Introduction to the course

CFV600 CORPORATE FINANCE AND EQUITY VALUATION

FALL SEMESTER 2022, NICLAS ANDRÉN

Contacts
Lecturers:
Niclas Andrén Lars Oxelheim
niclas.andren@fek.lu.se lars.oxelheim@telia.com
046-222 4666
Outline
• Scope and contents of the course
• Course literature
• Assessment
We will study corporate valuation
• Corporate valuation and equity valuation
– While the course title refers to equity valuation, we will emphasize corporate valuation
» Not much of a distinction, since you easily transform between the two
» Firm value = Equity value + Debt value
– We will cover the entire valuation process
» Macro, industry, competitive, and business analysis – analyze a firm’s economic and
competitive setting and competitive strategy; identify key value drivers and business risks
» Accounting analysis – evaluate to what extent a firm’s accounting captures underlying business
reality; undo accounting distortions to create more unbiased and economically meaningful data
» Financial analysis – use financial data to evaluate firm’s current and past performance
» Forecasting company performance – synthesize the insights from previous analyses to make
predictions about a company’s future performance potential
» Valuation – converting forecasts into valuations, analyzing their reliability, and applying the
valuation conclusion
– We will cover both the qualitative and quantitative side of valuation
» You may consider the quantitative side the more challenging one, but that’s an initial hurdle on
the passage towards learning to value companies
» ”Valuation depends mainly on understanding the business, its industry, and the general
economic environment, and then doing a careful job of forecasting. Careful thought and hard
work leads to foresight. Correct methodology is only a small, but necessary, part of the
valuation process.” (Koller et al, 2020. Valuation. Wiley)
Why study corporate valuation?
• How much is your business worth? This is not a speculative question, or one that
should be answered with a “ballpark” guess. Attaching an accurate valuation to a
company is a critical part of ongoing business strategy.

• Value creation is a core operating principle for many of today’s most successful
and admired companies
» But how do firms create value? And how do they know they are creating value?

• To understand potential sources of value for a corporation, you need a

framework to guide your analysis
» Equity analysis
» Analyzing and evaluating financial implications of strategic and operating decisions on
firm value
» Doing acquisitions, mergers, buyouts, divestitures, or restructuring
» Inviting new partners/owners
» Value-based compensation schemes (stock and options programs, etc)
Scope and contents of the course
• We emphasize both art and science
– Science: learning correct and consistent methodology
» Doing the nitty-gritty details of financial analysis correctly
» Making adequate financial statements adjustments, calculating cost of capital, get valuation
models to balance, etc
– Art: a valuation is by necessity subjective
» Imagine the challenges in imagining a firm’s possible futures
» This is where the careful thought and hard work truly comes in

• Valuation is imprecise, but imprecision should not be the result of deficient

methodology
Scope and contents of the course
• We will look at valuation of different types of firms
– Publicly traded and privately held
– Young, growing, mature, declining
• But our primary focus will be more mature publicly traded firms – the comfort zone
of most valuation models
– We will not cover pre- and post-money valuations of startups
– We will not cover leveraged buyout valuation
– We will not cover breakup (sum-of-the-parts) valuation
– We will not cover asset-based valuation
Scope and contents of the course
• We will look at valuation of different types of firms
– Publicly traded and privately held
– Young, growing, mature, declining
• But our primary focus will be more mature publicly traded firms – the comfort zone
of most valuation models
– We will not cover pre- and post-money valuations of startups
– We will not cover leveraged buyout valuation
– We will not cover breakup (sum-of-the-parts) valuation of firms in decline
– We will not cover asset-based valuation models
• We will look at different valuation techniques
– Discounted cash flow valuation (present-value models)
» Free cash flow models, dividend-discount models, profit-based models
– comparables-based valuation (multiplier models)
• But our primary focus will be free cash flow valuation
– While the inputs into the valuation model vary across DCF models, the valuation
techniques are similar
– While multiplier models are important, they are conceptually easier to work with and,
hence, require less attention in the lecturing
What are our expectations on you?
• Our objective is to prepare you for working as analysts or consultants doing
valuations professionally
– This requires a solid understanding of the entire valuation process
– But this is not the end of your training if you want to become valuation professionals
» The next step is to gain experience in doing valuations – the art of valuation
» And there’s certainly more to learn on valuation than we can squeeze into a single course
Course literature
• Main textbook: Pinto, J E, 2020. Equity Asset Valuation (4th ed), Wiley.
– This is a handbook on valuation from an outside analyst’s point of view
» You can work with it as a how-to guide
– It covers the entire valuation process
» It does not go particularly deeply into any step, but provides enough detail on all
important steps
» I will be filling in by going deeper where I see a need for further depth
» Authors vary across chapters, so the book is slightly repetitive

