The role of the CEO is to be a value manager.

1. Value & Valuation
The Role of the CEO
Michael Herlache MBA
Doctorate of Business Administration in Finance Candidate 2020
CEO of AltQuest Group
Value & Valuation
The Role of the CEO

2. Index
I. The Purpose of the Company
II. How Companies Create Value
III. Strategy & Finance
IV. Value & Valuation
V. The Role of the CEO
VI. Value Management
VII. Valuation
VIII. Value Management with Discounted Cash Flows
IX. Growth or Restructuring
X. Value Management Process
XI. Measuring Added Value: ROIC vs. Market Return
XII. Measuring Added Value: Economic Profit & NPV
XIII. Strategies (i.e. Asset Mix) That Maximizes NPV
XIV. Valuation in the Public Markets
XV. Real Markets & Financial Markets
XVI. Value Planning & Control (i.e. Management)
XVII. Value Metrics
XVIII. Value Planning & Control (i.e. Management) in Practice
XIX. Market Value Added
XX. DCF vs. Earnings Multiple
XXI. Cash Flow
XXII. Value Management Capability
Value & Valuation
The Role of the CEO
XXIII. Value Lifecycle
XXIV. Valuation Frameworks: Discounted Cash Flow
XXV. Modeling Value: Financial Modeling

3. I. The Purpose of the Company
Companies exist to create value
Business is the art and science of building & monetizing capabilities.
Value & Valuation
The Role of the CEO

4. II. How Companies Create Value
Companies create value by investing capital at rates of return that
exceed their cost of capital. This is the principle of value creation.
The only thing that differs across companies is the implementation (i.e.
different asset and capitalization mix)
Value & Valuation
The Role of the CEO

5. III. Strategy & Finance
Rate of Return (IRR) Cost of Capital
Asset Mix Capitalization Mix
Corporate Strategy Finance
Uses Sources
Value & Valuation
The Role of the CEO

6. Rate of Return Cost of Capital
Asset Mix Capitalization Mix
Corporate Strategy Finance
Uses Sources
IV. Value & Valuation
Value & Valuation
The Role of the CEO
Valuation

7. V. The Role of the CEO
Value & Valuation
The Role of the CEO
Valuation
Value Management

8. VI. Value Management
Value & Valuation
The Role of the CEO
• Valuation to guide business decisions and ultimately corporate policy
• Valuation for each strategic alternative; how much value does each create
• Managing value mindset throughout organization
• Value – Assess it, create it, and communicate it
• Review and target performance of asset mix
• Communicate the value of the business to shareholders & value of strategy
• Value of company derives from ability to generate cash flows

9. VII. Valuation
Value & Valuation
The Role of the CEO
Comparable Companies
Comparable Transactions
Discounted Cash Flow
LBO (Financial Sponsor)
Accretion/Dilution (Strategic)

10. VIII. Value Management with Discounted Cash Flows
Value & Valuation
The Role of the CEO
Discounted Cash Flow

11. IX. Growth or Restructuring
Value & Valuation
The Role of the CEO
Continuous CF/EPS performance assessment
1. Hit growth target – Then continue growth
2. Miss growth target – Then restructure
Discounted Cash Flow

12. X. Value Management Process
Value & Valuation
The Role of the CEO
Discounted Cash Flow
1. Determine current market valuation of company:
1. Market valuation (if public)
2. Comp companies
3. Comp transactions
2. Compare to DCF as is (is the company being
undervalued by the market or overvalued?)
3. Determine sources of deviation from cash flow targets
4. DCF with restructuring
5. DCF with organic growth
6. DCF with inorganic growth
7. DCF with financial engineering (i.e. change in
capitalization
8. Summed DCF for total value increase with changes
compared to DCF as is

13. XI. Measuring Value Added: ROIC vs. Market Return
Value & Valuation
The Role of the CEO
Discounted Cash Flow
Measure return on invested capital (after-
tax operating profits divided by capital
invested in working capital, PP&E) and
compare it with stock market returns

14. XII. Measuring Value Added: Economic Profit & NPV
Value & Valuation
The Role of the CEO
Discounted Cash Flow
Economic profit = ROIC spread % over cost
of capital x invested capital
The objective is to maximize economic
profit. When the company is larger, one
should use Net Present Value (NPV) which
calculates economic profit in a more
robust and flexible fashion.

