Valuation Basics

1. Entity Method:

   • Adjusted presetn value method (APV)

   • WACC

   • Total Cash Flow / Capital Cash Flow

2. Equity Method:

   • Flow to Equity

—> Discounting Flows to Equity at the cost of equity (derived via CAPM)

Formel:

Equity value / number of shares = Fair value per share

k -> Cost of equity

i -> risk free rate: e.g. government bonds

MRP (Market risk Premium ) = ERP - i -> market return

beta -> risk of the company in comparison to the market

“+”:

• Theoretically sound

• Forces the analyst to be rigouros in modelling future cash flows

• Explicitly takes into account the value impact of the future timing and profile of cash flows

“-”:

• Accurate forecasts of future cash

  flows required (until eternity)

• Requires accurate estimate of the

  cost of capital

• Often a large percentage (on

  average about 70%) of value lies

  beyond the explicit forecasting

  period (terminal value)

• Terminal Value techniques are at

  best approximate and at worst

  totally inappropriate

• Misleading semblance of

  valuation accuracy

• Often rather overstates value

  through understatement of risk

  (overoptimistic business plans of

  management)

“+”:

• Relies on implicit market

  forecasts instead of individual

  forecasts

• Offers view on current market

  environment

• Reduces the forecasting problem

  to only a few drivers, avoidance

  of misleading precision possible

• Easy to communicate

• Focus on the key statistics that

  investors use

“-”:

• Limited comparabilitiy of

  companies, individual target

  characteristics can not alwasy be

  taken into account

• Requirements to the selection of

  the peer group are much more

  complex than it may seem

• Assumes that the market is

  always right

• High risk of abuse if the hidden

  working steps are not performed

  accurately