Corporate Finance

Valuation Panorama

© Franck CEDDAHA 2007

 I. Restated Net Worth
1. Patrimonial method (1/2)

This method aims at revaluing the market value of assets and

liabilities and to adjust book value of equity of identified capital gains
or losses

Revaluation

Book Equity
Asset A
Revaluation value of value
equity
Value
Asset B Asset B

© F. Ceddaha, 2007 2
 I. Restated Net Worth
1. Patrimonial method (2/2)

Possible approach ?
• Liquidation approach
• Going forward approach

Tax impact is different

Difficulty to determine the continuing value of assets

© F. Ceddaha, 2007 3
 II. Multiple valuation
2. Analogical method (1/2)

Principle : applying to the target a multiple, observed on a sample of

peers

Multiples give a value which integrates :

expected growth and

Interest rates
profitability

MULTIPLES

Risk level

© F. Ceddaha, 2007 4
 II. Multiple valuation
2. Analogical method (2/2)

Three steps in multiple method:

1 Choose a
sample of « Target »
comparable Value ?
listed Comparable
companies Value

10x
10x
Aggregate Aggregate
3
Calculate
2 multiples Apply multiples to
Aggregate

Value = Multiple x Aggregate

© F. Ceddaha, 2007 5
 III. Discounted Free Cash Flows
3. Intrinsic method (1/2)

Principle: « a firm is like a bond ! »

The value of the firm is obtained, through discounted free cash flows
at a rate depending on risk

We get the following formula:

∞
Free Cash Flows year i
Value = ∑
i =1 (1 + k) i

© F. Ceddaha, 2007 6
 III. Discounted Free Cash Flows
3. Intrinsic method (2/2)

The 4 steps of the DCF method

Estimate discount
rate 4
Value
discounting
Calculate
terminal 3
value
Calculate
2 free cash
flows

Build a time
business 1
Business plan horizon plan

© F. Ceddaha, 2007 7
 IV. Options and corporate finance
4. Real Options (1/3)

Principle: taking into account company life flexibility

Those flexibilities are options to valorize, what leads to Adjusted

Present Value (APV)

APV = DCF Value + Real Options Value

Real Options are a tool to integrate time value in a firm valuation

© F. Ceddaha, 2007 8
 IV. Options and corporate finance
4. Real Options (2/3)

Real Options declination

Investment / Expectation / Divestiture /

Growth Learning Reduction

Scale up Scale down

Project Expanding Project Downsizing

Expecting that
Switch up success conditions Switch down
Flexibility of the project are Flexibility
implemented

Scope up
Scope down
New Projects
Project abandoning
Implementation

© F. Ceddaha, 2007 9
 IV. Options and corporate finance
4. Real Options (3/3)

The four steps of real options method

2 1
Choose to Determine
exercise potential
available values of
real options cash flows
Compute the 1987
expected
3 return of 1789
retained cash
flows 1929

T0 T0+1 T0+2 time

Repeat the process till T discounting

0,
4 cash flows at each decisional node
© F. Ceddaha, 2007 10
 Conclusion
1. Valuation methods advantages and drawbacks

Advantages Drawbacks
• Easy reference • Book approach
Patrimonial
• Relevant for small companies • Going concern value is an issue
Method
• Limited application fields
• Simple and popular • Reliability of the sample

Multiples • Tangible reference in a negotiation • Share price signification

process
• “Intrinsic”
Intrinsic” method • Sensitivity of retained assumptions

DCF • Thoughts about business and • Choice of terminal value and wacc
profitability
• Circularity of the method

• Managerial view close to reality • Heavy implementation

Real Options
• Time Value • Difficult to price

© F. Ceddaha, 2007 11