week 3 - Fins3625AppliedCorporateFinance 3/16/2010 Weekly...

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Fins 3625 Applied Corporate Finance 3/16/2010 Kingsley Y. Fong 1 Week 3 Corporate/enterprise Corporate/enterprise valuation Reference. BD Chapter 11 1 Fins 3625 Applied Corporate Finance Weekly Learning Outcomes You should be able to List four different valuation techniques Apply trading multiple and the corporate/enterprise DCF valuation model to value a firm Discuss the assumptions underlying trading multiple valuation Contrast the strength and weakness of the multiple and DCF valuation Discuss the application of value-based management Discuss and provide examples of three corporate governance mechanisms Fins 3625 Applied Corporate Finance 2 Applications of valuation analysis Acquisitions How much would one be willing to pay to buy the company? Divestitures How much can the company / division be sold for? Fairness Opinion Is the price offered for the company / division fair from a financial point of view? Public Equity Offerings How much value can be obtained in the public market for the company / division? Restructurings What is the value that can be generated through a restructuring of the company? Demergers Allocation of value between the demerged entities Different analyses favour different industries Fins 3625 Applied Corporate Finance 3 The key valuation techniques Fins 3625 Applied Corporate Finance 4 Trading multiples Compare all publicly traded companies in one industry according to: Trading value Financial performance Credit profile Identify relative value among: Publicly traded companies Operating units of a large corporation Indicate credit profile to: Determine credit rating Determine appropriate capital structure Fins 3625 Applied Corporate Finance 5 Commonly used multiples Price-to-earnings Price-to-book Enterprise value to EBITDA (a cash flow multiple) Enterprise value to revenues Multiples can be applied to current (trailing) or next-year (forward/prospective) estimates of earnings in order to obtain the present value of the enterprise or its equity, or estimate horizon value in discounted cash flow valuation Fins 3625 Applied Corporate Finance 6
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Fins 3625 Applied Corporate Finance 3/16/2010 Kingsley Y. Fong 2 Multiples and Fundamentals Gordon Growth Model: Dividing both sides by the earnings, Dividing both sides by the book value of equity, P 0 DPS 1 r g n n n 0 0 -g r ) g (1 x Ratio Payout = PE EPS P If the return on equity is written in terms of the retention ratio and the expected growth rate Dividing by the Sales per share, n n 0 0 -g r g - ROE = PBV BV P n n 0 0 -g r ) g (1 x Ratio Payout x ROE = PBV BV P n n 0 0 -g r ) g (1 x Ratio Payout Margin x Profit = PS Sales P Fins 3625 Applied Corporate Finance 8 Fins 3625 Applied Corporate Finance 9 What are the advantages and disadvantages of using multiples?
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This note was uploaded on 10/03/2010 for the course FINS 3625 taught by Professor Kingsleyfong during the Three '08 term at University of New South Wales.

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week 3 - Fins3625AppliedCorporateFinance 3/16/2010 Weekly...

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