Company Valuations

Overview

1. Understand the principles of company valuations.
2. Learn the different valuation methods that are used in practice.
3. Demonstrate the relation between the different methods.
4. Derive the cost of capital, and to apply appropriate discounts in arriving at a final valuation.

You will gain hands-on experience in preparing valuations under the supervision of the presenter. This will enable you to appreciate the intricacies of company valuations, provides you with an opportunity to ask questions, and gives you the practice and confidence in carrying out a valuation.

Topics Covered

Fundamental to any valuation exercise is an understanding of the company’s business, its strategy, competitive advantage, and the drivers that affect its cash flows. The course analyses a company’s cash flows by separating them into cash flows from operating, investing, and financing activities. The interrelation between these cash flows in computing the free cash flows to the firm and the free cash flows to equity holders is illustrated, as these free cash flow numbers are used in the valuation of the enterprise (firm) and equity, respectively.

The course examines the methods that are frequently used for company valuations. It commences with the familiar Dividend Discount Model (DDM), which is then extended to the Discounted Cash Flow (DCF) model, probably the most commonly used method for company valuations. The relation between the DCF model and a less frequently used accounting-based Residual Income Model (RIM) is then examined, including an explanation of their equivalence and how the Price to Book (PB) ratio is derived.

Valuations require the use of discount rates to discount the relevant forecasted valuation attribute. The course examines how one goes about computing the cost of capital, including the cost of debt, the cost of equity, and the weighted average cost of capital. Estimating the cost of equity using the Capital Asset Pricing Model (CAPM) is illustrated, together with an explanation and application of the role of betas in the estimating the cost of equity capital. The effect of company size and dividend imputation on the cost of capital is demonstrated.

The course examines the discounts that are often applied to valuations. These include discounts for a lack of control, illiquidity and lack of marketability, and unsystematic risks such as dependence on key personnel and key customers. These discounts are particularly relevant in the valuation of small, private, and public unlisted companies.

Values derived using these methods are benchmarked against comparable companies, referred to as compco analysis, using pricing multiples that relate the value to some measure of financial performance or financial position. The course will examine the rationale and use of pricing multiples such as Enterprise Value to EBITDA (EV/EBITDA), Enterprise Value to EBIT (EV/EBIT), Enterprise Value to Sales (EV/S), Price to Earnings (PE), and Price to Book (PB).

Who should attend

This course is designed for a wide audience, including:

• Chartered Accountants in practice, who are called upon to provide valuations for a wide variety of purposes;
• Financial and investment analysts, who monitor the performance and valuation of companies in their buy-hold-sell recommendations;
• Barristers and solicitors, who are involved with transactions that require an understanding of the principles of business valuation when advising clients on the sale and purchase of businesses, matrimonial property and estate assets that include shares in private and public unlisted companies, and in assessing economic damages.
• Executives in corporate acquisitions or business development departments, who are engaged in identifying target acquisitions, involved in due diligence of targets, and pricing target companies.
• Business people who want an appreciation of what their business is worth so that they are better informed when receiving advice relating to listing their companies, selling down of their shareholding, and other activities where they need to have a good understanding of what their business is worth.

Outcomes

You will be able to identify the different methods in valuing company valuations and select the appropriate methods to the circumstances surrounding the valuation. You will be able to relate the underlying principle that the value of an asset is the present value of its future cash flows to valuation models such as the DDM, the DCF, and the RIM.

You will gain an understanding of how the cost of capital is derived. In particular estimating the cost of capital for a private company or a public unlisted company. Unlike a publicly listed company, there is no market prices to estimate the company’s equity beta that is used to compute the cost of equity capital. Sources of this information will be discussed so that you will be able to access them in your valuations.

You will gain an understanding and appreciation of the discounts that you may apply in a valuation due to the size of the shareholding, liquidity and marketability considerations, and the unsystematic risks that may exist.

Finally, real hands-on practice in valuing companies will provide you with a template and the practice that will give you confidence for your future work in company valuations. You will actually evaluate a company during the course!