1 dominique thevenin financial valuation of companies 2009 financial valuation of companies...
TRANSCRIPT
![Page 1: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/1.jpg)
11
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
Financial Valuation of companiesFinancial Valuation of companies
![Page 2: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/2.jpg)
22
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
Financial Valuation of companiesFinancial Valuation of companies
Objectives of the course: Unterstand the commonly used techniques in
valuation of companies
Be able to estimate a spread of values of a company
Pr Dr Dominique Thévenin
Associate Professor
Grenoble Ecole de Management
![Page 3: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/3.jpg)
33
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
SummarySummary
1. Asset Pricing: general rules 2. Patrimonial valuation methods 3. Analogy valuation methods 4. Discounted methods 5. WACC issues and statistical approach of CAPM 6. Specific cases: techno companies, convertible
bonds
![Page 4: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/4.jpg)
44
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
SummarySummary
Course documents Slides, Exercices and small cases, Cases
Required tools Simple calculator, or PC Excel Linear regression, statistics Boursorama, yahoo finance, google finance Bloomberg, www.infancials.com,
Course Book Bryley & Meyers ( en) Vernimen (Fr)
![Page 5: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/5.jpg)
55
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
1. General rules about asset pricing1. General rules about asset pricing
Financial ressourcesFinancial ressourcesFinancial ressourcesFinancial ressources
operationsoperationsoperationsoperations
investmentinvestmentinvestmentinvestment
![Page 6: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/6.jpg)
66
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
1.1 Overview on interest rates1.1 Overview on interest rates
Interest rate Expected inflation Report of consumption Time (liquidity) Risk premium
Short horizon interest rate Decided by Central Banks In the context of monetary policy
Long Horizon interest rate Market rate cointegrated with short rates
2% 2% (2010 €)(2010 €)3% ( past average)3% ( past average)
1-2% (5-15 years)1-2% (5-15 years)0% - 4 -6%0% - 4 -6%
2% 2% (2010 €)(2010 €)3% ( past average)3% ( past average)
1-2% (5-15 years)1-2% (5-15 years)0% - 4 -6%0% - 4 -6%
1% € 2007-2010,1% € 2007-2010,0,25% yen, $, 0,25% yen, $, 20102010
1% € 2007-2010,1% € 2007-2010,0,25% yen, $, 0,25% yen, $, 20102010
![Page 7: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/7.jpg)
77
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
1.2. Overview: asset pricing1.2. Overview: asset pricing
Value of an asset = transaction price = price that the owner estimates to be enough. that the investor should pay when buying this asset,
P° What you pay = what you get = sum of the future cash flows that you receive as long as
you hold this asset = Discounted future cash flows
Certain or safe cash flows: bonds P°= present value of future cash flows @ right risk rate
![Page 8: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/8.jpg)
88
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
Overview: asset pricingOverview: asset pricing
Uncertain cash flows: Speculative pricing : discounted expected cash flows
Interest rate = adjusted to the risk of the asset
P° moves in response to rates fluctuations and cash flow revisions
Real assets P° sensitive to expected selling price, rents, and interest
rates
Stocks P° sensitive to dividends, profits, selling price and interest
rates
![Page 9: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/9.jpg)
99
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
Overview of asset pricing: bonds Overview of asset pricing: bonds valuationvaluation
The bondholder receives fixed subsequent payoffs. Exemple : 500 € in fine bond @ 3%, maturity 10 years. What is the value of this bond if market rate is ?
5% 8% 12% 2% 1%
![Page 10: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/10.jpg)
1010
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
1.3 Valuation of a company1.3 Valuation of a company
Firm = set of assets holded by shareholders Shares are assets themselves
Value of a company = value of all of its assets = Debt Value + Equity value Creditors = money suppliers = stakeholders. Thus the
good issue is the value of Equities. Equity Value = Assets value – Debt Value
Direct valuation: valuate equities from dividends or profits
Indirect valuation: valuate assets and substract the debt
![Page 11: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/11.jpg)
1111
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
Valuation of a companyValuation of a company
Assets oh the company = set of projects, investments in process, (no growth situation)
growth opportunities ( few are disclosed)
Value of the assets = PV of the future cash flows of all the projects
+ PV of growth opportunities
Discounted at the weighted cost of capital
![Page 12: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/12.jpg)
1212
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
Main methods to valuateMain methods to valuate
Book value, or patrimony approach Financial statements provide information about patrimony
information about past profitability
Information about competitors
Analogy approach Duplicate the valuation from similar firms
Financial or discounted approach The value of an asset or a security = present value of
expected cash flows = sum of discounted expected cash flows. ( part 3)
![Page 13: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/13.jpg)
1313
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
2. Book value approach2. Book value approach
A1: value of equities = book value of equities Simple: just read it in the financial statements !
