Cheat Sheet - DRAFT
Valuation 2025
HEC Lausanne
This cheat sheet might be slightly adjusted depending on the content we will be able to
cover.
Table of Contents
1 – Cash Flows ......................................................................................................... 2
2 – Financial Analysis ............................................................................................... 2
3 – Forecasting Cash Flows ...................................................................................... 3
4 – Cost of Capital .................................................................................................... 4
5 – Firm Valuation ..................................................................................................... 5
7 – Relative Valuation ............................................................................................... 6
8 – EVA ..................................................................................................................... 7
9 – Options (I) ........................................................................................................... 8
10 – Options (II) ........................................................................................................ 9
11 – Mergers & Acquisitions ...................................................................................... 9
12 – Venture Capital ............................................................................................... 10
14 – Private Firms ................................................................................................... 10
15 – LBOs and Capital Cash Flows .......................................................................... 10
Appendix: Standard Normal CDF (“Z-table”) .......................................................... 11
1
1 – Cash Flows
NOPLAT:
NOPLAT = EBIT − adjusted taxes = EBIT × (1 − Tax rate)
NOPLAT = Net income + After-tax interest expense
Net Working Capital (NWC):
NWC = Operating cash + Inventory + Receivables (+Pre-paids) - Payables (acc.pay. & taxes)
ΔNWC𝑡 = NWC𝑡 − NWC𝑡−1
Free cash flow, residual cash flow, retained earnings:
FCF = NOPLAT + D&A − ΔNWC − Net Long-Term Investment
Residual cash flow = FCF + increase LT Debt − 𝑎𝑓𝑡𝑒𝑟 − 𝑡𝑎𝑥 interest expenses
Retained Earnings𝑡 = Retained Earnings𝑡−1 + Net Income𝑡 − Dividend𝑡
2 – Financial Analysis
Total Liabilities
Debt / Equity Ratio =
Total Equity
Total Liabilities
Debt / Capital Ratio =
Total Assets
EBIT
Interest Coverage Ratio =
Interest Expenses
Net Debt
Debt Service Coverage =
EBITDA
Current assets
Current ratio =
Current liabilities
Cash + Trade accounts receivable
Quick ratio =
Current liabilities
EBIT
Return on Assets (ROA) =
Book value of assets
2
Net income Net income Sales Assets
Return on Equity (ROE) = = × ×
Book value equity Sales Assets Book value equity
Net Sales - COGS EBIT Net income
Gross Margin = , EBIT margin = , Net margin =
Net Sales Sales Sales
Stock price 𝑏
P/E ratio = =
Earnings per Share (𝑟𝑒 − 𝑔)
Stock Price
𝑃𝐵 = = P/E ratio × 𝑅𝑂𝐸
Equity per share
𝐷𝑌 = Dividend per Share/Stock Price
3 – Forecasting Cash Flows
Fundamental growth rates:
𝑔=⏟
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑅𝑎𝑡𝑒 × 𝑅𝑂𝐼𝐶,
𝐼𝑅
NOPLAT
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 (𝑅𝑂𝐼𝐶) =
Invested capital
Net investments Invested capital𝑡 − Invested capital𝑡−1
IR = =
NOPLAT NOPLAT
𝑔
FCF = NOPLAT − net investment = NOPLAT × (1 − IR) = 𝑁𝑂𝑃𝐿𝐴𝑇 × (1 − )
ROIC
𝑔
FCF1 NOPLAT1 × (1 − ROIC)
Value = =
WACC − 𝑔 WACC − 𝑔
Terminal value and firm value:
𝑡=𝑁
CF𝑡 Terminal value
Value = ∑ 𝑡
+
(1 + 𝑟) (1 + 𝑟)𝑁
𝑡=1
Terminal value estimation – stable growth model:
3
𝐹𝐶𝐹𝑇+1 𝐹𝐶𝐹𝑇 × (1 + 𝑔)
Terminal Value 𝑇 = =
(𝑟 − 𝑔) (𝑟 − 𝑔)
𝑔
𝑁𝑂𝑃𝐿𝐴𝑇𝑇+1 × (1 − 𝑅𝑂𝑁𝐼𝐶 )
Terminal Value 𝑇 =
(𝑟 − 𝑔)
4 – Cost of Capital
Dividend Discount Model:
𝐷𝑖𝑣0 × (1 + 𝑔)
𝑃0 =
(𝑟𝐸 − 𝑔)
𝐷𝑖𝑣0 × (1 + 𝑔) 𝐷𝑖𝑣1
𝑟𝐸 = +𝑔 or 𝑟𝐸 = +𝑔
𝑃0 𝑃0
CAPM:
𝑟𝑗 = 𝑟𝐹 + β𝑗 × 𝐸[𝑟𝑀 − 𝑟𝐹 ]
Fundamental betas:
𝐷
β𝐿 = β𝑈 (1 + ((1 − τ) ))
𝐸
Cost of debt:
𝑟𝐷 = 𝑟𝐹 + risk premium
Yield to maturity of a bond:
𝐹𝑉
𝑌𝑇𝑀 = −1
𝑃
Cost of capital:
𝐸 𝐷
𝑟𝑊𝐴𝐶𝐶 = 𝑟𝐸 × + 𝑟𝐷 × (1 − τ) ×
𝐸+𝐷 𝐸+𝐷
4
5 – Firm Valuation
Dividend Discount Model – Zero Growth:
𝐷𝑖𝑣
𝑃0 =
𝑟𝐸
Dividend Discount Model – Constant Growth:
𝐷𝑖𝑣0 × (1 + 𝑔) 𝐷𝑖𝑣1
𝑃0 = =
(𝑟𝐸 − 𝑔) (𝑟𝐸 − 𝑔)
Dividend Discount Model – Gordon-Shapiro:
Let b denote the payout ratio.
