PDF Techniques in Finance & Valuation FINAL - Boston University
Techniques in Finance & Valuation
1
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)
2
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 )
3
Trading Comparables
Relative Valuation Technique
4
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
6
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
7
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
8
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