the
parties
Anis Samet, Ph.D., American
University of Sharjah
17



While all methods should, in theory, yield the
same result, they rarely do, because of factors
including, but not limited to, market conditions,
the industry in which the target company
operates and the type and nature of the business
All valuations are biased. The only questions are
how much and in which direction
Simpler valuation models do much better than
complex ones
Anis Samet, Ph.D., American
University of Sharjah
18


Knowing what an asset is worth and what
determines that value is a pre-requisite for
intelligent decision making -- in choosing
investments for a portfolio, in deciding on the
appropriate price to pay or receive in a
takeover and in making investment, financing
and dividend choices when running a
business
A sound investing is that an investor does not
pay more for an asset than it is worth
Anis Samet, Ph.D., American
University of Sharjah
19
The firm’s value is driven by:
1. Earnings capacity
2. Growth opportunities
3. Real corporate performance, as compared to
market benchmarks
4. Sales, operating margin, return on
investment

Anis Samet, Ph.D., American
University of Sharjah
20
Valuation Models
Asset based
valuation:
Liquidation
value/
Replacement
cost
Discounted Cash Flow
models: Relying on
future expected cash
flows and determining
the appropriate discount
rate to use
Alternative and latest
methodologies:
Relative valuation: Using
comparable companies in
the same sector/industry.
Multiples
Break-even method
Dividend Discount Model
Economic-Value Added
(EVA)
Adjusted Present Value
(APV)
Cash Flow Return on
Investment (CFRI)
Real options
Anis Samet, Ph.D., American
University of Sharjah
21



Accounting valuation is important, because
the value of assets on a company’s financial
statements needs to be reliable
Analysis of this valuation is just as important
as the valuation itself
Some assets, such as real estate, which
is carried at cost less depreciation, can be
carried on the balance sheet at far from their
true value
Anis Samet, Ph.D., American
University of Sharjah
22
Session 2: Discounted Cash Flow (DCF) 1
Anis Samet, Ph.D., American
University of Sharjah
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


Discounted Cash Flow (DCF) analysis is a method
of valuing a project, company, or asset using the
concepts of the time value of money
All future cash flows are estimated and
discounted to give their present values (PVs) —
the sum of all future cash flows, both incoming
and outgoing, is the net present value (NPV),
which is taken as the value or price of the cash
flows in question
Discounted cash flow analysis is widely used in
investment finance, real estate development, and
corporate financial management
Anis Samet, Ph.D., American
University of Sharjah
24

The value of the firm is obtained by
discounting expected cash flows to the firm,
i.e., the residual cash flows after meeting all
operating expenses and taxes, but prior to
debt payments, at the weighted average cost
of capital, which is the cost of the different
components of financing used by the firm,
weighted by their market value proportions
Anis Samet, Ph.D., American
University of Sharjah
25
T
CFt
Terminal ValueT
Firm Value  

t
T
(1  r )
t 1 (1  r )



CFt: Cash flow in period t
r: discount rate
T: life of the firm
Anis Samet, Ph.D., American
University of Sharjah
26


For an asset to have value, the expected
cash flows have to be positive some time
over the life of the asset
Assets that generate cash flows early in their
life will be worth more than assets that
generate cash flows later; the latter may
however have greater growth and higher
cash flows to compensate
Anis Samet, Ph.D., American
University of Sharjah
27

Step 1—Forecast Expected Cash Flow: the
first order of business is to forecast the
expected cash flow for the company based on
assumptions
regarding
the
company's
revenue growth rate, net operating profit
margin, income tax rate, fixed investment
requirement, and incremental working capital
requirement
Anis Samet, Ph.D., American
University of Sharjah
28

Step 2—Estimate the Discount Rate: the next
order of business is to estimate the
company's weighted average cost of capital
(WACC), which is the discount rate that's used
in the valuation process
Anis Samet, Ph.D., American
University of Sharjah
29

Step 3—Calculate the Value of the
Corporation: the company's WACC is then
used to discount the expected cash flows
Anis Samet, Ph.D., American
University of Sharjah
30

