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Company Valuation:

DCF and Multiples; APV; Equity Cash Flow

Course Module in Corporate Financial Management
I. Overview of suggested content (HBS cases unless otherwise noted)

Title Author Product Publication Pages Teaching

Number Year Note
Valuation Overview
1. What's It Worth?: A Luehrman 97305 1997 11p ---
General Manager's Guide to
Valuation (HBR Article)
And Note on Mergers and Foerster 95B023 1995 (Rev. 14p --
Acquisitions and Valuation 2000)
(Ivey Note)
Discounted Cash Flow
(DCF) and Multiples
2. Radio One, Inc. Ruback 201025 2000 15p 201027
Amtelecom Group Inc. Dunbar 904N14 2004 32p 804N14
(Ivey case)
3. Spyder Active Sports— Villalonga 206027 2005 23p ---
Alternative: Kohler Co. Villalonga 205034 2005 20p 205093
Supplement: Corporate Luehrman 206039 2005 9p ---
Valuation and Market
Multiples (HBS Note)
Adjusted Present Value
4. Sampa Video, Inc. Andrade 201094 2001 (Rev. 3p 204125
Alternative 1: Seagate Andrade 201063 2001 (Rev. 19p 204160
Technology Buyout 2002)
Alternative 2: Kmart, Inc. and Meulbroek 200044 2000 (Rev. 25p 202083
Builders Square 2002)
Supplement: Using APV: A Luehrman 97306 1997 8p ---
Better Tool for Valuing
Operations (HBR Article)
Equity Cash Flow
5. Acova Radiateurs Meulbroek 295150 1995 (Rev. 12p 200003
Alternative 1: Philip Morris Ruback 289045 1989 (Rev. 21p 289046

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Company Valuation: An HBSP Course Module

Companies and Kraft 1994)

Alternative 2: BW/IP Luehrman 293058 1992 16p 295147
International, Inc.

II. Rationale for selecting and sequencing the items in this module
The module starts with the bestselling Harvard Business Review article “What’s It Worth? A General
Manager’s Guide to Valuation.” The article first describes the limitations of the standard WACC
(Weighted Average Cost of Capital) version of DCF (Discounted Cash Flow) valuation of companies. As
an alternative, the article then proposes the Adjusted Present Value, Options, and Equity Cash Flow
methods as better suited for valuing operations, opportunities, and ownership claims. The Ivey note, Note
on Mergers and Acquisitions and Valuation, demonstrates the DCF, multiples (comparable companies),
and break-up value methods for valuing companies in the mergers and acquisitions context.

The next two segments contrast the traditional DCF and multiples techniques to value public (segment 2)
and private (segment 3) companies. Segment 2 recommends Radio One, a standard bestseller used over
two days at Harvard Business School, both at introductory MBA and executive levels. It concerns the
acquisition of a series of urban radio stations across the United States. The alternative Amtelecom Group
case, which can be covered in a single session, explores valuation of a Canadian telecommunications
subsidiary for sale to a buyer or for an initial public offering (IPO). The Amtelecom case includes a sum-
of-parts valuation.

Segment 3 offers two new cases on valuing privately held companies and shareholder conflicts in family
firms. Both cases have worked well in HBS executive programs on valuation. Spyder Active Sports—2004
concerns exit options for the founder and private equity partner of a high-end ski apparel manufacturer.
The complementary case, Kohler Co., focuses on valuing a minority stake and issues of control premiums
in a plumbing fixtures company. The supplementary technical note “Corporate Valuation and Market
Multiples” reviews the implementation and limits of the multiples valuation method.

The last two segments explore the alternative valuation techniques mentioned in the lead HBR article. In
Segment 4, about Adjusted Present Value (APV), Sampa Video, concerning the expansion of a video
chain, is a short case that highlights the impact of a project’s debt capacity on valuation. Students are
required to value a project using APV, WACC, and Capital Cash Flow (CCF) methods. The two
alternative cases illustrate valuation in a more in-depth buyout context—Seagate (a two-session case)
focuses on the volatile technology sector, while Kmart focuses on the traditional retail sector. The
supplementary HBR article “Using APV: A Better Tool for Valuing Operations (HBR Article)” describes an
APV analysis in clear step-by-step fashion using a hypothetical company example.

