Company Valuation

Company Valuation - ASICS 401 Company Valuation ASICS 401 -...

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ASICS 401 - Mitton ASICS 401 Company Valuation
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ASICS 401 - Mitton 2 Company Valuation in Corporate Finance In the context of corporate finance, we want to be able to value companies for mergers and acquisitions How much do we pay for an acquisition target? What merger terms are fair for our shareholders? What price do we demand for our company from an acquirer? Is the current stock price an accurate measure of company value in an M&A context? Why or why not? What other purposes does company valuation serve in corporate finance?
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ASICS 401 - Mitton 3 Different Valuation Methods 1. Discounted Cash Flow Analysis The “workhorse” valuation tool 1. Comparables Cash-flow-based Multiples Asset-based Multiples
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ASICS 401 - Mitton 4 1. DCF Analysis Recall our two-step process for valuing investments: Forecast expected FCF Estimate WACC; Compute NPV Note: Remember that we have calculated the FCFs as the cash that is available to the firm to pay all claimholders. To this point we have used our methodology primarily for valuing projects. When we want to value an entire company, we face some new issues.
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ASICS 401 - Mitton 5 What’s different in company valuation relative to project valuation? In DCF analysis for company valuation we must consider: 1. In contrast to projects, which often have limited lives, companies usually will be considered to have unlimited lives. -- To account for the going-concern value, we calculate a terminal value of the company. 1. We typically want to estimate the value of just the equity in the company; i.e., we might want to estimate a stock price. -- Our current method would give us the value of the whole firm (also known as enterprise value ); i.e., D + E -- If we want to value just the equity in a company we need to subtract the value of its existing debt (as always, in MV terms if possible)
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ASICS 401 - Mitton 6 Companies with long lives In valuing ongoing businesses (or projects with very long lives), we don’t want to forecast every year of cash flow forever. Forecast FCF until it is reasonable (or best guess) to think that the project or company is in “steady state.” Then to value the remaining years, calculate a terminal value under one of two assumptions: 1. The company is liquidated 2. The remaining FCFs can be valued as a perpetuity
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7 Terminal Value: Liquidation Scenario LV T = ALV T + NWC T LV T = Liquidation value at time T ALV T = Asset liquidation value at time T Remember ALV T =RV T -(RV T -BV T )*t NWC T = Recapture of net working capital at time T Note: This method is like what we have already done with short-lived projects. We are not necessarily assuming that the company will actually be
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Company Valuation - ASICS 401 Company Valuation ASICS 401 -...

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