Master 2020/2021

Corporate Valuation (Advanced Level – Corporate Valuation-2)

Category 'Best Course for Career Development'

Category 'Best Course for Broadening Horizons and Diversity of Knowledge and Skills'

Type: Compulsory course (Strategic Corporate Finance)

Area of studies: Finance and Credit

Delivered by: School of Finance

Where: Faculty of Economic Sciences

When: 1 year, 3, 4 module

Mode of studies: offline

Instructors: Vitaliy Dyachenko, Svetlana Grigorieva, Nikita Pirogov, Irina Skvortsova, Dmitry Tikhomirov

Master’s programme: Strategic Corporate Finance

Language: English

ECTS credits: 6

Contact hours: 64

Course Syllabus

Abstract

The Advanced Business Valuation Course explores both the theoretical basis and practical application of all major elements of discounted cash flow valuation, relative valuation and assetbased valuation. You learn to differentiate between long-term value-creating strategies and shortterm indicators, such as market share, earnings per share, share price and others. The course discusses how to evaluate company’s strategic position and develop forecasts using different techniques. Within this course you consider special cases in valuation such as valuation in emerging capital markets, valuation of companies with changing capital structure, valuation of high levered firms, firms with negative earnings, private firms, and valuation of options. You also discuss how to evaluate companies in different industries: mining, telecom, media and finance. Participants are provided with the opportunity to work in small teams in order to prepare reviews of empirical literature, cases and analytical tasks based on real data.

Learning Objectives

• to provide students with sufficient theoretical knowledge and practical experience to be able to value a company using different valuation models (DCF, APV, Residual income, Multiples) in normal and special cases

Expected Learning Outcomes

• Know how to apply traditional valuation techniques (DCF, relative valuation and asset based valuation) in emerging capital markets
• Know how to value firms with changing capital structure and high levered firms
• Know the advantages and disadvantages of Residual income models
• Know how to distinguish value creation from value destruction in order to ensure long-term competitive success and survival
• Know main methods to value company’s intangible assets
• Know how to use option pricing methods to value flexibility
• Know the specificity of valuing companies in different industries
• Know how to apply premiums and discounts in business valuation (control premium, discount for lack of control, discount for lack of marketability)

Course Contents

• Introduction to valuation
  Misconceptions about valuation. Purposes of valuation. Main steps of business valuation process. Standards (types) of firm value: market value, fair value, investment value, liquidation value. Business valuation approaches and methods: an overview. Valuation across the life cycle of the firm. Necessary information for business valuation. Historical financial statement analysis: spreading, normalizing, common-sizing. The structure of business valuation report.
• Premiums and discounts in business valuation
  The impact of controlling (non-controlling) ownership interest and marketability on company value: control premium (CP), discount for lack of control (DLOC) and discount for lack of marketability (DLOM). Prerogatives of control. Factors that influence control. Advantages and disadvantages of methods used to assess the control premium (M&A method, Block transaction method, Mergerstat method, Mercer approach).Determinants of the control premium. Liquidity and marketability. Factors that decrease the illiquidity discount. Main methods used to measure marketability discount (restricted stock studies, pre-IPO studies, option pricing, bid-ask spread, multiple method, Mercer approach (QMDM)). Determinants of DLOM. The size of premiums and discounts: results of empirical studies. Features of applying premiums and discounts in practice (for companies from developed and emerging capital markets).
• Income approach. Valuing companies by cash flow discounting: main steps, models, and problems
  Building a financial model. Analysing the historical performance. Normalization process. Adjustments for non-operating assets and liabilities and related income and expenses. Adjustments for nonrecurring and unusual items. Key value drivers. Developing accurate forecasts using 'topdown' and 'bottom-up' techniques. Length of the high growth period: main factors. Estimating terminal value: assumptions, models and specific cases (cyclical companies, firms with negative earnings). Advanced valuation issues: non-operating expenses, one-time charges, reserves, provisions and foreign currency. Choosing the discounted cash flow model. Free cash flow to the firm (FCFF). Free cash flow to equity (FCFE). Capital cash flow (CCF). Valuation issues specific to emerging capital markets. Inflation. Calculating the cost of equity in emerging markets: the CAPM-models. The Fama-French three-factor model. Arbitrage pricing theory. Build-up model. The cost of equity of large (small) capitalization companies. The cost of debt and other components of the capital structure. Estimation of the cost of capital in practice. Firm valuation. Equity valuation. Estimating equity value per share. Valuing companies with changing capital structure. Original adjusted present value model (APV), compressed APV, recursive WACC model: key assumptions and main steps. Valuation of companies with high leverage.
• Income approach. Capitalization methods and residual income valuation methods
  Capitalization method. Calculating normalizing expected economic income: assumptions and methods. The difference between capitalization rate and discount rate. Common mistakes. Excess cash flow method. The main steps of the method. Determine the fair market value of net tangible assets. Develop «normalized» cash flow. Determine an appropriate blended rate for net tangible assets. Determine the fair market value of the intangible assets. Shortcomings of the method. Valuation models based on residual income concept. Residual income valuation in relation to other approaches. Economic value added (EVATM) approach to valuation. Similarities and differences between EVA and free cash flow. Economic value added and market value. Edwards- Bell-Ohlson valuation technique. Advantages and disadvantages of the method.
• Market approach. Valuing companies using multiples
  The use of multiples in valuation. Criteria for comparable company selection. Basic steps of using multiples: definitional tests, descriptive tests, analytical and application tests. Relative and fundamental multiples. Growth multiples. Sector multiples. Multiples and their determinants. Choosing multiples for business valuation. Advantages and disadvantages of different multiples. Relationships among valuation multiples. Multiples and continuation value. Dispersion of the multiples. Cross-country differences in multiples. Relative valuation in emerging capital markets. Comparable companies from another countries. The importance of country risk adjustments (the sovereign spread method, the relative market coefficients and the regression approach).
• The role of cost approach in business valuation. Valuation of intangible assets
  Fundamentals of cost approach. Main steps of net asset value method. Identify assets and liabilities to be revalued. Construct a value-basis balance sheet. Valuation of intangible assets as one of the main steps of the net asset value method. Identification and classification of intangible assets. Income approach: royalty method, multiperiod excess earnings method (MEEM), differential method, greenfield method. Market approach. Cost approach. Valuing brands: Hulihan Valuation Advisors method, Interbrand method, Financial World method. Nature of goodwill. Calculating goodwill: purposes and methods. Intangible asset valuation in practice. Liquidation value method: assumptions and main steps. Orderly liquidation value. Forced liquidation value. Liquidation expenses. Calculating cost of capital during liquidation.
• Real options and valuation.
  Capital and portfolio of real options. Merton’s approach for valuing risky debt. Estimation of asset value and its volatility. Role of duration. Real option framework for equity valuation. Equity as a compounded option. Types of real options in equity valuation. Growth options. Valuation of the firm with option to expand and option to defer. Application of Black-Scholes- Merton formula for valuing equity and its restrictions. Binomial model and its boundaries. Valuing firms in different industry sectors. Features of real option valuation in emerging markets.
• Corporate valuation in different industries
  The specificity of mining, telecom, media and finance industries. Writing the industry survey: main issues and parts. Key performance indicators in mining, telecom, media and finance industries. Building the financial model for companies from different industries: main assumptions and steps. Forecasting sales growth rate, cost of goods sold, sales, general and administrative expenses, capital expenditures and working capital in different industries. Building the pro forma financial statements. Calculating cost of capital in mining, telecom, media and finance industries. Choosing peer companies and multiples in different industries. Valuation in mining, telecom, media and finance industries: case studies based on real data