Segment 5, on the equity cash flow (ECF) method, closes the module with Acova Radiators, a candidate
that students must value for a leveraged buyout (LBO) in an international setting. The teaching note
provides one- and two-day teaching plans and ECF and CCF valuations of Acova. The first alternative,

This module assumes students are familiar with the discounted cash flow (DCF) and Weighted Average Cost of
Capital (WACC) concepts.

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Company Valuation: An HBSP Course Module

Philip Morris Companies and Kraft, uses a variety of valuation techniques to assess a merger from both
companies’ perspectives. The second alternative, BW/IP International, is an integrative case that values
an acquisition candidate using both the adjusted present value and equity cash flow methods.

Technical notes for further reading:

Note on Capital Cash Flow Valuation (Ruback, 295069, 13p, 1994)
Note on Valuing Equity Cash Flows (Luehrman, 295085, 10p, Rev 2005)
Note on Valuing Private Businesses (Crane, 201060, 14p, 2001)

III. Detailed description of recommended items

Valuation Overview
1. What's It Worth?: A General Manager's Guide to Valuation Timothy A. Luehrman (Harvard Business
Behind every major resource-allocation decision a company makes lies some calculation of what that
move is worth. So it is not surprising that valuation is the financial analytical skill general managers want
to learn more than any other. What do generalists need in an updated valuation tool kit? In the 1970s,
discounted-cash-flow analysis (DCF) emerged as best practice for valuing corporate assets. And one
version of DCF--using the weighted-average cost of capital (WACC)--became the standard. Over the
years, WACC has been used by most companies as a one-size-fits-all valuation tool. Today the WACC
standard is insufficient. Improvements in computers and new theoretical insights have given rise to tools
that outperform WACC in the three basic types of valuation problems managers face. Timothy Luehrman
presents an overview of the three tools, explaining how they work and when to use them. Subjects:
Acquisitions; Capital budgeting; Capital costs; Financial analysis; Joint ventures; Present value; Valuation
Length: 11p

Note on Mergers and Acquisitions and Valuation Steve R. Foerster; Dominique Fortier (Richard Ivey
School of Business/UWO)
The object is to define what is meant by mergers and acquisitions and to understand why they happen.
The impact of these deals on shareholders of both the acquiring and acquired companies is investigated,
and the reasons why some mergers succeed while other fail are examined. Finally, in order to determine
the value of a firm, some valuation frameworks are provided. Subjects Covered: Acquisitions; Mergers;
Valuation Length: 14p

Discounted Cash Flow (DCF) and Multiples

2. Radio One, Inc. Richard S. Ruback; Pauline Fischer
Radio One (NYSE: ROIA and RIOAK), the largest radio group targeting African-Americans in the country,
had the opportunity to acquire 12 urban stations in the top 50 markets from Clear Channel
Communications, Inc. (NYSE: CCU) in the winter of 2000. The stations were being sold by Clear Channel
Communications, Inc. to obtain Federal Communications Commission (FCC) approval for its acquisition
of AMFM, Inc. (NYSE: AFM). Radio One was also negotiating the acquisition of nine stations in Charlotte,
North Carolina, Augusta, Georgia, and Indianapolis, Indiana. The proposed acquisitions would double the

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Company Valuation: An HBSP Course Module

size of Radio One. The case focuses on the strategic and financial evaluation of the proposed
Learning Objective: To provide students the opportunity to forecast the cash flows associated with the
proposed acquisitions and to value those projections using discounted cash flows as well as transaction
and trading multiples. Subjects Covered: Acquisitions; Mergers; Present value; Valuation Setting: District
of Columbia; Radio; $81.7 million revenues; 1999