15. XIII. Valuation in the Public Markets
Value & Valuation
The Role of the CEO
Discounted Cash Flow
Valuation in the public markets has
investors paying for the performance they
expect the company to achieve in the
future; investors ultimately end up paying
more since their valuations are not based
upon the past or cost of the assets.
The CEO should endeavor to have his
company in the public markets since the
largest multiples are applied in valuation

16. XIII. Real Markets & Financial Markets
Value & Valuation
The Role of the CEO
Discounted Cash Flow
When a public company, the CEO has to
both maximize the intrinsic (DCF) value of
the company and manage the
expectations of the financial market
Differences between actual performance
and market expectations and changes in
these expectations drive share prices. The
delivery of surprises produces higher or
lower total shareholder returns

17. XIII. Value Planning & Control (i.e. Management)
Value & Valuation
The Role of the CEO
Discounted Cash Flow
Planning & control system should be put
in place to monitor the NPV of every
business unit and summed to get the NPV
of the corporation. Economic profit (i.e.
NPV) targets set annually for next three
years, progress monitored monthly and
managers’ compensation tied to
economic profit against these targets

18. XIII. Value Metrics
Value & Valuation
The Role of the CEO
Discounted Cash Flow
Metrics are to drive decisions and guide
all employees toward value creation.

19. XIII. Value Planning & Control (i.e. Management) in Practice
Value & Valuation
The Role of the CEO
Discounted Cash Flow
1. Corporate management sets long-term value
creation targets in terms of market value of a
company or total returns to shareholders
(TRS)
2. Strategic alternatives valued in DCF (i.e. NPV)
3. Intrinsic value of chosen strategic alternative
translated into short and medium term
financial targets and then targets for
operating and strategic value drivers
4. Performance assessed by comparing results
with targets on both financial indicators and
key value drivers. Managerial rewards linked
to performance on financial measures and
key value drivers

20. XIII. Value Metrics: Market Value Added & Total Return to Shareholders
Value & Valuation
The Role of the CEO
Discounted Cash Flow
Market Value Added is the difference
between the market value of a company’s
debt and equity and the amount of capital
invested. Measures financial market’s view of
future performance relative to capital
invested in business.
Total Return to Shareholders measure
performance against the expectations of
financial markets and changes in these
expectations. TRS measures how well a
company betas the target set by market
expectations

21. XIII. Value Metrics: DCF vs. Earnings Multiple
Value & Valuation
The Role of the CEO
Discounted Cash Flow
DCF is intrinsic value. Earnings multiples
are market values.
Earnings alone is inadequate without
understanding the investment required to
generate the earnings. Should know ROIC

22. XIII. Cash Flow
Value & Valuation
The Role of the CEO
Discounted Cash Flow
Cash flow equals the operating profits of
the company less the net investment in
working capital and fixed assets to
support the company’s growth.

23. XIII. Value Management Capability
Value & Valuation
The Role of the CEO
Discounted Cash Flow
I. Set aspirations and targets
I. An inspirational statement of intent
II. Value-linked quantitative target
II. Manage the corporate portfolio
I. Strategic theme analysis
II. Value management process
III. Three horizon analysis
III. Orient the organization toward value
IV. Understand value drivers
V. Manage business performance
I. Create business unit strategy to maximize value
II. Set value-linked targets
III. Review performance
VI. Manage individual performance

24. XIII. Value Management Capability Continued
Value & Valuation
The Role of the CEO
Discounted Cash Flow
I. Set aspirations and targets
I. An inspirational statement of intent
I. State that the goal is to maximize
shareholder value
II. Vision is “To create shareholder value by
being the world’s premier _____ company
from a strategic and financial standpoint”
III. States what businesses we are in and what
we aspire to be known for

25. XIII. Value Management Capability Continued
Value & Valuation
The Role of the CEO
Discounted Cash Flow
I. Set aspirations and targets
I. An inspirational statement of intent
II. Value-linked quantitative target
I. Mark the milestones toward their aspiration
with value linked targets
II. Target share price (i.e. double every three,
four or five years)
III. Target key value drivers (ex. Financial (EBIT)
or operational (ex. Number of customers)
IV. Calibrate proposed targets against historical
performance to observe how large a gap
needs to be closed

26. XIII. Value Management Capability Continued
Value & Valuation
The Role of the CEO
Discounted Cash Flow
II. Manage the corporate portfolio
I. Determine to what extent its current
portfolio of businesses will help meet its
aspirations.
II. Determine the strategic advantages of
the parent corporation
III. Improvement opportunities continuously
IV. Manage growth pipeline

27. XIII. Value Management Capability Continued
Value & Valuation
The Role of the CEO
Discounted Cash Flow
II. Manage the corporate portfolio
I. Strategic theme analysis
I. Which capabilities does the corporation
possess?
I. Industry shaper
II. Deal maker
III. Scarce asset allocator
IV. Skill replicator
V. Performance manager
VI. Talent agency
VII. Growth asset attractor
II. Value management process
III. Three horizon analysis

