COMM 300: Value in business
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Value
Key concept: exchange creates value and is determined through exchange. Value is retrospective... you only know what its worth after you've experienced it (after the fact)
Valuation
Assessment of future use or exchange value - prediction about the future.
- Liquidation value - value of business's basic assets, like the computers
- Going-concern value - value of customer list?
- Value using discounted cash flows
- Investment value - value something as an investment
- Strategic value - buy a firm for strategic reasons
- Has particular value to a particular firm / person
Value Creation Strategies
EVA = NOPAT - WACC x invested capital
Three ways to creat value:
- Increase operating profts after taxes (NOPAT)
- Increase revenues
- Decrease costs
- Decrease financing costs (WACC)
- Restrucutre the asset base
Doing a valuation
Guaging a value of a firm, thre techniques
Valuing the firm vs. valuing its parts: for this class, you'll want to value the firm, not its equity, debt, or other parts
Value Driver
- Managerrial decision making. You might not want to get rid of something, even if it has low cash flows, because of synergies.
Market multiples method
- Price / earnings, EBITDA, and other stock market valuation techniques
Value = a function of underlying characteristics
Calculating values using market multiples
When calculating relative values using market multiples, you'll want:
- Corect "Comps" (comparison firms)
- Selection, aggregation methods
- Correct characteristics
- Income, assets, etc.
- Correct pricing
Caveats:
- Comp selection is critical
- "Average" is generally not a goal
- International comparison
- Multiples are the consequent, not the precedent of valuation
- Keep in mind that multiples don't create the value
Investment analysis
- Discounted cash flows, economic value added
Value = a function of the present value of future cash flows
You'll want to keep in mind:
- Magnitude of cash flows
- Timing
- Discount rate
Difference between evaluating a project and a firm: with a firm there is no "end" as there is in the project. Called continuing values
Estimating future cash flows
- Usually derived from pro forma financial statements
- Need a explicit and implicit forecast period. Explicit is the cash flows you calculate. Implicit is at some point in the future, when you assume the future cash flows.