Alternative: Amtelecom Group Inc. Craig Dunbar; Andrew Cogan (Richard Ivey School of Business/UWO)
The CEO of Amtelecom Group Inc. (AGI) must make a recommendation to the board of directors
regarding the best way to sell its Amtelecom Communications subsidiary. AGI owns and operates ICS
Courier, a national fixed-route courier business, and Amtelecom Communications, a regional
telecommunications, cable television, and Internet business. Amtelecom Communication's capital
requirements are not being satisfied because cash is being diverted to ICS Courier to cover its losses. In
addition, AGI's stock has been performing poorly. To alleviate these problems, the board has decided to
sell off Amtelecom Communications. The three sales alternatives being considered are: selling to a
strategic buyer, IPO via a common share offering, and IPO via an income trust offering.
Learning Objective: To teach valuation in a strategic setting and provide an opportunity to apply sum of
parts valuation to value a diversified firm, apply discounted cash flow, conduct a transactions analysis to
determine the standalone value of a firm, and gain a basic understanding of income trusts. Subjects
Covered: Financial strategy; IPO; Mergers & Acquisitions; Subsidiaries; Valuation Setting: Canada;
Communications industry; 2002 Length: 32p

3. Spyder Active Sports—2004 Belen Villalonga; Dwight Crane; James Quinn

David Jacobs founded a high-end ski apparel company in 1978. He successfully built and grew the
company, establishing a major international brand that appealed to ski racers and other active skiers. In
1995, he sought external financing to support further growth of the company and structured a financial
deal with CHB Capital Partners, a private equity firm in Denver. By 2004, Jacobs was ready to consider
alternative types of equity transactions that would provide a source of liquidity to him and his family,
including sale of Spyder to another apparel company and sale of a large block of stock to a private equity
firm. Poses issues of valuation of a privately owned company and presents alternative ways to harvest
wealth from a private company. Also brings up family business issues because the transaction would
have a significant effect on two of his children who are involved in the business. Includes color exhibits.
Learning Objective: To provide an opportunity to study valuation of a private company and the process of
harvesting wealth, along with its impact on the owner and his family. Subjects Covered: Financing,
Growth strategy, Private equity, Valuation. Setting: Colorado; Apparel industry; $61 million revenues ; 50
employees; 2004 Length: 23p

Alternative: Kohler Co. Belen Villalonga; Raphael Amit

Kohler Co., best known for its plumbing fixtures, is a large, private family firm. As part of a recapitalization
aimed at preserving family ownership of Kohler Co., non-family shareholders, who held 4% of common
stock, were required to sell their shares to the company. A group of dissenting shareholders filed a
lawsuit claiming that the buyout price undervalued their shares by a factor of five. In April 2000, Herbert
V. Kohler, Jr., chairman and CEO, has to decide whether to settle with the dissenters and, if so, at what

Harvard Business School Publishing

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Company Valuation: An HBSP Course Module

share price. The decision calls for a detailed valuation of the company at the time of the recapitalization.
Provides the necessary data for students to value the company using both a discounted cash flow
approach and a multiples (comparable companies) approach. Students must identify and understand the
different valuation assumptions that can lead to a wide range in price, including the applicability of
discounts for lack of marketability and lack of control. Exhibits are available in electronic form to facilitate
analysis of the data (HBS courseware 9-205-707).
Learning Objective: To examine the valuation of privately held firms from the perspectives of the
controlling shareholder(s) and minority shareholders. Subjects Covered: Family owned businesses; Legal
aspects of business; Recapitalization; Shareholder relations; Stockholders; Valuation Length: 20p

• Downloadable, spreadsheet exhibits

• If both cases are used, then Kohler, which requires a more advanced valuation, should follow

Supplement: Corporate Valuation and Market Multiples Timothy A. Luehrman (Harvard Business School
Technical Note)
Provides a basic introduction to the use of market multiples for business valuation. Explains the method's
reliance on the Law of One Price, sets forth the basic steps for using the method, and reviews some
practical issues arising in its application.
Learning Objective: To introduce the use of market multiples to estimate the value of a business. Subjects
Covered: Acquisitions, Mergers, Stocks, Valuation. Length: 9p

