This document provides an overview of valuation techniques and strategic management concepts for an advanced corporate finance course. It begins with introductions and reviews key concepts like prisoners' dilemmas and valuation approaches. The main sections cover discounted cash flow valuation, including calculating free cash flows, determining weighted average cost of capital, and estimating terminal value. Other topics include strategic management tools like Porter's five forces, game theory applications, and using multiples. Worked examples are provided to demonstrate the step-by-step process of valuation. The goal is to equip students with the skills to determine a company's enterprise value through financial statement analysis and forecasting.

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Welcome!

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Little GT Reminder
Prisoner‘s Dillemma

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Where do We stand?
Value Expansion Value Measurement
Real
Options
Game
Theory
Strategic
Management
Value Measure
Risk-Adj. Discount
“Grow the Moneybag” “Measure its value”

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Types of “Valuation
Direct Indirect
Captures the true essence of
vlaue.
Very precise, “safe” but
extremely inconvenient
• Dividends
• Earnings
• Cash Flows
• Residual Income
Very strained & dangerous
but extremely convenient
• Trading Comparables
• Transaction
Comparables
• Adjusted Multiples

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Numerator
Cash is King vs. Accruals
Operating profit
- TAX on OP
=NOPAT
+D&A
-𝝙 in Net Working Capital
- Capital Expenditures
+Provisions
+/- other non cash charges
=Free Cash Flow to Firm
Accrual adjustments provide
analysts and investors with
matching and timing
information!
Residual Income
Penman & Sougiannis (1998)
Your STORY MATTERS!!!!!
Sell your STORY and have solid arguments for your assumptions!
Valuation is not a rocket-science it is a story-sensitive type of exercise
“Valuation is a craft you learn by doing”
If you are too much of a critic you never f***
vs
Assumption is the mother of all f***ups!

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• Factual match to the Numerator! Don‘t be WACC freaks
• Captures Risk
• Risk free rate
• Systematic risk
• Idiosyncratic risk?
• Other premiums
• Captures Capital Requirements
• Explicit Cost-of-Equity!
• Most common in PE industry
Denominator

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ENTERPRISE VALUE
Using Free Cash Flow to Firm
Using WACC
=ENTERPRISE VALUE
-Value of NET non-equity claims (Debt)
=EQUITY VALUE
/nr. Of shares
=VALUE per share

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Golden rule of valuation:
In a story-dependent exercise, you cannot afford to
loose the big picture which is – what drives the value.
• (Sales)
• (Sales) Growth
• Risk – Discount rate
Analyst‘s tendencies
Don‘t get overwhelmed by excruciating details for
immateriallities:
• Use average
• Use last year‘s value

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Focus for Today

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EXPANDEDEXPANDEDEXPANDED
EXPANDED
NPVNPVNPV
NPV
STRATEGICSTRATEGICSTRATEGIC
STRATEGIC
VALUEVALUEVALUE
VALUE
GameGameGame
Game
TheoryTheoryTheory
Theory
EquilibriaEquilibriaEquilibria
Equilibria
Nash-Stackelberg
Cournot- Nash
Nash
Bayesian
GamesGamesGames
Games
SequentialSequentialSequential
Sequential
5) Backward Induction
SimultaneousSimultaneousSimultaneous
Simultaneous
3) Nash eq. in Pure Strategies
4) Mixed Strategies
2) Dominated Strategies
1) Dominant Strategies
StrategicStrategicStrategic
Strategic
ManagementManagementManagement
Management
InternalInternalInternal
Internal
ViewViewView
View
DynamicDynamicDynamic
Dynamic
CapabilitiesCapabilitiesCapabilities
Capabilities
Processes
Positions
Paths & Path Dependencies
Resource-basedResource-basedResource-based
Resource-based
view of the Firmview of the Firmview of the Firm
view of the Firm
Source of CASource of CASource of CA
Source of CA
Distinctive
Scarce
Relevant
Sustainable
Appropriable
ExternalExternalExternal
External
ViewViewView
View
Industry &Industry &Industry &
Industry &
Competitive AnalysisCompetitive AnalysisCompetitive Analysis
Competitive Analysis
Industry StagesIndustry StagesIndustry Stages
Industry Stages
Mature IndustriesMature IndustriesMature Industries
Mature Industries
Cost Leadership
Differentiation
New IndustriesNew IndustriesNew Industries
New Industries
Preemption
Fast Following
Porter's 5 forcesPorter's 5 forcesPorter's 5 forces
Porter's 5 forces
Internal Rivalry
Potential Entrants
Customers
Substitutes
Suppliers
Game
Theory
FLEXIBILITYFLEXIBILITYFLEXIBILITY
FLEXIBILITY
VALUEVALUEVALUE
VALUE
RealRealReal
Real
OptionsOptionsOptions
Options
Proprietary or SharedProprietary or SharedProprietary or Shared
Proprietary or Shared
Option to Defer
Option to Expand
Aption to Abandon
Option to temporarily shut down
Option to switch inputs/outputs
Option to Contract
ValuationValuationValuation
Valuation
Risk NeutralRisk NeutralRisk Neutral
Risk Neutral
ProbabilityProbabilityProbability
Probability
Lattice Approach
Replicated Portfolio
ENTERPRISEENTERPRISEENTERPRISE
ENTERPRISE
VALUEVALUEVALUE
VALUE AdjustedAdjustedAdjusted
Adjusted
Present ValuePresent ValuePresent Value
Present Value
Debt Capacity
Value of the Tax Shield
LBOs
DiscountedDiscountedDiscounted
Discounted
Cash FlowsCash FlowsCash Flows
Cash Flows
TerminalTerminalTerminal
Terminal
ValueValueValue
Value
Gordon's modelGordon's modelGordon's model
Gordon's model
Rate of return
Reinvestment rate
Growth
Multiple
FCFFCFFCF
FCF
GrowthGrowthGrowth
Growth
rateraterate
rate
Reinvestment rate
ROCB
FreeFreeFree
Free
CashCashCash
Cash
FlowsFlowsFlows
Flows
EBITEBITEBIT
EBIT
Non-Cash Charges
Change in Working Capital
CAPEXCAPEXCAPEX
CAPEX
Reinvestment Rate
Terminal Value Treatment
(1-g/ROCB)
Tax over EBIT
WACCWACCWACC
WACC
Cost of EquityCost of EquityCost of Equity
Cost of Equity
Small Firm Premium
BetaBetaBeta
Beta
Unlevered
Levered
Top-Down
Bottom-Up
Risk Free Rate
ERP
Cost of Debt
ResidualResidualResidual
Residual
IncomeIncomeIncome
Income
Normal Income
Cost of Equity
Clean Surplus
MultiplesMultiplesMultiples
Multiples
EV/EBITDA
Price/Earnings
EV/Sales
Price/Book Value
Road Map

