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Unformatted text preview: 8/19/2010 1 FBE 421 P ROFESSOR B RIGGS Valuation Overview O VERVIEW OF V ALUATION P ROCESS F ROM A Q UALITATIVE P ERSPECTIVE We have to start somewhere – so let’s skip the numbers for now and focus on the common sense part of the equation… This module serves to explore critical elements of corporate strategy and their impact on the application of valuation methodologies. L t’ t bli h f k f di i f i k Let’s establish a framework for discussion of risk, growth and margin 8/19/2010 2 O VERVIEW OF V ALUATION P ROCESS F ROM A Q UALITATIVE P ERSPECTIVE The valuation process consists of five steps: o Understanding the business o Understanding the business. o Evaluating the historical financial performance of the firm. o Selecting the appropriate valuation model(s). o Applying the model. o Making the investment decision or recommendation. Let’s focus on the first step – understanding the business business. Understanding the business requires: o Industry analysis. o Competitive strategy analysis. o Corporate strategy analysis. I NDUSTRY A NALYSIS Our first step in the valuation process is to study the industry in which the firm operates. This is because individual firm profitability , a driver valuation, is heavily influenced by two factors: o Characteristics of the industry. o Firm’s competitive position within the industry. When analyzing these factors, it is important to keep in mind their implications for the growth of the mind their implications for the growth of the business’s cash flows into the future. Likewise, it is important to note the relevant risks associated with operating a business within a particular industry in order to identify threats to future cash flows. 8/19/2010 3 I NDUSTRY A TTRACTIVENESS AND P ROFITABILITY Identifying Favorable Industry Characteristics: a function of the average profitability of the industry versus industry cost of capital. A favorable industry is one in which the average return on capital of the industry exceeds the industry’s cost of capital. Factors Determining Industry Profitability: It is easier to make money in some industries than it is in others. Profits in an industry are a function of: o Customer willingness to pay. o Prices of suppliers. o Distribution chains. o Brand value/Premiums. o Union/Labor Issues. o Government Issues. P ORTER ’ S F IVE F ORCES We use Porter’s Five Forces to describe an industry’s economic characteristics: Internal industry rivalry o Internal industry rivalry. o Threat of new entrants....
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