𝐷𝑖𝑣0 × (1 + 𝑔) 𝑏 × 𝐸𝑃𝑆0 × (1 + 𝑔) 𝑏 × 𝐸𝑃𝑆1
𝑃0 = = =
(𝑟𝐸 − 𝑔) (𝑟𝐸 − 𝑔) (𝑟𝐸 − 𝑔)
FCFE Model – Constant Growth:
𝐹𝐶𝐹𝐸1
Equity value =
𝑟𝐸 − 𝑔
FCFE Model – Two-stage:
Let 𝑟𝐸,ℎ𝑔 denote the cost of equity in high growth, 𝑟𝐸,𝑠𝑔 denote the cost of equity in stable
𝐹𝐶𝐹𝐸𝑛+1
growth, and let 𝑃𝑛 = .
𝑟𝐸,𝑠𝑡−𝑔
𝑡=𝑛
𝐹𝐶𝐹𝐸𝑡 𝑃𝑛
Equity value = ∑ 𝑡 + 𝑛
𝑡=1 (1 + 𝑟𝐸,ℎ𝑔 ) (1 + 𝑟𝐸,ℎ𝑔 )
FCFE Model – Three-stage:
𝑡=𝑛1 𝑡=𝑛2
𝐹𝐶𝐹𝐸𝑡 𝐹𝐶𝐹𝐸𝑡 𝑃𝑛2
Equity value = ∑ 𝑡
+ ∑ 𝑡
+
(1 + 𝑟𝐸 ) (1 + 𝑟𝐸 ) (1 + 𝑟𝐸 )𝑛2
𝑡=1 𝑡=𝑛1+1
DCF Model – Constant Growth:
𝐹𝐶𝐹1
𝑉0 =
𝑊𝐴𝐶𝐶 − 𝑔
5
DCF Model – General Version
∞
𝐹𝐶𝐹𝑡
𝑉0 = ∑
(1 + 𝑊𝐴𝐶𝐶)𝑡
𝑡=1
𝑡=𝑛
𝐹𝐶𝐹𝑡 𝐹𝐶𝐹𝑛+1 /(𝑊𝐴𝐶𝐶𝑠𝑡 − 𝑔)
𝑉0 = ∑ 𝑡 + 𝑛
𝑡=1 (1 + 𝑊𝐴𝐶𝐶ℎ𝑔 ) (1 + 𝑊𝐴𝐶𝐶ℎ𝑔 )
APV Model
𝑉𝐿 = 𝑉0 = 𝑉𝑈 + 𝑃𝑉(tax shield) − 𝑃𝑉(expected bankruptcy costs)
with
𝑃𝑉(tax shield) = τ × 𝐷
and
𝑃𝑉(expected bankruptcy costs) = ℙ(bankruptcy) × 𝐵𝐶
Discount rate:
E D
𝑟𝑈 = 𝑟𝐸 × + 𝑟𝐷 ×
E+D E+D
Dealing with Cash
𝐹𝐶𝐹1
𝐹𝑖𝑟𝑚 𝑣𝑎𝑙𝑢𝑒 = + Excess cash
𝑊𝐴𝐶𝐶 − 𝑔
7 – Relative Valuation
• 𝑀𝑉𝑇 , 𝑀𝑉𝐶 : market values of to-be-valued and comparable asset.
• 𝑉𝐼𝑇 , 𝑉𝐼𝐶 : valuation indicators of to-be-valued and comparable asset.