28. XIII. Value Management Capability Continued
Value & Valuation
The Role of the CEO
Discounted Cash Flow
II. Manage the corporate portfolio
I. Strategic theme analysis
II. Value management process
I. Do DCF to quantify impact of value creation
levers: investor communication, internal
improvements, disposals, growth opportunities
(organic or inorganic), and financial
engineering
III. Three horizon analysis
I. Ensure that portfolios always include
businesses in all three stages of development
I. Horizon 1: core businesses
II. Horizon 2: emerging opportunities (have
revenues but no CF)
III. Horizon 3: future options (initial activity has
begun)

29. XIII. Value Management Capability Continued
Value & Valuation
The Role of the CEO
Discounted Cash Flow
III. Orient the organization toward value
III. Having the right organization in place ensures
company’s value creation aspirations and
strategy are translated into disciplined execution
IV. Hard areas:
III. Structure (who reports to whom), Decision rights,
people (key jobs), and coordination mechanisms
(how do things get communicated or done)
V. Soft areas:
III. Beliefs (how much potential people believe exists in
market), values (what people think is important, and
leadership style
VI. Should be clearly designed performance units
and individual accountabilities
VII. Organization to then set targets, measure
performance, and reward success

30. XIII. Value Management Capability Continued
Value & Valuation
The Role of the CEO
IV. Understand value drivers
IV. What elements in day to day operations have the most impact on value. These are value drivers
V. Prioritizing these drivers and thus determining where resources should be placed or removed is key
VI. Value driver is a performance variable that has impact on the results of a business (ex. Production
effectiveness or customer satisfaction)
VII. The metrics associated with value drivers are called key performance indicators (KPIs) (ex. Capacity utilization
or customer retention rate)
VIII. KPIs used for target setting and performance measurement
IX. Value drivers should be directly linked to shareholder value creation and cascade down through the
organization
X. Each business unit should have its own key value drivers and KPIs
XI. Managers should monitor these numbers regularly to obtain an overview of business performance
XII. 5 to 10 KPIs
XIII. Value driver definition starts with creating value trees linking operating elements of business with value
creation, then prioritizing which drivers have greatest impact on value (use DCF to determine sensitivity of
business unit’s value to changes in value drivers), then institutionalizing the value drivers by incorporating
them into the targets and scorecards of business performance management

31. XIII. Value Management Capability Continued
Value & Valuation
The Role of the CEO
V. Manage business performance
I. Manage each business to attain results consistent with top-down aspirations by
process of setting targets for a performance unit and regularly reviewing progress
against them
II. Create business unit strategy to maximize value
III. Set value-linked targets
I. Translating strategy into specific quantitative goals
II. Agree on a target, corporate center and business unit formalize commitment in a
performance contract. Contract contains milestones and quantitative and qualitative goals
that business unit needs to achieve through performance period.
III. Targets should cascade through organization (CEO gets financial indicators, business unit head
gets key performance indicators, managers get operational levers)
IV. Review performance
I. Structured calendar of performance reviews
II. Scorecard incorporating value metrics and KPIs from value driver analysis
III. Custom scorecards in each business unit

32. XIII. Value Management Capability Continued
Value & Valuation
The Role of the CEO
Discounted Cash Flow
VI. Manage individual performance
VI. Link managerial rewards to behavior that
creates overall shareholder value
VII. People performance management
includes target setting and performance
reviews. These targets should link to
KPIs.
VIII. CEOs get TRS, MVA; Business unit
manager gets Economic profit;
Functional manager gets operating profit
and ROIC; Mid level/frontline gets
operating value drivers

33. XIII. Value Management Capability Continued
Value & Valuation
The Role of the CEO
Discounted Cash Flow
VI. Manage individual performance
VI. Link managerial rewards to behavior that
creates overall shareholder value
VII. People performance management
includes target setting and performance
reviews. These targets should link to
KPIs.
VIII. CEOs get TRS, MVA; Business unit
manager gets Economic profit;
Functional manager gets operating profit
and ROIC; Mid level/frontline gets
operating value drivers

34. XIII. Value Lifecycle
Value & Valuation
The Role of the CEO
Discounted Cash Flow
I. Product development – includes market
analysis, product design, invention and
testing
II. Market introduction – initial release of
the product and usually followed by high
levels of advertisement
III. Rapid Growth – sales growth accelerates
with increasing sales year over year
IV. Maturity phase – the sales growth rate
approach the average growth rate of the
economy
V. Decline – demand will slowly decline as
newer inventions make it obsolete

