Dcf : Course on Dcf

Financial Reporting : Valuation Lecture 5 Discounted Cash Flows

Lecturer: Antonio Occhionero CA, MBA

Lecture 5 Agenda

1. Summary of Principal Valuation Methodologies

2. DCF Overview 3. Projections 4. Terminal Value 5. WACC 6. Present Value 7. Bridge to Equity

Antonio Occhionero, 2011

Principal Valuation Methodologies

DCF

Inherent fundamental value  Present value of projected unlevered free cash flows and PV of terminal value using WACC as a discount rate

Compco

Public market implied fundamental value    Value = Multiple * Firm Characteristic Forward looking revenue, EBITDA, earnings Value based on market trading multiples Useful for IPOs Reflects current market perception Widely used by investors Easy to understand Market volatility Quality of comparables

Compaq

Value in a change-ofcontrol situation    Value = Multiple * Firm Characteristic Historical revenue, EBITDA, earnings Value based on sale transaction multiples

Asset Based Value

Value based on cost of substitution  Value producing assets and liabilities are measured at current market value

Methodology

 Useful in IPO, M&A and LBO  Allows for assessment of projects  Can develop sensitivity analysis of strategies  Sensitivity to projections, WACC and terminal value

     

 Useful in M&A  Provides realistic sense of premium paid  Determines market demand for sector  Highlights consolidation trends  Market volatility  Quality of comparables

 Useful for a liquidation  Objective measurement methodologies  Generally lower than “going concern” value  Difficulty in valuing goodwill and other intangibles

Antonio Occhionero, 2011

Characteristics

Principal Valuation Methodologies

LBO

Maximum price through target debt and equity returns

Dividend Discount Model

Present value of future dividend stream

Economic Value Added

Sum of beginning capital base and future value added  EVA = NOPAT (Invested Capital * WACC)

Methodology

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