𝑀𝑉𝐶
𝑀𝑉𝑇 = × 𝑉𝐼𝑇
𝑉𝐼𝐶
Enterprise Value (EV):
EV = MV debt + MV equity - Excess cash + MV minority interests
Market Value of Equity:
MV Equity = EV – Debt – Minority interests + Excess cash
6
P/E multiple: interpretation under the Gordon-Shapiro model
𝑃0 𝑏
=
𝐸𝑃𝑆1 (𝑟𝐸 − 𝑔)
List of multiples:
• EV/Sales
• EV/EBITDA
• P/E
1 𝑃
• P/Dividends = Payout ratio × 𝐸𝑃𝑆0
0
𝑃0
• P/Book = ROE × 𝐸𝑃𝑆
0
𝑃
• P/Sales = Net profit margin × 𝐸𝑃𝑆0
0
8 – EVA
Residual income valuation
Residual Income (RI) = Net income - $ cost of equity
∞
𝑅𝐼𝑡
𝑃0 = 𝐵0 + ∑
(1 + 𝑟𝐸 )𝑡
𝑡=1
Economic Value Added (EVA)
EVA𝑡 = Operating income after tax𝑡 − Invested capital𝑡−1 × WACC
Firm value
∞
𝐸𝑉𝐴𝑡
Firm value = (Net) invested capital + ∑
(1 + 𝑊𝐴𝐶𝐶)𝑡
𝑡=1
where
∞
𝐸𝑉𝐴𝑡
∑ = Market Value Added
(1 + 𝑊𝐴𝐶𝐶)𝑡
𝑡=1
Net Asset Value
• Asset value = Book assets + Hidden reserves - Deferred taxes
• Net asset value = Asset value - Liabilities = Book equity + Hidden reserves - Deferred
taxes
7
Capitalized earnings
Normalized future earnings
Equity value (capitalized earnings) =
Cost of capital
Practitioner’s approach
Net asset value + 2 × Capitalized earnings
Equity value =
3
9 – Options (I)
Black-Scholes formula:
𝑐0 = 𝑆𝒩(𝑑1 ) − 𝐾𝑒 −𝑟𝑇 𝒩(𝑑1 − σ√𝑇)
Where
ln(𝑆/𝐾) + 𝑟 × 𝑇 1
𝑑1 = + σ√𝑇
σ√𝑇 2
And we have the following notations:
• The current price of the underlying asset: S
• The exercise price of the option: K
• The time to maturity of the option: T
• The risk-free interest rate: r
• The standard deviation of the return on the underlying asset: 𝜎
• The standard normal cumulative distribution function: 𝒩(⋅)
Value of Debt:
𝐷 = 𝑉 − 𝐸
Yield:
𝐷𝑒 𝑌𝑇 = 𝐹
Risk-neutral default probability:
𝑃(𝑉𝑇 < 𝐹) = 1 − 𝒩(𝑑1 − σ√𝑇)
8
10 – Options (II)
Real options valuation:
1 (1 + 𝑟) − 𝑑 𝑢 − (1 + 𝑟)
𝑉𝑎𝑙𝑢𝑒 = [ 𝐶𝐹𝑢 + 𝐶𝐹𝑑 ]
1+𝑟 𝑢−𝑑 𝑢−𝑑
Risk-neutral probability if underlying asset delivers cash flow:
1+𝑟−𝑑−δ
𝑝=
𝑢−𝑑
11 – Mergers & Acquisitions
Value of merged company:
Value of merged company
= Stand-alone acq + Stand-alone target + Synergies − Cash payments
New shares to issue
Assume that new shareholders will expect to own α % of the company.
α
New shares to issue = (Number of shares outstanding) ×
1−α
Share exchange ratio
Shares issued to target shareholders Equity paid per target share
Share exchange ratio = =
Shares acquired from target shareholders Price of acquirer's share
9
12 – Venture Capital
Exit value at time T
Exit value 𝑇 = Net income 𝑇 × P/E ratio (forward)
Pre- and Post-money valuation
Here, 𝑟 indicates the return required by Limited Partners on the Venture Fund.
Exit value Exit Value × 𝑃(𝐸𝑥𝑖𝑡)
Post-money valuation = =
(1 + Required Return)𝑇 (1 + 𝑟)𝑇
Pre-money valuation = Post-money valuation - Capital needs
Dilution & retention percentage
Retention share = %-share at exit / %-share now
Dilution percentage = 1 - retention percentage
14 – Private Firms
Market beta σj
Total beta = =
ρ𝑗𝑚 σm
σ𝑗𝑚 ρ𝑗𝑚σ𝑗
(with Market beta = 2 = )
𝜎𝑚 σ𝑚
15 – LBOs and Capital Cash Flows
The formula considered in this class is:
𝐶𝐶𝐹 = 𝐹𝐶𝐹 + Interest Tax Shields
with
Interest Tax Shields = τ × Pre-Tax Interest
10
Appendix: Standard Normal CDF (“Z-table”)
Table displays the cumulative probability associated with each value of Z for a standard
normal distribution.
Recall that Φ(−𝑍) = 1 − Φ(𝑍) .
11