Assessment Elements

• Home assignments
  Team projects include discussion of different topics, cases, and analytical tasks that are prepared in teams of 5-6 students. Requirements for team projects include (1) clear and understandable calculations in Excel; (2) analytical report in Word; (3) presentation in Power Point. Half of the projects weigh 5% and the other half 10%.
• Final case
  Final case is devoted to valuation of Russian companies in mining, telecom, media and finance industries, based on the open data. Requirements for team projects include (1) clear and understandable calculations in Excel; (2) presentation in Power Point.
• Class participation

Interim Assessment

• Interim assessment (4 module)
  0.1 * Class participation + 0.2 * Final case + 0.7 * Home assignments

Bibliography

Recommended Core Bibliography

• Damodaran, A. (2012). Investment Valuation : Tools and Techniques for Determining the Value of Any Asset, University Edition (Vol. 3rd ed). Hoboken, N.J.: Wiley. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=442925
• Hitchner, J. R. (2017). Financial Valuation : Applications and Models (Vol. Fourth edition with website). Hoboken, New Jersey: Wiley. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=1506670
• Wessels, D., Goedhart, M. H., & Koller, T. (2015). Valuation : Measuring and Managing the Value of Companies, University Edition (Vol. 6th ed). Hoboken: Wiley. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=1046521

Recommended Additional Bibliography

• Arzac, E. R. (2008). Valuation for Mergers, Buyouts, and Restructuring (Vol. 2nd ed). Hoboken, NJ: Wiley. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=1639464
• Fernandez, P. (2002). Valuation Methods and Shareholder Value Creation. Elsevier. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.b.eee.monogr.9780122538414
• Friedl, G., Copeland, T., & Antikarov, V. (2018). Real Options. A Practitioner´s Guide, Book Review. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsbas&AN=edsbas.5BD264EB
• Hitchner, J. R., Mard, M. J., & Hyden, S. D. (2013). Valuation for Financial Reporting : Fair Value, Business Combinations, Intangible Assets, Goodwill, and Impairment Analysis. Hoboken, N.J.: Wiley. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=1102750
• King, A. M. (2006). Fair Value for Financial Reporting : Meeting the New FASB Requirements. Hoboken, N.J.: Wiley. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=159616
• Mercer, Z. C., & Harms, T. W. (2008). Business Valuation : An Integrated Theory (Vol. 2nd ed). Hoboken, N.J.: Wiley. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=208023
• Pereiro, L. E. (2006). The practice of investment valuation in emerging markets: Evidence from Argentina. Journal of Multinational Financial Management, (2), 160. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.a.eee.mulfin.v16y2006i2p160.183
• Pratt, S. P., Reilly, R. F., & Schweihs, R. P. (2000). Valuing a Business : The Analysis and Appraisal of Closely Held Companies (Vol. 4th ed). New York: McGraw-Hill Professional. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=52012