Assets are valuated according rules and regulations. Continental Europe focuses on safety principle, with historical costs: does not reflect their market value. Far from
reality.
Distinguish some liabilities from equities is not trivial Convertible bonds ? Options on stocks ?
Consolidated datas are not always safe
IFRS regulation improves the valuation of listed companies
![Page 14: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/14.jpg)
1414
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
2.1. Book value approach2.1. Book value approach
A2: net reevaluated assets : Valuate every asset in the balance sheet at its market value
Are all assets liquid ?
Are all assets profitable ? (useless assets)
Does every asset fully reflect future earnings ? Brands, licences, specific assets ?
Some elements do not exist in assets and financial statements Know how, human capital, specific assets, growth
opportunities
On the other side: dissimuated liabilities
![Page 15: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/15.jpg)
1515
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
2.1. Book value approach2.1. Book value approach
Listed companies: IFRS Assets and liabilities are valuated at their « fair value »
A2 approach Only some untangible assets are valuated at the fair value:
acquired brands and licences, financial investments, etc.
Goodwills are controversy
IFRS are sometimes contrevorsy, but the induced valuations are closer to market valuations
Nevertheless, the difference between market and book values are large
![Page 16: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/16.jpg)
1616
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
2. Book value approach2. Book value approach
A3: the goodwills:
Idea: valuate assets that accounting systems are not able to do, but generate profits.
Untangible assets, know how, human ressources,…
These additionnal value = Goodwill.
But methodologies suggest hazardous formulas:
No cash, no discount, no risk and no expectations!
The Goodwill valuation approach has no backgroud
But Goodwill exists : ex post, GW = Price of a firm – Book Value…
![Page 17: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/17.jpg)
1717
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
Example: HermesExample: Hermes
31/12/2010 sept-11INVESTED ASSETS 1627 25512BOOK EQUITIES 2150 MARKET CAP 26035NET DEBT -523 -523
2010/2011SALES 2631EBITDA 897NET INCOME 518
![Page 18: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/18.jpg)
1818
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
Example: RenaultExample: Renault
31/12/2010 sept-11INVESTED ASSETS 42419 27474BOOK EQUITIES 22235 MARKET CAP 7290NET DEBT 20184 20184
2010/2011SALES 40404EBITDA 3835NET INCOME 3860
![Page 19: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/19.jpg)
1919
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
3. the « multiples »3. the « multiples »
Underlying idea: markets evaluate identical firms at the same price.