Step 4—Calculate Intrinsic Stock Value: we
then subtract the values of the company's
liabilities—debt, preferred stock, and other
short-term liabilities to get Value to Common
Equity, divide that amount by the amount of
stock outstanding to get the per share
intrinsic stock value
Anis Samet, Ph.D., American
University of Sharjah
31
Operating cash flow (OCF)
=Earnings Before Interest and Taxes (EBIT) +
depreciation* - taxes
= EBIT(1-T) + depreciation
FCF
= OCF – reinvestment
= OCF - capital spending - working capital
spending
= OCF - capex – ΔNWC
•
•
•
Depreciation, or more generally any non-cash charges
Capital spending: changing in fixed assets
Working capital=total current assets-total current liabilities
Anis Samet, Ph.D., American
University of Sharjah
32
Firm value
= PV of FCF during forecast period +
PV of terminal value
T
FCFt
Terminal ValueT
Firm Value  

t
T
(
1

WACC
)
(
1

WACC
)
t 1

Terminal value = proxy for all cash flows after the
forecast period.
Anis Samet, Ph.D., American
University of Sharjah
33
Statement of Income — Example
(figures in thousands)
Revenue
Sales Revenue
$20,438
Operating Expenses
Cost of goods sold
$7,943
Selling, general and
administrative expenses
$8,172
Depreciation and amortization
$960
Other expenses
$138
Total operating expenses
$17,213
Operating income
$3,225
Non-operating income
$130
Earnings before Interest and Taxes
(EBIT)
$3,355
Net interest expense/income
$145
Earnings before income taxes
$3,210
Income taxes
$1,027
Net Income
$2,183
Anis Samet, Ph.D., American
University of Sharjah
34






FCF1=390
FCF2=600
FCF3=694
Terminal Value=500
WACC: 10%
Find the firm’s value using DCF
Anis Samet, Ph.D., American
University of Sharjah
35
390 600
694
500
SCA Value 



 $1,747.48
2
3
3
1.1 (1.1) (1.1) (1.1)
Anis Samet, Ph.D., American
University of Sharjah
36

Session 3: Discounted Cash Flow 2
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University of Sharjah
37





As seen before the discount rate that we have
used to discount the future cash flow is the
WACC
The WACC is the weighted average of the cost of
equity and the cost of debt. The weights depend
on how much of the firm’s activity is financed by
debt and equity
The higher the cost of debt, the higher the WACC
The higher the cost of equity, the higher the
WACC
The higher the WACC, the lower the firm’s value
Anis Samet, Ph.D., American
University of Sharjah
38
D
D
WACC  * K E  * (1  T ) * K D
E
V

Where:
Ke = cost of equity
Kd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V=E+D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
T = corporate tax rate
Anis Samet, Ph.D., American
University of Sharjah
39






D=2000
E=3000
Ke=12%
Kd=8%
T=20%
Find WACC
Anis Samet, Ph.D., American
University of Sharjah
40
3000
2000
WACC 
*12% 
* 8% * (1  20%)  9.76%
5000
5000
Anis Samet, Ph.D., American
University of Sharjah
41






Two companies that are different in term of
risk should they have the same WACC?
No! Why?
Shareholders investing in the riskier company
require a higher return and therefore a higher
Ke
Banks lending money to the riskier company
require a higher interest rate and therefore a
higher Kd
So the riskier company has a higher WACC
A higher WACC lead to a lower value
Anis Samet, Ph.D., American
University of Sharjah
42


The cost of debt depend on the interest paid
by the company on the outstanding loans
The cost of debt is the weighted average of
the costs of different debt instruments used
by the company (e.g., bonds, sukuk, bank
loans, ..)
Anis Samet, Ph.D., American
University of Sharjah
43




The cost of equity represents the rate of
return required by shareholders to invest in a
company
The required rate of return depends on the
riskiness of the company
If the company is a public company, we can
estimate the cost of equity using the Capital
Asset Pricing Model (CAPM)
If the company is a private company, we try
to find a comparable public company to
estimate the cost of equity using the CAPM
Anis Samet, Ph.D., American
University of Sharjah
44

CAPM is used to determine a theoretically
appropriate required rate of return of an asset
E ( R )  r f   * ( E ( Rm )  r f )




E(R):is the expected return on the asset
Rf: is the risk-free rate of interest such as interest
arising from government bonds
Β: is the sensitivity of the expected excess asset
returns to the expected excess market returns
E(Rm): is the expected return of the market
Anis Samet, Ph.D., American
University of Sharjah
45





