06 Intro to Business Valuation
What are the 3 valuation approaches?
1. Asset Approach
2. Income Approach
3. Market Approach
What are the 3 methods to calculate FCFF (or UFCF)?
1. EBIT method
2. Net Income method
3. EBITDA method
UFCF = FCFF = ...
= EBIT*(1-t) + DEP - CapEx - ∆NWC
What are the different stages for a typical DCF forecast?
Stage 1: discrete forecast
Stage 2: terminal value
What is the relationship between risk and required rate of return?
The higher/lower the risk, the higher/lower the required rate of return is to compensate for that risk.
cost of debt
COD = yield * (1-t)
cost of equity
Capital Asset Pricing Model or CAPM
COE = Rf + ß * ERP
(ERP = Rm - Rf)
WACC
WACC = COD * D/(E+D) + COE * E/(E+D)
Levered Beta ß
ß(L) = ß(U) * [1 + (1-t) * D/E]
What is the most notable advantage of a diversified portfolio of stocks?
You remove the firm-specific risk or alfa, and are hence only exposed to the market risk or ß.
What discount rate should you use to discount unlevered free cash flows?
WACC
terminal value using the perpetuity growth method
TV = [last UFCF * (1+g)] / (WACC-g)
you still need to discount this to the present vale using (1+WACC)^n !!!
TV calculation methods
1. perpetuity growth method
2. terminal multiple method
What are the steps in Comparable Company Valuation?
1. select peer group
2. locate data
3. perform valuation using multiple
What are the steps in Precedent Transaction Valuation?
1. select transactions
2. locate data
3. perform valuation using multiple
Which value is used as the purchase price for a company?
Enterprise Value