Consider the PER: Market price /net income Price Earning Ratio indicates how many times of annual profit you
pay a company PER Air liquide = 18 the price of the share = 18 times its annual
net profit The current net profit is commonly seen as the main
reference to measure the profitability of a company. the PER shows the expected growth of the profits PER 6-8 = low growth PER 10 = maturity PER > 20 = growing company
![Page 20: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/20.jpg)
2020
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
The multiplesThe multiples
Consider now the links between economic variables of the firm: income, sales, net assets, book value Net profit = Sales x net margin in% Sales = invested assets x turn over speed
Links between 1 economic variable and the market price are established A « multiple » = market price / economic variable
there are links between market valuation and most economic variables. Multiples are very closed among an industry, because
companies run the same business model
![Page 21: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/21.jpg)
2121
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
multiplesmultiples
But the debt will infer. Thus separate these indicators Market cap / net income, variables related to equities,
Enteprise value / variable limited to economic variables
Where Enteprise value = market cap + debt
![Page 22: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/22.jpg)
2222
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
multiplesmultiples
Equities assets
Common PER= MarkCap/net incomeP :B = Markcap / book value of equities
Q Tobin = Ev / book value of assets
industry P:D : market cap / dividend
P:S = Ev / salesP:EBITDA = Ev / EBITDAP:EBIT =Ev / EBIT
Ev commonly means market value of assets = market cap + debt
P:S, P:EBIT are often computed on market cap and not Ev . Please pay out
![Page 23: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/23.jpg)
2323
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
examplesexamples
DEC 2008 sept-09
company book value market cap P:B perBNP 53 56 1,06 12,4SOC GEN 36 30 0,83 29CREDIT AGRICOLE 41 29 0,71 25,5AIR LIQUIDE 7 20 2,86 18PEUGEOT 13 5 0,38 NARENAULT 19 9 0,47 NAACCOR 3,3 8,3 2,52 30,6VIVENDI 23 24 1,04 9,25LVMH 13 34 2,62 18,3GOOGLE in EUROS 20 100 5,00 35
![Page 24: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/24.jpg)
2424
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
The multiplesThe multiples
The use of the multiples if non listed company Look for listed similar companies on a market Compute main multiples Duplicate the multiple to unlisted companies, or analyse the
place of a company among its competors Advantages
simple, easy Cons
Difficult to build samples of similar companies What else if no earnings… What else if the maket price is very volatile Book datas are delayed in regards to market datas
![Page 25: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/25.jpg)
2525
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
Example 2006Example 2006
Strong differences even in the same industry!PEUGEOT RENAULT VW Porsche GM en M$ BMW TOYOTA M€
SALES 56267 41338 95268 6575 162610 46656 149221EBITDAEBIT 1940 1323 2792 872 -982 3774 14806NET INCOME 1029 3367 1120 779 -8921 2242 9733CARS in 1000 1995 2543 5193 88 9200 1425 7974book EQUITIES 14406 19661 23647 2525 15636 16973 79091DEBT 8992 8448 61261 326 241251 29509 61524book Assets 23398 28109 84908 2851 256887 46482 140615
Ev : S 0,34 0,83 0,90 2,35 1,59 1,27 1,61Ev : EBIT 9,75 25,94 30,77 17,73 -263,71 15,66 16,20Q tobin 0,81 1,22 1,01 5,42 1,01 1,27 1,71P:B 0,69 1,32 1,04 6,00 1,13 1,74 2,25P E R 9,64 7,68 22,01 19,43 -1,99 13,21 18,32mark cap / cars in € 4973 10174 4747 172017 1925 20777 22364
mark cap 9 922 25 872 24 649 15 138 17 709 29 607 178 334Ev 18 914 34 320 85 910 15 464 258 960 59 116 239 858
![Page 26: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/26.jpg)
2626
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
4. Discounted approaches4. Discounted approaches
Value of equities = value of assets – value of debt.
Assets = sum of investment projects
Assets value = present value of future economic cash flows, discounted @ the cost of capital.
Infer equities
Value of equities = present value of the future cash flows to shareholders
equities value = (economic cash flow – cash flow to bondholders) discounted @ the cost of equities
![Page 27: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/27.jpg)
2727
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
4. Discounted approach4. Discounted approach
Exemple: a company produces cheese and generate a stable and infinite EBITDA = 20 M. The balance sheet shows 50 M debt at 6% interest. Income tax = 30%, and shareholders require a 9% return.
1. Estimate the value of its equities, 2. Estimate the WACC and the value of its assets
![Page 28: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/28.jpg)
2828
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
4.1. The DCF method4.1. The DCF method
DCF = Discounted Cash Flows. Translate strategy into a stream of future economic cash
flows.
