Techniques in Finance & Valuation FINAL

Techniques in Finance & Valuation

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What is Valuation?

Valuation: Methods of quantifying how much money something should be exchanged for today, considering future benefits.

We will teach 4 valuation methods

Trading Comparables

Transaction Comparables

$

Sum-of-the-Parts Valuation

Discounted Cash Flow Analysis (DCF)

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Why is Valuation important?

Sell-side Research:

Should our clients buy, sell or hold a given stock (fixed income

security, option etc.,)?

Acquisitions: How much should we pay for the company?

Valuation

Hostile defense:

Is our company undervalued/vulnerable

to a hostile bidder?

Debt offerings:

What is the value of the company against which debt is being issued?

(collateral)

Divestitures: How much should we sell our company for?

Initial Public Offering (IPO):

How much is the company worth? (price per share )

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Trading Comparables

Relative Valuation Technique

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Agenda

Multiples: Comparables Trading (transaction comparables will be covered by Mike) Theory: Similar companies (all else equal) should have similar valuations Defining a Peer Group ("similar companies") Picking the right multiples Calculating CLX's multiples Spreading Peer Group multiples Calculating CLX's implied value

First day on the job... (potential interview question)

Your boss thinks shares of Clorox Co. ("CLX") might be a good investment: She asks you: "How much do you think they are worth?"

One common approach is Multiples Based Valuation Technique

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What are multiples?

Examples: Price / Earnings (P/E) Firm Value / Revenues Firm Value / EBITDA

Earnings per share $4.24

Earnings per share $2.90

"CLX" $67 a share

?

"ENR" $67 a share

$67 / $4.20 15.8x

$67 / $3.00 23.1x

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Trading Comparables: The Theory

Basic Assumption: Similar companies should have similar valuations Employing multiples is a relative valuation technique

17x Price / Earnings ( "Price to Earnings")

17.0 x

16x

16 .0 x

15x

14x

13x

12x

11x

10 .0 x

10x

9x

8 .1x

8x 8.5x

7x

7.8

x 67..06xx

6x

7.0 x 6 .0 x

65.0.0xx

5x

2005 2005

Q3 Q4

7.5x 7.2 x

6 .5x 5.7x 6 .3 x

2006 Q1

14 .0 x 13 .0 x

15.0x

14 .0 x 14 .4 x

13 .2 x 13 .0 x

12 .0 x13 .0 x12 .0 x 11.7x

11.0 x 11.5x

11.0 x

12 .0 x

8.6x 8.0x 8 .0 x

10.0x 10.0x 89.8.5xx

89.2.0xx

7.0x7.2x

8.5x

7.4 x

1154.4.7xx 14 .2 x

14 .0 x

13 .214x.0 x

13 .6 x

12 .08 x

9 .2 x

14 .4 x 14.4x 14.2x

14.0x

13 .1x 1212.1.x8 x

12.0x

13.5x 13.0x 13 .0 x

12.0x

11.0 x

11.0 x

10 .9 x

13.0x

12 .0 x

12.0x 11.0x

11.0x 10 .0 x

10 .0 x

9 .0 x 8.1x 8.1x

99.0.0x10x.0 x 8 .8 x 8 .0 x

9 .5x

8 .8 x 79.8.0xx

8 .0 x

2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

11.1x

101.10.0xx

9 .6 x 10.0x

12 .0 x 11.1x 10 .5x

11.0 x 10 .1x

2010 2010 Q1 Q2

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