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P/L Analysis & Forecast

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CF Adjustments

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Pyramid Principle

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1st step
Value Measure
Risk-Adj. Discount

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Cash Flow Preference
Operating profit (EBIT)
- TAX on OP
=NOPAT
+D&A
-𝝙 in Net Working Capital
- Capital Expenditures
+Provisions
+/- other non cash charges
=Free Cash Flow to Firm
-interest on debt
+/- increase/decrease in debt
=Free Cash Flow to Equity
We need to obtain (all) the abovementioned data (somehow)

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RI Equivalent
0
2
4
6
8
10
12
Y=0 Y=1 Y=2 Y=3 Y=4 Y=5
ResidualIncome
Capital Charge Residual Income
Residual Income= Invested Capital ∗ (ROIC – WACC)
As industries mature
RI diminishes
For RI valuation
Choose LONG PROJECTION PERIOD
And assume
RI=0 in terminal year
Value = 𝐵𝑉?@A + C
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠? − 𝐵𝑉? ∗ 𝑒
1 + 𝑒 𝑡
O
?@A

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Start with Historical Data
Condensed format is sufficient

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Sales Factor-Decomposition
REVENUE
Quantity # Price $
Offline Online
CZ
SK
PL
(X + Y)
(X + Y)
(X + Y)
*
*
*
$/piece
$/piece
$/piece
*
+
Assume Hennes & Mauritz

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Continue by “Driving it”
Value Measure
Risk-Adj. Discount

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“Drive” the sales
Why Sales?
Now your “STORY” kicks in
Balance the narrative and numbers
Fallback options:
• Use last year value
• Use average of X last years

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Link other items to Sales
Use Days or Margins
What is the difference?

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Conduct DCF
Continuation (Terminal) Value vs. EXIT Multiple
Why?

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Cost of Debt
2 situations:
Going Concern
Assume no-problem situation
Distressed Company
“Mental Exercise”
Market Debt Value differs from
reported value of debt
Acquiring the
company:
• Use expected
Don‘t call me
Synthetic COD
• Damodaran J
• Int. Coverage
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑃𝑎𝑖𝑑
𝐸𝐵𝐼𝑇
Actual COD
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑃𝑎𝑖𝑑
𝐴𝑣𝑔. 𝐷𝑒𝑏𝑡

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Cost of Equity
1) As a HURDLE RATE
Literally “your call” - IRR
2) Bottom-UP
• Interest Free Rate
• Proportional Beta (Industry Standards/Median)
3) Top-Down
• Interest Free Rate
• Regressional Beta
4) “Dodgy Bastard”
• Market Premium
• Small Firm Premium
• Illiquidity Premium

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Regressional Beta
Adjustment for “ Systematic Risk Portion “
𝑒. 𝑔 𝐵𝑒𝑡𝑎 = 1,5
R2 = 0,5
What‘s the correct adj. For privately held company?
𝑅 = 𝑅2 = 0,5 = 0,7
Apply the WHOLE RISK of the company:
𝐵𝑒𝑡𝑎 =
1,5
0,7
= 2,14

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Cost of Equity
IRR
Straightforward use of the required IRR
Through BETAs
CoE = Risk Free Return + Beta * ERP
ERP = (Market Return – Risk Free Return)
Dodgy Bastard Style
CoE = Market Risk (Country & Industry ) + SFP + IP

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WACC
𝑊𝐴𝐶𝐶 = 𝐶𝑜𝐸 ∗
𝐸𝑄𝑈𝐼𝑇𝑌
𝐸𝑄𝑈𝐼𝑇𝑌 + 𝐷𝐸𝐵𝑇
+ 𝐶𝑜𝐷 ∗ 1 − 𝑇𝑎𝑥 ∗
𝐷𝐸𝐵𝑇
𝐸𝑄𝑈𝐼𝑇𝑌 + 𝐷𝐸𝐵𝑇
Use Target Ratios!

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WACC & g & Terminal Value

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WACC & g & Terminal Value

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WACC & g & Terminal Value
How to handle perpetual growth?
• Assume reasonable cap
• Average growth of the economy during X last years
For Mature Companies
g=ROE * Retention Ratio
For Growing Companies
g EBIT =
Capex+ ∆NWC ∗ROIC
EBIT * (1-Tax)
g NOPLAT =
Capex+ ∆NWC ∗ROIC
NOPLAT

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End Result – Football Field

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Try Yourself – Example 1

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Example Continuation

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Example Continuation

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OVERDELIVER.