Adjusted Present Value (APV)

4. Sampa Video, Inc. Gregor Andrade
A video rental store is considering offering home delivery service. Management must value the project
under different financing strategies and methods, specifically adjusted present value (APV) and weighted
average cost of capital (WACC).
Learning Objective: To explain how to implement APV and WACC, and when each is appropriate.
Subjects: Capital budgeting; Capital investments; Cash flow; Debt management; Financial strategy;
Financing; Present value; Valuation Setting: 2001 Length: 3p

Alternative 1: Seagate Technology Buyout Gregor Andrade; Todd Pulvino; Stuart C. Gilson
In March 2000, a group of private investors and senior managers were negotiating a deal to acquire the
disk drive operations of Seagate Technology. The motivating factor for the buyout was the apparently
anomalous market value of Seagate's equity: Seagate's equity value was just a fraction of the value of its
minority stake in Veritas Software Corp., a software maker. The investor group had to decide how much
to offer for the operating assets, as well as how to finance the transaction. Further complicating the
analysis was the fact that, unlike in traditional buyout settings, the target company was in a highly cyclical,
volatile, and capital--intensive industry.
Learning Objective: To illustrate cash flow valuation (adjusted present value and WACC), including
estimating the cost of capital from comparables, as well as the impact of financing decisions on value; to
discuss leveraged buyouts, both in traditional settings within mature industries, as well as in the more
volatile technology sector; to discuss tax implications associated with corporate divestitures; and to

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Company Valuation: An HBSP Course Module

qualitatively evaluate potential costs of financial distress in a capital-intensive technology-driven setting.

Capital structure; Financial strategy; Leveraged buyouts; Mergers & Acquisitions; Present value;
Software; Valuation Setting: Silicon Valley; Computer hardware; $6.8 billion revenues Length: 19p

• Two-session comprehensive case

Alternative 2: Kmart, Inc. and Builders Square Lisa Meulbroek; Jonathan Barnett
In 1997, Kmart received an offer from retail buyout specialists Leonard Green & Partners for the purchase
of its ailing 162-store home improvement chain, Builders Square. Green's offer included a $10 million
cash payment, a warrant to purchase a 28% stake in the new entity in the future, and the assumption of
approximately $1.5 billion in noncancelable Builders Square lease obligations. Kmart would remain
contingently liable for the lease payments if the new entity were to fail. In the midst of the fiercely
competitive home improvement retail industry, the questions posed include (1) what is the value of the
Builders Square subsidiary?,(2) is the Green offer a good deal for Kmart?, and (3) should Kmart accept
the offer or hold out for a higher offer or more offers?
Learning Objective: To incorporate off-balance-sheet financing of operating lease guarantees into a
valuation exercise (using multiples and the APV approach) focused on a money-losing subsidiary.
Subjects: Capital structure; Corporate reorganization; Debt management; Discount department stores;
Divestiture; Leasing; Liability; Options; Restructuring; Valuation Setting: Building materials industries;
Retail industry; $2.5 billion revenues; 1997

Supplement: Using APV: A Better Tool for Valuing Operations Timothy A. Luehrman (Harvard Business
For the past 25 years, managers have been taught that the best practice for valuing assets--that is, an
existing business, factory, product line, or market position--is to use a discounted-cash-flow (DCF)
methodology. That is still true. But the particular version of DCF that has been accepted as the standard--
using the weighted-average cost of capital (WACC)--is now obsolete. Today's better alternative, adjusted
present value (APV), is especially versatile and reliable. It will likely replace WACC as the DCF
methodology of choice among generalists. Like WACC, APV is used to value operations, or assets-in-
place. Timothy Luehrman explains APV and walks readers through a case example designed to teach
them how to use it. Subjects: Acquisitions; Capital budgeting; Capital costs; Financial analysis; Present
value; Valuation Length: 8p