Rf: 5%
Β: 1.4
E(Rm): 12%
Find E(R)
E(R)=5%+1.4*(12%-5%)=14.8%
Anis Samet, Ph.D., American
University of Sharjah
46
Strengths
1.
CAPM is based on the idea that investors demand
additional expected return if they are asked to accept
additional risk
2.
the expected return of a security or a portfolio equals
the rate on a risk-free security plus a risk premium.
 Weaknesses:
1.
The model assumes that asset returns are normally
distributed
2.
The model assumes that all investors have access to
the same information
3.
The model assumes that the variance of returns is an
adequate measurement of risk

Anis Samet, Ph.D., American
University of Sharjah
47



Terminal value is quite large compared to
expected annual cash flows
DCF valuation is sensitive to the terminal
value
It is difficult to estimate the terminal/residual
value of a company
Anis Samet, Ph.D., American
University of Sharjah
48
Strengths of DCF
Weaknesses of DCF
DCF offers the closet thing to the
company’s intrinsic value
Length of projection period?
DCF allows to find out which
companies are overpriced and
which ones are underpriced
Confidence about future cash
flows
DCF analysis is a great tool to
analyze what assumptions and
conditions have to be fulfilled in
order to reach a certain company
value
Other sources of value (cash,
holdings in other firms, nonoperating assets)
DCF is a valid method to assess
the company’s value if special
precaution is put on the validity of
the underlying assumptions
DCF valuation depends on the
quality of inputs: forecasted CFs
and WACC. Garbage-in garbageout principle holds
Anis Samet, Ph.D., American
University of Sharjah
49



It is very easy to manipulate the DCF analysis
to result in the value that you want it to result
in by adjusting the inputs
This is even possible without making changes
that would be significant from an economist’s
point of perspective, e.g. a change in the
perpetual growth rate or in the WACC by just
a few base points
Analysts or business professionals have no
tools to estimate the input factors with that
kind of exactness
Anis Samet, Ph.D., American
University of Sharjah
50
Session 4: Case study
Anis Samet, Ph.D., American
University of Sharjah
51
Revenues
Cost of goods
sold
Depreciation
EBIT
Interests
Taxable income
Taxes
Net Income
∆ in capital
spending
∆ in working
capital
Year 1
Year 2
Year 3
1000
1500
2000
500
700
1000
100
400
100
700
150
850
100
300
100
600
120
730
60
240
120
480
146
584
0
100
100
50
-20
60
Anis Samet, Ph.D., American
University of Sharjah
52







Terminal value=500
Tax rate=20%
Ke= 14%
Kd=7.5%
D/V=50%, E/V=50%
Find the firm’s value using DCF
What would be the firm value if the WACC is
12% or 15%?
Anis Samet, Ph.D., American
University of Sharjah
53
Day 2
Anis Samet, Ph.D., American
University of Sharjah
54
Valuation Models
Asset based
valuation:
Liquidation
value/
Replacement
cost
Discounted Cash Flow
models: Relying on
future expected cash
flows and determining
the appropriate discount
rate to use
Alternative and latest
methodologies:
Relative valuation: Using
comparable companies in
the same sector/industry.
Multiples
Break-even method
Dividend Discount Model
Economic-Value Added
(EVA)
Adjusted Present Value
(APV)
Cash Flow Return on
Investment (CFRI)
Real options
Anis Samet, Ph.D., American
University of Sharjah
55
Session 1: Multiples 1
Anis Samet, Ph.D., American
University of Sharjah
56
Relative valuation models:


1.
2.
3.
Comparable companies valuation (trading
market valuation)
Comparable transactions valuation
Define a set of publicly traded comparable
companies
Observe how those companies are valued by
the market
Apply that valuation to the firm
Anis Samet, Ph.D., American
University of Sharjah
57
Mostly used multiples:
1. Price-to-earnings ratio
2. Price-to-book ratio
3. Enterprise value to Earnings before Interest,
Taxes, Depreciation, and Amortization
(EBITDA)
4. Enterprise value to revenues

Anis Samet, Ph.D., American
University of Sharjah
58


Definition of 'Price-Earnings Ratio - P/E Ratio'
A valuation ratio of a company's current share
price compared to its per-share earnings
Calculated as:
Market Value per Share
Earnings per Share (EPS)
Anis Samet, Ph.D., American
University of Sharjah
59


For example, if a company is currently trading at
$43 per share and earnings over the last 12
months were $1.95 per share, the P/E ratio for
the stock would be 22.05 ($43/$1.95)
The P/E is sometimes referred to as the
"multiple", because it shows how much investors
are willing to pay per dollar of earnings. If a
company
were
currently
trading
at
a
multiple (P/E) of 20, the interpretation is that an
investor is willing to pay $20 for $1 of current
earnings
Anis Samet, Ph.D., American
University of Sharjah
60


