Company valuation

2 Appendices

Here you can describe Excel calculations, or those in any other package you are familiar with. Submit them as a separate excel file when you submit course- work. Number each folder as Appendix 1, Appendix 2 etc. In the text give the Appendix numbers so that I can go back to the folder to see them, if necessary.

For example, if you have a folder where you calculate the risk free rate from past data as the average of the past 10 years’ gilt rates mention this in the text, or in a footnote, or in parenthesis. It could read “See appendix 1 for details” or something similar to alert me that I can see the calculations in that folder.

3 Cover Page

Cover page should include the Company/Event you have chosen and your name.

4 Sections

It is easier to read and follow the analysis if you use sections and subsec- tions. All of you are working with different companies that have different strength/weakness and all of you have a different reason for valuing the company. Your coursework and coursework format will reflect that. Take the suggestions below as general remarks and feel free to adapt them to your particular company and your particular reason for valuation or “valuation event”.

4.1 Introduction.

Start with an introduction. Here you address the first point in the assignment document. Why are you studying this company and this valuation evident? What makes it interesting and important? Discuss your motivation and why you chose this company for valuation.

Just as an example, are you submitting your report to the CEO of the main competitor that is planning to acquire your chosen company? Are you a stock market investor, or a fund manager, and planning to buy or sell? Are you submitting this report to the CEO of this company that is evaluating an offer from a prospective buyer? Any reason you have interest in the value of the company is fine as long as you state it clearly. This section comes mainly from Week 1 assignment.

5 Company Background.

Make sure to include a company background section of your coursework. Give a good analysis of the company background with reference to its past performance, industry, economy etc. Your assumptions will depend on this background anal- ysis. Your decision will depend on this background analysis. This section comes

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from mainly Week 1 assignment. And maybe some of the peer analysis of Week 9 or so.

6 Valuation of the Company.

You can be flexible in the subsections here when you present the valuations and the steps you use to arrive at those valuations. Every company is different. Every assignment should have a different purpose to conducting the valuation. It will all be reflected in this section. You can use the sequence you used in weekly assignments in this section.

Calculation of the cost of equity and the weighted average cost of capital for your firm. Discuss the different assumptions you make for each component and show how you arrived at one, or a series, of cost of capital estimates under different assumptions.

• The first part of this section comes from your work in week 3 when you calculate the risk free rate, market premium and the β coefficient for your company and then calculate the cost of equity.

Make sure you discuss the choice of estimation periods and processes you used for the risk free rate, market premium,market β, and the cost of equity capital.

Compare the CAPM and Fama-French 3 factor model of your chosen com- pany’s implied cost of equity capital. Recalculate your company’s WACC if you think the Fama-French 3-factor offers an enhanced explanation of the costs of equity funding for your firm.

• The second part of this section comes your calculation of the cost of debt and the weighted average cost of capital (WACC) for firm valuation under different assumptions.

Make sure you discuss the choice of estimation periods and processes you used for the cost of debt and the capital structure of the firm.

• Calculation of cash flows to the firm and cash flows to equity using dif- ferent assumptions. Discuss the different assumptions you make for each component of cash flow estimations and how you arrived at one, or more, cash flow estimates under different assumptions.

Make sure you discuss the choice of adjustments and estimation processes you make for Research and Development, Leasing, Depreciation/Amortisation, Capital expenditures etc. if they are relevant for your firm.

• Make sure to calculate cash flows to the firm using different assumptions and to describe your choices.

• Again, make sure to calculate cash flows to equity using different assump- tions and to describe your choice.

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Calculation of the future cash flows using different estimates of growth rates for cash flows. Describe and justify your choice in each case. You can estimate a range of growth rates, or assume growth rates change as the firm life cycle develops.

• Calculated different estimates of growth rates. Make sure you describe and justify your choices.

• Recalculate different estimates of terminal/continuing value of your chosen company. Again, make sure to justify your choices, reconcile your chosen growth rate back to the currently observed price.

• Recalculate the value of the firm and value of equity under different as- sumptions. This section will summarise and present the range of values you have calculated under different assumptions.

Calculation of the value of the firm relative to its international or home- country peers. It is tough to find an exact replica of your firm or sometimes even define an industry. Discuss how you make and adjust your assumptions accordingly.

7 Discussions and Conclusions.

You have calculated the value of the firm and the value of equity under different assumptions. It is usually helpful to present the different values you have calcu- lated under different assumptions. One easy way of doing it to construct a table and show, for example, how the value changes under different cost of capital assumptions, or growth rate assumptions, etc. This makes it easier to see the range of values from a minimum to a maximum. You may also choose to attach probabilities, necessarily subjective/personal ones, to each of the outcomes you consider.

Once you have this then you can make a decision. You can compare your valuation to current market values and arrive at a buy/sell/hold decision. Or you can state that this is the maximum you are willing to pay to acquire the company. Or this is the maximum you are willing to get to sell it etc. You know the company background and the industry and the economy. You can use all additional information you have about company prospects in making a decision. You can discuss the advantages and the disadvantages of the several approaches you used this valuation process. The key point is you need to make a decision. Make that decision. It is always hard to make a decision. But make it. Do you recommend buy/sell/hold? Make sure you make that decision, even if you do so expressing doubts about that judgement. To govern is to choose and bear the consequences of choices made.

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8 How to do well on assignment. What am I looking for here?

• To gain a mark in 50% to 60% range I expect to see all the parts of the assignment answered. So at least:

1. A DCF valuation,

2. An accounting–based valuation,

3. A comparision of the DCF and accounting valuation,

4. An estimate of CAPM β weighted cost of equity capital and Fama- French 3-factor weights/factor loadings and a matching weighted cost of capital, reflecting how the debt–equity funding choice of your chosen com- pany’s cost of capital, capital structure, may vary in response to your chosen event,

5. Estimates of potential growth rates of cash-flows/earnings, justified by reference to your sector/event,

6. Calcuation of the value of your chosen company relative to peers at home and abroad.

7. Scenario analysis to describe how shocks to funding, technology, costs, market share growth, regulatory changes, etc, may/has impact upon your chosen company.

• To gain a mark in 60% to 70% range I would expect to see each of the elements mentioned in description of 50%-60% plus clear customation of these valuation methods to your company/event.

Here the “valuation story” you develop is crucial is justifying why you makes the choices of estimation periods, competitors, alternative scenarios you have chosen. Perhaps a useful way to envisage this is to imagine yourself convincing a client that your advice is worth taking; that you are not just selling; but rather impartially guiding them in their purchase/sale decision.

To reach this standard will require a good knowledge of your chosen com- pany and the valuation event you study and crafting of methods studied in class to understand how value has/will evolve in your chosen company, following the event you have chosen to study. It will also involve mak- ing reasoned choices about what is and is not relevant to your particular company/event combination.

• To gain a mark above 70% I am looking for analysis/insights beyond the normal range I have discussed in class, additional, and perhaps rather different methods; beyond simply applying methods provided for you in my teaching. So this requires an element of inventiveness and assertiveness by you in order to differentiate your product from the pack.

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So a first class piece of work is by its definition exceptional and challenging of the received wisdom I have tried to impart in my lectures and classes. So to reach this standard you must create value, undertake analysis beyond that introduced to you in my class, moving beyond recycling knowledge to creating it.

Recall the assignment document solely defines what you are required to do in the assessed coursework, but some of you may find these words helpful in understanding how I will approach marking it.

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