Discount @ wacc
DCF gives the value of assets
![Page 29: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/29.jpg)
2929
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
4.1.DCF4.1.DCF
« free cash flow » table Economic cash flow including
operating flows after tax (NOPAT + depréciations) + Delta Net Working Capital - investment required to maintain operations possible No interest or debt flows (except if you compute cash
flow to shareholder) Techniques
Assume depreciations = investment (roll over) Cash flow every year as long as the visibility is correct Troncate the subsequent flows at the end: « terminal price
»Assume a multipleOr assume a long term growth rate
Discount the free cash flows value of assets
![Page 30: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/30.jpg)
3030
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
4.1. DCF4.1. DCF
Advantages Translate a strategy into datas
Specific DCF if diversified company. Then consolidate. ( SOTP = sum of the part)
Cons Few visibility over long period
DCF is very sensitive to the « terminal price »
Requires to know the WACC
![Page 31: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/31.jpg)
3131
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
Example: MemscapExample: Memscap
Memscap: high tech company at Grenoble. IPO: january 2001 valuated by Société Générale
Owen Subsequent DCF are published:
2001 2002 2003 2004 2005 2006 2007 2008 2009sales 17,5 79,5 131 245 344 464 604 767 959cost of salesEBITTaxdepreciationsfluctuation NWCacquisitions 6,8 8,8Free Cash Flow -17,3 -25,1 19,3 44,9 62,7 81 105,3 133 175
![Page 32: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/32.jpg)
3232
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
4.2.Discounted approaches:4.2.Discounted approaches:dividends or fundamental approachdividends or fundamental approach
Price of a stock = present value of the cash flows to shareholders Dividends and capital gains: D1 and (P1-P0) if cash flo to
shareholders are restricted to dividends
If D1 and P1 are estimated, the required return to shareholders wellknown,
R
PDP
1
110 R
PDP
1
221
nn
n
tt
t
R
P
R
DP
)1()1(10
![Page 33: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/33.jpg)
3333
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
4.2. dividends4.2. dividends
= present value of inifinite dividend stream If you introduce a long term growth rate: Gordon-Shapiro
model.
Dividend and growth rate are not independant
Growth rate has to be < return rate
Reverse the model and get Required return = dividend yield + growth rate
Fundamental and Gordon Shapiro models have a weak explainatory power:
< 40% in US stocks
60% in France
gR
DP
1
0
![Page 34: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/34.jpg)
3434
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
4.2. dividends4.2. dividends
Limits of Gordon Shapiro model Valid with mature companies
Irrelevant with growing companies Troncate the model into growing period and
maturity
ROE often irrelevant (delayed) to estimate g with( way 2)
Irrelevant if the dividend policy is unstable
![Page 35: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/35.jpg)
3535
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
4.2. dividends4.2. dividends
3 ways to estimate the growth rate? Try to translate the strategy into sustenable long terme
growth rate Link payout ( Dividend / Earnings) = b, and growth
(1-b) * Earnings are retained and invested Ceteris paribus,
the book equities increase by (1-b)*ROEEarnings and Dividends increase by (1-b)*ROE
g = (1-b)*ROE g is the requested growth to get the same ROE
Observe subsequent dividends over time, and run an exponential regression t / t-1
![Page 36: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/36.jpg)
3636
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
4.2. dividends4.2. dividends
Exercice: look at a listed company Compute b, ROE,
infer growth rate,
Compute dividend yield
Infer the cost of equities
Download the dividends over the past 10 years
Regress and infer g
![Page 37: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/37.jpg)
3737
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
4.3. growth and stock price4.3. growth and stock price
Growth of sales and earnings should show a long term link g = 0: b = 100%, dividends = earnings. P0= earnings / r
PER = 1/r, or r = 1/PER If g>0: additionnal cash flows and earnings Price moves
up PER moves up r = 15% g = 0% b=100% PER = 6.67 R = 15% g =10% b=40% ROE =16.66% PER = 8 r = 15% g =10% b=50% ROE =20% PER = 10
![Page 38: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/38.jpg)
3838
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
French market 2006: average PER = 16 (13 in 1993) PER were historicaly high 1998-2002. Earnings had to grow ! Dec 2009: <10
Growing company : PER > 20 - 25
![Page 39: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/39.jpg)
3939
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
4.4 Discounted approach: Bates 4.4 Discounted approach: Bates ModelModel
PERb g A
k gA PERn0
1 1
( )( )
. Ag
k
n
n
( )
( )
1
1
Mix DCF + PER approaches Firm is growing at g over n years, and retained earnings (1-b)
are constant over time.