A ratio used to compare a stock's market value to
its book value. It is calculated by dividing the
current closing price of the stock by the book
value per share
Also known as the "price-equity ratio” and
calculated as:
P/B Ratio 

Stock Price
(Total Assets - Intangible Assets and Liabilities)/# of Shares
A lower P/B ratio could mean that the stock is
undervalued
Anis Samet, Ph.D., American
University of Sharjah
61







For example, if a company is currently
trading at $43
Total assets $1,000,000
Total liabilities $400,000
Intangible assets $100,000
Number of outstanding shares: 10,000
Find price-to-book ratio
Price-to-book ratio
=43/($500,000/10000)=0.86
Anis Samet, Ph.D., American
University of Sharjah
62

It represents the enterprise value per dollar of
EBITDA. It is calculated as:
EBITDA Multiple 
Stock Price
EBITDA per Share
Anis Samet, Ph.D., American
University of Sharjah
63






For example, if a company is currently
trading at $43
EBIT=$400,000
Amortization & Depreciation=$50,000
Number of outstanding shares: 10,000
Find enterprise value to EBIT (1.075)
Find enterprise value to EBITDA (0.96)
Anis Samet, Ph.D., American
University of Sharjah
64

It represents the enterprise value per dollar of
revenues. It is calculated as:
Revenues Multiple 
Stock Price
Revenues per Share
Anis Samet, Ph.D., American
University of Sharjah
65




For example, if a company is currently
trading at $43
Revenues=$600,000
Number of outstanding shares: 10,000
Find the enterprise value to revenues (0.716)
Anis Samet, Ph.D., American
University of Sharjah
66

A well-designed, accurate multiples analysis
can provide valuable insights about a
company and its competitors. Conversely, a
poor analysis can result in confusion
Anis Samet, Ph.D., American
University of Sharjah
67

To apply multiples properly, use the following four best practices:
Choose
comparables with
similar prospects
Step 1
To analyze a
company using
comparables, you
must first create an
appropriate peer
group.
Use enterprise
value multiples
Use multiples
based on forward
looking data
Step 2
Use an enterprise
value multiple to
eliminate effects from
changes in capital
structure and one
time gains and losses
Step 3
When building a
multiple, the
denominator should
use a forecast of
profits, rather than
historical profits
Anis Samet, Ph.D., American
University of Sharjah
Eliminate nonoperating items
Step 4
Enterprise-value
multiples must be
adjusted for non
operating items
hidden within
enterprise value and
reported EBITA
68
Session 2: Multiples 2
Anis Samet, Ph.D., American
University of Sharjah
69


When you gather the information for
comparables, you should make sure that the
multiples are determined in the same manner
and then applied consistently to the subject
company
Many analysts remove non-recurring items
from earnings before calculating these ratios
so to get a better picture of the underlying
earnings of a company
Anis Samet, Ph.D., American
University of Sharjah
70