Equity Cash Flow

5. Acova Radiateurs Lisa Meulbroek
In March 1990, Baring Capital Investors faced a decision about whether and how much to bid for Acova
Radiateurs, a subsidiary of Source Perrier. Source Perrier had decided to sell Acova, and Baring Capital
Investors thought it might make a good leveraged buyout candidate.
Learning Objective: To give students an opportunity to value Acova using the flows-to-equity technique,
as well as to evaluate the merits of this technique relative to the valuation methodologies typically used by
buyout firms. Subjects: Acquisitions; Capital structure; Corporate control; Divestiture; International
business; International finance; Leveraged buyouts; Mergers & Acquisitions; Project evaluation; Valuation
Setting: France; Plumbing & HVAC; 337M FF; 500 Employees; 1990 Length:12p

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Company Valuation: An HBSP Course Module

Alternative 1: Philip Morris Companies and Kraft, Inc. Richard S. Ruback

Gives students the opportunity to explore the effect of substantial free cash flow on corporate acquisition
and operating strategies. Students are also given the opportunity to extract information from the common
stock prices of the participating firms. A variety of valuation techniques are employed to assess the
plausibility of a restructuring plan. Subjects: Acquisitions; Cash flow; Food; Restructuring Setting: Food
industry; Tobacco industry; Fortune 500 Length: 21p

Alternative 2: BW/IP International, Inc. Timothy A. Luehrman; Andrew D. Regan

Less than a year after completing a leveraged buyout of their own company, the managers of BW/IP
International were presented with an attractive acquisition candidate. To buy the target company,
however, BW/IP would have to borrow more money and take on more administrative problems at a time
when its managers are already very busy. The case asks students to consider how BW/IP can convince
its lenders that the acquisition is a good idea. Presents two straightforward valuation exercises. Also
permits a careful comparison of the capital allocation processes at a large, low-leveraged, public
company, versus a small, highly-leveraged, private company. Subjects: Capital budgeting; Financial
management; Loan evaluation; Machinery; Reorganization; Securities analysis; Valuation Setting:
California; Fluid control, pump & seal industries; mid-size; $250 million revenues; 1988 Length: 16p

HBS Technical Notes for Supplementary Reading

Note on Capital Cash Flow Valuation Richard S. Ruback

Presents the capital cash flow method for valuing risky cash flows. In this method cash flows are
calculated to include the benefits of interest tax shields. In a capital structure, with just ordinary debt and
common equity, capital cash flows equal the flows available to equity--net income plus depreciation less
capital expenditure and the change in working capital--plus the cash interest paid to bondholders. The
interest tax shields decrease taxable income and thereby increase cash flows. Since the interest tax
shields are included in the cash flows, a before-tax interest rate that corresponds to the riskiness of the
assets is appropriate to value the capital cash flows. Subjects: Capital budgeting; Cash flow; Investment
management; Valuation Length: 13p

Note on Valuing Equity Cash Flows Timothy A. Luehrman

A technical note for advanced students on the topic of valuing highly-levered equity. Introduces the
"equity cash flow" valuation methodology, shows how to use it, discusses the sources and signs of its
built-in biases, and provides some guidance about when to use it. Subjects: Capital budgeting; Capital
costs; Equity financing; Present value; Valuation Length: 10p

• Teaching Note, (295149), 8p, by Timothy A. Luehrman

Note on Valuing Private Businesses Dwight B. Crane; Indra A. Reinbergs

This case provides a brief overview of valuation for owners of closely held companies. The focus is on a
comparable transactions approach, although rules of thumb and discounted cash flow are mentioned.
Earnings multiples and their drivers are discussed. It uses company example and transaction data on

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Company Valuation: An HBSP Course Module

private deals as an exercise in screening for comparable companies and valuation based on multiples. It
includes a three-page bibliography with references to further sources on valuation methods, private
transaction data, financial databases for company screening, and professional advisors from appraisal
and valuation communities.
Learning Objective: To teach participants how to value privately owned businesses. Subjects: Financial
analysis; Financial ratios; Price earnings ratio; Small business; Valuation Length: 14p

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