Why Value Value?

Why Value Value?

Corporate Finance
• Value-based management
• Strategic decision-making
• Asset / financial restructuring
• Liquidation / bankruptcies
• ESOP / compensation

Investment Banking /Private Equity / Venture Capital

• M&A | leveraged buyout
• IPO | new venture | raising capital

Investment
• Value investing; portfolio management

Regulatory / legal uses Consulting Estate, gift, and income tax

 Why Value Value?

• Doorbot, now “Ring” • Scrub Daddy

• Seeking $700,000 for a • Seeking $100,000 for END
10% stake a 10% stake
Which Value?
 Which Value?
• Book Value vs. Market Value

• Equity Value / Value of Common Equity

• Enterprise Value (EV)

• market value of an entire company

• Intrinsic value
• estimated “true” value of a company
 Which Value?
• Fair Market Value
• Internal Revenue Service (IRS) in its Revenue Ruling 59-60
• “The price at which the property would change hands
between a willing buyer and a willing seller when the former
is not under any compulsion to buy and the latter is not under
any compulsion to sell, both parties having reasonable
knowledge or relevant facts.”

• Fair Value: state rights / financial reporting

• The Financial Accounting Standards Board (FASB)
• “The price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date.” END

(Note: This definition is still open to interpretation.)

How to Value Value?
Part I: Analyzing the Business
Valuation Purpose?

Valuation
process

How to
value
value
Valuation Valuation
models principle
 Valuation Process
Analyzing Business
Analyzing Business Valuation Modeling
Environment

Company Analysis Macro View Which Model(s) To

Look To The Economy Use?

Identify
VALUE DRIVER(S) Assumptions
Sector Specific / Trend
And Model Inputs

Know The Industry / Market Analysis Apply, Validate and

Management Team Porter’s Five Forces Justify
SWOT Analysis
Post-valuation
Identify Existing and Revisit and
Potential Problems Adjustment
 Analyzing the Business
• Business Profile | Life Cycle
• What does the company do?

• Assessing financial and accounting

information
• How does the company perform currently?

• Growth | Future Prospectus

• Where might the company go next?
 Analyzing the Business
• Identify the VALUE DRIVER(s)!
• Product Innovation?
• Branding? Reputation?
• Customer Relationship?
• Corporate Culture?

• Which factors will have the most significant

impact on the future value of the business?

• Which of those factors can be most effectively

END
managed?
 How to Value Value?
Part II: Analyzing the Business Environment
 Analyzing the Business Environment

• Tracking the economy

• GDP
• Consumer Price Index (CPI) / Inflation
• Unemployment Rate
• Interest Rate

FRED database
Analyzing the Business Environment
 Analyzing the Business Environment

• Tracking the market

• DJIA

• S&P 500 Index

• Nasdaq Composite Index

 Analyzing the Business Environment

• What’s news?
• WSJ

• Bloomberg

• CNBC

Global view
Analyzing the Business Environment
Porter’s Five Forces
of Competitive Position Analysis
Threat of
new entrants

Rivalry
Bargaining Bargaining
among
power of power of
suppliers existing buyers
competitors

Treat of substitute
products or services
Analyzing the Business Environment
SWOT Analysis
STRENGTHS
Characteristics of a business
which give it advantages over
its competitors
OPPORTUNITIES
Elements in a company’s external
environment that allow
it to formulate and implement
strategies to increase profitability
WEAKNESSES
Characteristics of a business
which make it disadvantageous
relative to competitors
THREATS
Elements in the external
environment that could endanger
the integrity and profitability of the
business
How to Value Value?
Part III: Valuation Modeling
 Valuation Modeling

Assumptions Apply, analysis,

Post-valuation
Which and modeling
Model inputs revisit
model(s)
to use? Collect Valuation and
information adjustment
Validate/Justify
 Valuation Models

Absolute • Focus on the fundamentals of a

valuation company, i.e., cash flow and growth
rate, to determine the “true” worth of
model the company

Relative • Value of a company is compared to the

valuation values assessed by the market for similar
model or comparable assets

END
How to Value Value?
Part IV: Valuation Principles
 Valuation Principles
• Going concern vs. liquidation value

• Value future / long-term benefits

 Valuation Principles
• Think about value driver(s)

• Think about risk and growth

• Sensitivity analysis is vital

 Valuation Principles
• One size may not fit all

Valuation Football Field

52-week trading range $22 $40

Current analyst forecast $45 $48

Comparable valuation $31 $63

Precedent transactions valuation $44 $65

DCF valuation $36 $55

0 10 20 30 40 50 60 70 80
Share price
 Valuation Principles
• What should be the goal of a firm?

• Both Art and Science

END
Financial Statements
in Valuation Perspectives
 Balance Sheet
in Valuation Perspective

Assets Rethink about Assets

Assets-in-place

Current assets

Growth assets

Long-term assets Non-operating assets

 Balance Sheet
in Valuation Perspective

value of resources = value of claims on resources

Assets Liabilities and equity

Assets-in-place Debt

Preferred stock
Growth assets

Equity
Non-operating assets

Firm Value = Vd + Vp + Ve
 Balance Sheet
in Valuation Perspective
Value of Equity = Enterprise Value
– V of net debt
– V of preferred stock
Liabilities and
Total Assets Shareholders’
Equity
Net Debt / PS

Enterprise Enterprise
Equity value
value value
 EXAMPLE
Equity Value: House Analogy

Value of house (building): $500,000

Value of property (land): $1,000,000

Box of cash in the basement: $10,000

Mortgage: $800,000

What is the enterprise value?

What is the equity value? END