35. XIII. Valuation Process: Discounted Cash Flows
Value & Valuation
The Role of the CEO
Discounted Cash Flow
I. Forecast Free Cash Flow
I. Recasting financials from accounting statements to financial. This process is also called
“normalizing” the financials. Normalizing strips out non-recurring events and non-cash charges
which are not part of normal operations of the company. These changes help you get to Free Cash
Flow (FCF)
I. Nonrecurring and non-cash charges usually found in MD&A or financial footnotes (above or below operating
income line? abnormal expense (reverse expense) or income (reverse income) and what time period does it
impact?)
II. Must tax effect when normalizing earnings (expenses reduced tax expense and gains increased tax expense) =
Non-recurring item x (1-tax rate)
III. Want to get to EBITDA = earnings before taxes, depreciation & amortization (operating income + D&A)
IV. D&A is from the Income Statement
II. Note historicals
III. Project financials using assumptions
II. Estimate Cost of Capital
I. Perform WACC analysis
II. Develop target capital structure
III. Estimate cost of equity
III. Estimate Terminal Vale
I. Use either cash flow multiple (i.e. EBITDA multiple) or growth rate method (i.e. Gordon Growth
method)
II. Discount it back to present value
IV. Calculate results
I. Bring all cash flows to present
II. Perform sensitivity analysis
III. Interpret results

36. XIII. Valuation Process: Discounted Cash Flows Continued
Value & Valuation
The Role of the CEO
Discounted Cash Flow
I. Forecast Free Cash Flow
I. FCF = EBIT – Taxes – Increase in working
capital – capital expenditures +
Depreciation and Amortization
II. DCF projects 5 years of FCF plus a
terminal value
I. Terminal value is a perpetuity
II. Gordon growth multiple vs. terminal
multiple. Use terminal multiple
III. Terminal multiple = (LTM multiple from
comps) x EBITDA

37. XIII. Valuation Process: Discounted Cash Flows Continued
Value & Valuation
The Role of the CEO
Discounted Cash Flow
II. Estimate Cost of Capital
I. Cost of capital (aka discount rate) is an investor’s required rate of return
II. The cost of capital should match the cash flows to be discounted
III. Discount rate in two forms; cost of equity and cost of debt. Combined on
balance sheet so discount rate is weighted average cost of capital
IV. WACC is the required rate of return for the overall enterprise. This is simply
a weighted average of the required rates of return for each of the different
sources of capital (equity and debt)
V. Perform WACC analysis
I. WACC = [Re x (E/(E+D)] + [(Rd x (D/(E+D)) x (1-T)]
II. Cost of equity calculated using the capital asset pricing model (CAPM)
I. Re = Rf + Beta (Rm – Rf)
II. Beta is measure of volatility or systematic risk of a security compared to the
market as a whole (ex. S&P 500). Firms use 2 year to 5 year betas
III. Un-levering and relevering beta. First unlever beta and re-lever with the subject
company’s capital structure (i.e. debt to equity ratio)
I. Bu = BL / [1 + D/E x (1-T)]
II. BL = Bu x [1 + D/E x (1-T)]
III. Cost of debt calculated by averaging (weighted) the coupon rates of its various
pieces of debt and multiplying it by the tax shield (1 – tax rate)

38. XIII. Valuation Process: Comparable Companies
Value & Valuation
The Role of the CEO
Discounted Cash Flow
I. Based on how similar companies trade
in the public markets
I. Select comp universe
II. “Spread” comps
I. Same time frame (Last twelve months)
II. Normalize numbers
I. Back out non-recurring items
III. Treasury stock method to calculate share
price
III. Select multiples for implied valuation
IV. Apply multiples to target to get valuation

39. XIII. Valuation Process: Comparable Transactions
Value & Valuation
The Role of the CEO
Discounted Cash Flow
I. Based on how similar transactions
occurred. Control premiums of 20-
25%
I. Select comp universe
II. “Spread” comps
I. Same time frame (Last twelve months)
II. Implied valuation multiples
III. Market premiums
III. Select multiples for implied valuation
IV. Apply multiples to target to get valuation

40. XIII. Modeling Value: Financial Modeling
Value & Valuation
The Role of the CEO
Discounted Cash Flow
I. Spread historical financial statements
and adjust historical income
statement for onetime, extraordinary
and non-recurring items
II. Derive historical ratios, trends and
variables
III. Project financial statements
IV. Integrate financial statement projects
with revolver