Mmi finance 5
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Mmi finance 5

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Mmi finance 5 Mmi finance 5 Presentation Transcript

  • Chapter V VALUING A BUSINESS
    • First setp in valuating a business is to decide what is to be valuated:
    • Do we want to valuate the company’s assets or its equity?
    • Shall we valuate the business as a going concern or in liquidation?
    • Are we to value a minority interest in the business or controlling interest?
    Valuating a Business
    • When a company acquires another, it can do so by purchasing either the seller’s assets or its equity. When the buyer purcases the seller’s equity, it must assume the seller’s liabilities.
    • Example: if you purchase a house for 100 thou EUR cash and assumption of the seller’s 400 thou EUR mortgage, you say you buy the house for 500 thou EUR, with 100 thou EUR down.
    • Most acquisition involving companies of any size are structured as an equity purchase . However, never lose sight of the fact that the true cost is the cost of equity + value of liabilities
    Valuating a Business – Assets or Equity?
    • Companies can generate value for owners in 2 states: in liquidation or as growing concerns
    • Liquidation value is the cash generated by terminating the business and selling its assets individually
    • Going-Concern value is the present worth of expected future cash flows generated by a business
    Valuating a Business – Dead or Alive?
    • Market value ≠ Book value
    • Why?
      • Financial statements (that give a value of the shareholder’s equity) are transaction based. For example, an asset for 1 mil EUR in 1950 and used by the accountant in the balance sheet, may have no relevance today (inflation, the asset is obsolete)
      • Companies tipicaly have many assets and liabilities that do not appear on the balance sheet, but affect future income (patents and trademarks, loyal customers, technology, better management)
    • When a company is publicly listed, it is a simple matter to calculate its market value
    • #of shares x market price per share
    Valuating a Business – Market value vs. book value
    • Absent market prices, the most direct way to estimate going-concern value is by calculating the present value of expected future cash flows going to owners and creditors.
    • When this number exceeds the acquisition price, the purchase has a possitive net present value and is therefore attractive. Converselly, when the net present value of the future cash flows is less than the acquisition price, th epurchase is unattractive
    • Fair market value
    • FMV of firm = PV{expected cash flows to owners and creditors}
    • Maximum price one should pay for a business = present value of expected future cash flows to capital suppliers discounted at an risk adjusted discount rate; discounted rate should be target company’s weighted –average cost per capital
    Valuating a Business – Discounted Cash flow
    • Value of equity = Value of firm – Value of debt
    • Therefore, in order to value a company’s equity, we need to estimate firm value and subtract debt.
    • Market value and book value of debt are usually the same an can be taken from the balance sheet
    Valuating a Business – Discounted Cash flow
    • Terminal value
    • Because a firm can have an infinitely long life expectancy, we can not estimate cash flow for hundreds of years
    • We think of the company’s future as composed of 2 periods: first (5-15 years) we presume company has a unique cash flow patern and growth trajectory – we estimate annual free cash flows; second – after the firs period company becomes stable, slow growth business – we estimate a single terminal value reprsenting the worth of all subsequent free cash flows
    • FMV of firm = PV(FCF years 1-10 + Terminal Value at year 10)
    • Where
    • FCF = EBIT (1- Tax)+ Depreciation – Capital expenditures – Working Capital
    Valuating a Business – Discounted Cash flow
    • In boom times, the newspaper companies would sell at:
    • 10 x multiple of EBITDA
    • Today, multiple of EBITDA decreased. The highest multiple is at internet companies. Please check on Yahoo finance for Yahoo, Google.
    Valuating a Business – Discounted Cash flow