FINC STMT Valuation

What is valuation?

converting a forecast into an estimation of firm value and asess the impact of strategic decisions on firm value

Objective of valuation

determine whether a company is undervalued/overvalued then decide to buy or short-sell

3 Valuation Methods

1. based on balance sheet: based on book value of firm’s equity

2. based on multiples: current or forecast measure of performance is convertible into a value through application of some price multiple for other comparable firm (ie: earnings, assets, sales)

3. Discounted Cash Flow: calculate and discount multiple forecast cash flows using the firm’s estimated cost of capital (wacc) to estimate their present value

DCF analysis is based on what

the idea that each asset has intrinsic value that can be estimated using future cash flows, their growth, and their risk

• enterprise value = NPV of forecasted free cash flows

Steps to calculate Enterprise Value

1. forecast FCF over finite horizon

2. estimate firm’s cost of capital (WACC, k)

3. Estimate terminal value

EV formula

What is terminal value

economic value of the firm in year t

Step 1: Formula for FCF calculation

Ebit(1-t) + Amortizations - CAPEX ± Change in WC

• sometimes its net income + net financial profit

Step 2: Formula for WACC

Kd = cost of debt

Ke = cost of equity = Rf + B(Rm-Rf)

t = effective tax rate = Income Tax/Earnings before tax

Step 3: Compute Firm Value