Live Case Study Valuation

Objective: To value your firm, based upon its existing management, and your expectations for the future.

Key Questions:

• What type of cash flow (dividends, FCFE or FCFF) would you choose to discount for this firm?

• What growth pattern would you pick for this firm? How long will high growth last?

• What is your estimate of value of equity in this firm? How does this compare to the market value?

Framework for Analysis:

1. Cash Flow Estimation

• What is this firm's accounting operating income? Would you adjust it for your valuation?

• What is your firm's effective tax rate? What is its marginal tax rate? Which would you use in your valuation?

• How much did your firm reinvest last year in internal investments, acquisitions, R&D and working capital?

2. Growth Pattern Choice

• How fast have this company's earnings grown historically?

• How fast do analysts expect this company's earnings to grow in the future?

• What do the fundamentals suggest about earnings growth at this company? (How much is being reinvested and at what rate of return?)

• If there is anticipated high growth, what are the barriers to entry that will allow this high growth to continue? For how long?

3. Valuation

• What is the value of the operating assets of the firm, based upon a discounted cash flow model?

• Does the firm have cash and non-operating assets and what is their value?

• Are there equity options outstanding (management options, convertible bonds) and how much are they worth?

• What is the value of equity per share? 4. Relative Valuation

• What multiple would you use to value the firm or its equity?

• What industry does the firm belong to, and what are the comparable firms?

• How does your firm's valuation (in multiple terms) compare to those of the other firms in the industry?

• What value would you assign your firm (or its equity), given how comparable firms are valued?

Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

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