Business Valuation

Business Valuation is the one of the most challenging tasks to perform in relation to the analysis of the company financials. The standard valuation relies on a good mix of science and art, in that it involves careful measures of critical input variables, mixed with a large part of interpretation and intuition. Company valuation relies on the appropriate estimation of key parameters, like growth potential, right cash flow discounting, etc. We provide robust background to assess what the theoretical value of a company should be based on the available information, the balance sheet, profit and loss account and cash flow statement. After this course, a Student will know how to value a business with the use of different valuation methodologies: DCF, Relative Valuation and Real Option approach. The course prepares students for the rewards and challenges they face in the professional world of business valuation, IPOs, tests for impairment of the assets.

Business Valuation is the one of the most challenging tasks to perform in relation to the analysis of the company financials. The standard valuation relies on a good mix of science and art, in that it involves careful measures of critical input variables, mixed with a large part of interpretation and intuition. Company valuation relies on the appropriate estimation of key parameters, like growth potential, right cash flow discounting, cost of equity and cost of debt, WACC etc. We provide robust background to assess what the theoretical value of a company should be based on the available information, the balance sheet, profit and loss account and cash flow statement. A good financial manager is supposed to understand the value of the company he manages, thus proper knowledge of the methodologies for corporate valuation is at the basis of a complete education in corporate finance. After this course, a Student will know what are the different valuation methodologies available for corporate valuation, and how do they differ from each other? How can the cost of equity be estimated with the use of the CAPM model in practice? How can market return and beta estimation (the parameters of CAPM) be estimated? We present the different valuation methodologies available to the analyst.

The course prepares students for the rewards and challenges they face in the professional world of business valuation, IPOs, test for impairment of the assets. This course emphasizes both the development of analytical skills such as Excel to leverage available information technology and the values and behaviours that make analysts effective in the workplace.

The course describes following topics:

1. Valuation of enterprises: theoretical basis

2. Capital Assets Pricing Model CAPM, the risk-free rate, the risk premium, the beta

3. Valuation of Cash Flow Streams, Income methods of enterprise valuation, the cost of capital, beta estimation, growth and terminal value

4. Financial Statement and Ratio analysis

5. Working Capital Management, Conversion Cycles, Receivables and Payables, Inventory, Cash and Liquidity Management

6. Pro Forma Statements, Forecasting, flexible budgeting

7. Weighted average cost of capital WACC, selection of the beta coefficient based on the CAPM model

8. Discounted Free Cash Flow Models

9. Relative Valuation Models

10. The Modigliani-Miller Theorems, the irrelevance of capital structure, WACC, Tax-Based Theories of Capital Structure

11. Dividend Discount Models, Payout Policy – Dividends vs. Share Repurchase, Modigliani-Miller Revisited

12. Real Option approach to business valuation, binomial trees, Black-Scholes-Merton Model

13. Presentations of case study’s business valuations, incl. ICT industry (Asseco), gaming industry (CD Project),

14. Foreign companies valuations – case-study of Facebook, Alibaba, Microsoft, Coca Cola, Astra Zeneca

15. Students’ Presentations of Business Valuations

A. Corelli, Analytical Corporate Finance, Springer Texts in Business and

Economics, Springer Nature Switzerland AG 2018, https://doi.org/10.1007/978-3-319-95762-3_8

S. Lynn, Valuation for Accountants, Springer Texts in Business and Economics, Springer Nature Singapore Pte Ltd. 2020, https://doi.org/10.1007/978-981-15-0357-3_5

Damodaran, A. website http://pages.stern.nyu.edu/~adamodar/New_Home_Page/home.htm

Hamada, R. (1972). The effect of the firm’s capital structure on the systematic risk of common stocks. Journal of Finance, 27, 435–452.

Lintner, J. (1965). Security prices, risk, and maximal gains from diversification. Journal of Finance, 20, 587–615.

Sharpe, W. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, 19, 425–442.

The course prepares students for the rewards and challenges they face in the professional world of business valuation, IPOs, test for impairment of the assets. This course emphasizes both the development of analytical skills such as Excel to leverage available information technology and the values and behaviours that make analysts effective in the workplace.

The student will understand the various methodologies for corporate valuation. The students will also gain practical knowledge and ability to prepare business valuation using various methods as well as calculate indicators (ratios) and forecasts useful in relative valuation and discounted cash flow valuation.

1. The student has knowledge of different valuation methodologies available for corporate valuation, and how do they differ from each other.

2. Students have knowledge about the indicators and ratios used by business analysts to prepare forecasts needed for the discounted cash flow (DCF) method.

3. The student has knowledge of the market ratios used for the purpose of relative valuation approach.

4. The student knows how can the cost of equity be estimated with the use of the CAPM model in practice.

5. The student knows how can market return and beta (the parameters of CAPM) be estimated.

The student has the ability to:

1. prepare business valuation with the use of the discounted cash flow (DCF) method,

2. calculate cost of equity, cost of debt and weighted average cost of capital (WACC),

3. suggest appropriate measures which should be used in relative business valuation and use relative valuation approach in business valuation,

4. interpret the results of business valuation and suggest suitable recommendation toward shares (buy, keep or sell),

5. apply real option approach to value business (i.e., start-up).

The student is aware:

1. how information flows through the enterprise and outside, and how information affects business valuation.

2. how the business valuation affects the (portfolio) investment decisions or M&A decisions.

SU05, SU06, SK01, SK03, SU04, SU03, SU02, SU01, SW03, SW02, SW01, SW04, SW05, SK02, SK04

Assessment:

Business valuation project with presentation (written & oral) of the outcomes, including the following four stages, each per 20 points (in total 80 points):

(1) fundamental analysis, SWOT, Porter's 5 forces model, business model, key value drivers

(2) ratio analysis

(3) forecasts and projections, pro forma financial statement

(4) DCF and relative business valuation & conclusions

Mid-term tests - 20 points (in total 20 questions per 1 point each)

Tests

There will be mid-tests (quizzes) (2 points each, 20 points in total) Students must attend lessons (online or in class) and earn points. Earned points will be totalled and added to other points to arrive at the total number of points and a final grade. There will not be a possibility to make-up or re-due a test or a project.

Grading system:

points 50 – 60 3.0 (dst)

points 61 – 70 3.5 (dst+)

points 71 - 80 4.0 (db)

points 81 – 90 4.5 (db+)

points 91 – 100 5.0 (bdb)