Valuation
Global Valuation Group
Financial Markets Education
May 2003
Download the full document at: www.gazhoo.com

You are Here
Accounting
Fundamentals
Financial Corporate
Statement Finance
Analysis Fundamentals
Financial
Valuation Modelling for
Techniques Analysts
Download the full document at: www.gazhoo.com

Valuation
♦ This course is about valuation
♦ We must think
— There is such a thing as value
— We can determine what it is
— Value matters
Download the full document at: www.gazhoo.com

Does Value Exist?
♦ A “good” business is worth more than the book value of its assets
♦ Businesses create organisational capital
— Management expertise
— Skilled workers
— Desirable products or services
— Favourable public opinion
♦ As investors we believe that market prices bear a relationship to
value
Download the full document at: www.gazhoo.com

So what do we mean by value?
♦ IRS Definition:
The price at which the [securities] would change hands between
a willing buyer and a willing seller when the former is not under
any compulsion to buy and the latter is not under any
compulsion to sell, both parties having reasonable knowledge of
the relevant facts.
Source: Revenue Ruling 65-193 March 1959, cited in Corporate Valuation by Bradford Cornell
♦ Some additions / cautions
♦ Even if they agree on value, not all investors will agree to trade:
— Preference for cash flow
— Portfolio effects
— Liquidity
— Time horizon
— Expectations about other investors! (Keynes)
Download the full document at: www.gazhoo.com

Can we determine value?
♦ The volatility of prices is related to the uncertainty in estimating
the value
♦ We can certainly identify characteristics of the firm that relate to
value:
— Sales
— Margins
— Growth Rates
— Asset utilisation
— Earnings
— Cash flows
— Tax rates
— Capital Structure
Download the full document at: www.gazhoo.com

Does Value (or valuation) matter?
♦ In the late 90’s price appeared to bear no relationship to
discernible value
♦ Look what happened!
♦ In the short run valuations may not dominate price
♦ In the long run the market is pretty good at determining value
and forcing convergence with price
♦ If it doesn’t there is always Investment Banking!
Download the full document at: www.gazhoo.com

What is the Value of Safeway?
Download the full document at: www.gazhoo.com

Investors
♦ Valuation is not just for equity investors
♦ Banks
♦ Fixed income investors
♦ Look at many of the same factors
♦ Are just as concerned about value
♦ May have specialised interests as well
♦ But many of the issues are exactly the same
Download the full document at: www.gazhoo.com

Buy the shares / Buy the bonds / Lend money?
♦ How will you get your investment back?
♦ Bondholders need cash not profits
— Coupon payments
— Principal or refinancing
— Price increases
♦ Equity Investors
— Dividends
— Price increases
♦ Banks
— Cash for loan interest
— Possible to trade loan for higher return
♦ See the difference?
Download the full document at: www.gazhoo.com