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2017 | Book

The Value of the Firm Read chapter Read first chapter

Inside Company Valuation

Author: Angelo Corelli

Publisher: Springer International Publishing

Book Series : SpringerBriefs in Finance

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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About this book

This book presents an in-depth overview of the most popular approaches to corporate valuation, with useful insights about innovations and possible improvements in that field. The book will help to understand the principles and methods of company valuation and acquire the knowledge required to perform valuations of corporate equity. The author concludes his analysis with two real case studies based on the experience of the two most popular initial public offerings that took place in the last years: Facebook and Twitter.

Table of Contents

Frontmatter
Chapter 1. The Value of the Firm
Abstract
There are several factors that determine the value of a company, all important and relevant in order to achieve the full exploitation of corporate assets. Some of them are the history and nature of the business, the economics of the industry, the book value and financial condition of the business. Valuation can be based on several methods, and it is possible to perform corporate valuation starting from either the balance sheet of the company, or its income statement. Another class of methods involves the goodwill as a measure of the projected corporate profitability and therefore, as the primary figure that adds up to the discounted cash flows from income. Overall, all the presented methods rely on the knowledge of the financial situation of the company and the ability to project the figures to the immediate future in order to define scenarios for the future profitability of the firm.
Angelo Corelli
Chapter 2. Dividend-Based Valuation
Abstract
Dividend discount models for equity valuation are a popular tool in the analysis of corporations and their financials. By using dividends as the target cash flow for the calculation of the present values, one directly aims at the equity value. The simplest forms of DDM rely on the discount of a perpetuity, by assuming the company will pay a constant dividend overtime, during its life. When the perpetuity allows for a constant growth rate of dividends overtime, it translate into the Gordon Growth model, which represents the value of the corporate equity as the present value of a growing perpetuity. Most of the multi-stage DDM are in fact designed to allow for an initial period of discrete cash flows to be discounted at the appropriate rate, and be summed up with the present value of a final perpetuity calculated on the residual dividend after the discrete period.
Angelo Corelli
Chapter 3. Free-Cash-Flow-Based Methods
Abstract
According to what is the target of the valuation, both free cash flows to the firm and free cash flows to equity can be calculated. When the cash flows have been calculated the valuation comes from the application of the Free-Cash-Flow-Based valuation methods, a family of models that relies on the accounting cash flows as a source of information for the value calculation. A further step entails the estimation of a growth rate for the cash flows in the future, so to adjust the model for a more realistic framework. After the growth rate is estimated, the valuation principles follow those of dividend discount models. It is possible in fact to set up single-stage or multi-stage models for both asset and equity valuation. A discrete sequence of discrete cash flows to be discounted at present value, together with a terminal value, represents the most popular approach to corporate valuation.
Angelo Corelli
Chapter 4. The Valuation of Private Firms
Abstract
The absence of time series and other public data about a private company forces the analyst to estimate some of the parameters required to carry on the valuation. In particular the beta, cost of debt and growth rate are needed for the purpose. When the information about comparable firms is acquired, it is then possible to estimate the beta as an average, and use such a figure as a good proxy of the beta of the private firm. The same holds for the cost of debt, especially in case the publicly traded comparable firms issue bonds and have a publicly observable cost of debt to be used again as a proxy of the figure for the private firm. The growth rate of the cash flows overtime is a factor that becomes crucial in the case of private firms. The financial history of the corporation helps in achieving good estimates.
Angelo Corelli
Chapter 5. A Real Case: Facebook
Abstract
After hiding the declining forecasts for the earnings in the coming quarter, the management and underwriters of Facebook decided to move on and price the IPO at the full projected price, therefore resulting in an overvalued IPO, quite uncommon. The financials of Facebook, as per historical value, allowed the underwriters to sell the stocks to the public at the aimed price of $38, a price that was not sustainable in the medium term, therefore declining immediately after public sale. The work done by the students in Sweden clearly shows how it was possible, by just behaving ethically and taking into account all aspects of the valuation, to achieve a fairer valuation in the range of the 20s, exactly the range exhibited by the market in the weeks after the IPO.
Angelo Corelli
Metadata
Title
Inside Company Valuation
Author
Angelo Corelli
Copyright Year
2017
Electronic ISBN
978-3-319-53783-2
Print ISBN
978-3-319-53782-5
DOI
https://doi.org/10.1007/978-3-319-53783-2