According to best practices it is necessary to
identify peers with the same business
concept, accounting principles, growth, ROIC
and financial and operational risk
It is important not to base a multiple
valuation on a single year’s estimates. Sales,
EBITDA etc. are different between years. DCF
catch this volatility but a one-year multiple
doesn’t
A multiple valuation should always be based
on estimates from multiple years
Anis Samet, Ph.D., American
University of Sharjah
71
Strengths
Weaknesses
Easy to produce
Measures relative, not intrinsic
value
Different estimates of value,
depending on which multiple you
use
Availability of comparables?
Vulnerable to manipulation
(definition of comparables)
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University of Sharjah
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Session 3: Alternative and Latest
Methodologies
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University of Sharjah
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It represents the number of years required to
get back the initial investment
For instance, an investment costs you
$100,000 and you will be receiving $25,000
each year so it takes you 4 years to breakeven
The shorter the time to break-even, the
better the project
Some investors care about the number of
years it takes to get back their initial
investment
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University of Sharjah
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Dividend Discount Model (DDM) uses predicted
dividends divided by (the discount rate –the
dividends’ growth rate)
Dividend Per Share
Value of Stock 
Discount Rate - Dividend Growth Rate
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This procedure has many variations, and it doesn't
work for companies that don't pay out dividends
As some companies do not change their dividends
from year-to year, then an average growth over a
certain number of years will be used
E.g., dividend per share=1$, discount rate=10$,
dividend growth rate=3%, so the value is $14.28
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University of Sharjah
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Adjusted Present Value (APV) is the net
present value of a project if financed solely by
equity (present value of un-leveraged cash
flows) plus the present value of all the
benefits of financing
This method is often used for a highly
leveraged project
The APV method is not used as frequently in
practice as is the DCF analysis
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University of Sharjah
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CFRI is a valuation model that assumes the
stock market sets prices based on cash flow,
not on corporate performance and earnings
Cash Flow
CFROI 
Market Value of Capital Employed
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Example: Cash flow=$5,000 and the capital
employed has a market value of $6,000 so
the CFROI=20%
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University of Sharjah
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For the corporation, it is essentially the internal
rate of return (IRR)
CFROI is compared to a hurdle rate to determine
if Investment is performing adequately
The hurdle rate is the total cost of capital for the
corporation (WACC)
The CFROI must exceed the hurdle rate to satisfy
both the debt financing and the investors
expected return
Example: CFROI=12% and WACC=8% so do we
accept the investment?
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University of Sharjah
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The Economic Value Added (EVA) is a measure of
surplus value created on an investment
Define the return on capital (ROC) to be the cash
flow return on capital earned on an investment
Define the cost of capital as the weighted
average of the costs of the different financing
instruments used to finance the investment
EVA = (Return on Capital - Cost of Capital) (Capital
Invested in Project)
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University of Sharjah
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EVA is a measure of dollar surplus value, not
the percentage difference in returns
It is closest in both theory and construct to
the net present value of a project in capital
budgeting
The value of a firm, in DCF terms, can be
written in terms of the EVA of projects in
place and the present value of the EVA of
future projects
Value= ( Investment in Existing Assets +
NPVAssets in Place) + NPV of all future projects
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University of Sharjah
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Example:
Return on Capital (2010)= 12.77%
Cost of Capital (WACC) (2010)= 8.85%
Capital in Assets in Place (2010): $29,500
EVA?
EVA (2011)=(12.77%-8.85%)*$29,500=
$1,154.5
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University of Sharjah
81
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Real
options
analysis (ROA) is widely
recognized as a superior method for valuing
projects with managerial flexibilities
There are cases in which a firm may enter a
new product market or region by making a
relatively small investment in order to
establish a foothold and acquire the option to
either expand it or exit this market when
more information is obtained
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University of Sharjah
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For example the opening of a new oil field
involves a series of decisions about whether
to lease an area, how to explore it, what wells
and pipelines to build, and so on
This perspective contrasts with the traditional
view of a project as set of decisions made
once at the beginning and unchanged during
the life of the project
In general, projects do not correspond to the
situation assumed by traditional analyses,
and the options view is much more realistic
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University of Sharjah
83
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Real options approach recognizes that risks
can be managed, to avoid bad outcomes or
take advantage of good ones are they
become apparent
The use of real options practically always
leads to higher values for the same project
than the traditional methods, precisely
because the options perspective recognizes
that managers make future decisions about a
project as uncertainties become resolved
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University of Sharjah
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Valuation Method
Usefulness
Comments
DCF
Widely used
Easy to implement
Multiples
Widely used
Depends on the accounting
information
Break-Even
Not frequently used
Does not take into account future
cash flows that occur after the
break-even point
DDM
Not frequently used
Used for firms paying dividends
APV
Not frequently used
Used for a highly leveraged project
EAV
Increasingly used
Depends on accounting and
economic data
CFROI
Not frequently used
Similar to DCF
Real Options
Not frequently used
Suitable for specific projects
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University of Sharjah
85
Final assessment
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University of Sharjah
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Session 4: Case study
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University of Sharjah
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Royal Ahold is a global retail supermarket
group based in Europe and the United States
with company headquarters in Amsterdam,
The Netherlands
There are six comparables to Royal Ahold
Find the value of Royal Ahold using Sales,
EBITDA, EBIT, and PER 2008 Multiples
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University of Sharjah
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University of Sharjah
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Royal Ahold data for 2008
Sales/Share
$
EBITDA/Share
100.00 $
EBIT/Share Net Income/Share
6.00 $
3.00 $
2.50
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University of Sharjah
90
Thank you!
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University of Sharjah
91