• Articles, but only a handful

• If you after the course find that you want to continue your study of valuation, my
recommendation would be Koller et al, Valuation. Measuring and Managing the
Value of Companies, Wiley
‒ Authored by co-workers McKinsey, so emphasizes the linkages between strategy,
finance, and corporate value creation
‒ I will use terminology and model structures as covered in this book as well, in parallel
to Pinto’s terminology, since they are relevant to know for valuation professionals
Lesson plan
Date Location Title

Oct 5 9-12 On campus Introduction to valuation, value creation, and model structures
Oct 5 13-16 On campus Cash flow modeling
Oct 6 9-12 On campus Financial analysis
Oct 11 13-16 On campus Valuation in a turbulent world economy
Oct 12 9-12 https://lu-se.zoom.us/j/66721047894 Forecasting
Oct 13 13-16 https://lu-se.zoom.us/j/66721047894 Estimating the cost of equity
Oct 19 9-12 On campus Estimating the cost of capital
Oct 20 9-12 On campus Market-based valuation
Oct 24 13-16 https://lu-se.zoom.us/j/66721047894 Profit-based valuation
Oct 26 9-12 https://lu-se.zoom.us/j/66721047894 Valuing different types of firms, incl privately held firms
Oct 27 13-16 On campus Identification of "sustainable" value - The MUST-analysis
Oct 28 9-12 On campus Presentation of group work (in relation to Lars' lectures)
Nov 1 13-16 https://lu-se.zoom.us/j/66721047894 Summing up the valuation; valuation uncertainty

Date Readings
Pinto ch 1-4 provide a more general background, so are suitable for reading on your own
Oct 5 9-12 Pinto ch 7.1-7.5 (also see 3.4.2, 3.4.4-3.4.5, 8.2.2-8.2.3, 8.4.3-8.4.4); Dobbs and Koller (2005); Rappaport (2006)
Oct 5 13-16 Pinto ch 6-8
Oct 6 9-12 Pinto ch 2, 7.6.2; Koller et al (2020, ch 29)
Oct 11 13-16 Oxelheim (2019); handouts
Oct 12 9-12 Pinto ch 2, 4.3-4.4, 6, 7.6.1
Oct 13 13-16 Pinto ch 5
Oct 19 9-12 Pinto ch 5; recorded lecture on Identifying corporate debt
Oct 20 9-12 Pinto ch 9; Foushee et al (2012)
Oct 24 13-16 Pinto ch 10
Oct 26 9-12 Pinto ch 11
Oct 27 13-16 Oxelheim (2019); handouts
Oct 28 9-12
Nov 1 13-16 Pinto ch 4.3.5, 4.4, 6.2.6, 8.4.2
Canvas
• I primarily use Canvas for uploading documents that you will find under Modules
– Esp slideshows used in the lecturing
Assessment
• An individual written exam at the end of the course (I haven’t seen a date yet)
– Covers textbook readings + what is covered in class
– Sample exam questions (with answers) will be posted in Canvas
– The in-chapter examples and end-of-chapter questions provide good guidance
– Both quantitative and qualitative questions

• Team work, undertaken in groups of four:

– Value a company of your own liking
Assessment
• Maximum no of points on the course is 100
– The individual exam is worth 50 pts
– The teamwork is worth 50 pts
• You must attain a pass (≥50%) on both the exam and the teamwork and get an
overall score ≥50 pts to pass the course
• Grading:
– You can choose how the team wants to be graded on the teamwork, either Pass/Fail
or A-F. If you choose A-F, your overall course grade will be based on your result on
the individual exam.

Course Individual exam Teamwork

A: 85-100 pts 0-50 pts A: 50 pts
B: 75-84 Pass ≥50 pts A-: 90% of 50 = 45 pts
C: 65-74 B: 80%
D: 55-64 C: 70%
E: 50-54 D: 60%
F: 0-49 E: 50%
F: 0%