PERn reflects moderate growth.
PER0 can be estimated as follows:
Value of equities = PER0 x Net Income0
![Page 40: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/40.jpg)
4040
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
BatesBates
Advantages Valid for growing companies
Simple
Possible to run Bates with a multiple of NOPAT, and gives the value of assets
Limits Positive Net income is required
Constant % dividend payout ( possible to input b=0%)
Requires to know the cost of equities
![Page 41: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/41.jpg)
4141
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
Bates: example GoogleBates: example Google
Google sept 2011 Cost of equities 10,3% ( beta 1, rf 1,8%, market 8,5%)
Net income 2010/2011 = 9013 M$
Market cap = 174 000 M$ PER°=19,3
b = 0 assumed for a long time
Forecasts = PER 2013 = 10,8
implicit growth rate = 47% over 2 years.
![Page 42: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/42.jpg)
4242
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
Conclusion about valuation methodsConclusion about valuation methods
Patrimonial approaches reflect the past Correct if real assets Avoid a priori Goodwills
Financial approaches are founded on expectations. They price growth opportunities. It ensures volatility when expectations are revised. Sensitive methods to hypothesis
Strong links with strategy Financial approaches requires to estimate first the cost of
equities, and/or the cost of capital ! Strong links with capital structure
![Page 43: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/43.jpg)
4343
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
5. Discount rate5. Discount rate
Discounted methods (part 4) require to know the discount rate
Cost of equities, or
WACC.
Cost of equities and WACC depend on the D/E leverage ratio
D/E ratio includes the market values and not the book values
Risk of « circular » estimation of discount rate
![Page 44: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/44.jpg)
4444
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
5.1 Cost of equities and CAPM5.1 Cost of equities and CAPM
Stock return = risk free + risk premium Stock risk = systematic risk + specific risk
Systematic risk = risk generated by the stock market on our stock
Specific risk = risk that can be eliminated by diversification of the portfolio owned by the shareholder
Only systematic risk is paid to shareholder This risk = Market risk smoothed or incréased by the
sensitivity of the stock in response to the market fluctuation
![Page 45: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/45.jpg)
4545
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
5.1 CAPM5.1 CAPM
Thus we get the derived equation of CAPM approach
Where beta = sensitivity of stock / market = cov (stock, market)/market variance
*)( fmfi rrrRE
![Page 46: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/46.jpg)
4646
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
5.1 CAPM5.1 CAPM
How to estimate the cost of equities of a listed company ?
Risk free is observable at a given date: T-Bonds à 10 years is the most commonly used proxy
Market risk premium: often published in financial newspapers. Average of the market premium over time: 3.5% -
4%. Never use 1/PER of the market
beta is sometimes published in financial newspaper unsafe
![Page 47: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/47.jpg)
4747
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
Risk premium over timeRisk premium over time
![Page 48: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/48.jpg)
4848
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
5.1 CAPM5.1 CAPM
How to estimate the beta of a listed company Beta = regression coefficient of Ri = a + beta * Rm
Download stock price and stock index, exchange them into returns Week data over 1 year is preferable
Regress Ri on Rm and get the beta coefficient
Run a Student test to decide if your estimation is acceptable Sophisticated econometric tests should be conducted,
due to non stationnary datas Beta reflects the risk of a company, and is not stable over
time, or after M&A
![Page 49: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/49.jpg)
4949
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
5.1 CAPM5.1 CAPM
How to estimate the beta of a non listed company Estimate the beta of a listed company Compute market D/E ratio Exchange the beta into the economic beta and duplicate it
to the non listed company,
Valuate the company under all equity financed hypothesis value of assets
Adjust with the debt Some iterations may be required
Avoid to compute the cost of equities and the WACC under book value D/E
)1( )1(0 E
TaxDD
![Page 50: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/50.jpg)
5050
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
6. Specific cases. 1. techno firms6. Specific cases. 1. techno firms
Growth opportunities Single cash flow sequence doesn not reflect correctly
Many stages with uncertain cash flow Many stages where decisions can change a project
Decision trees Real options
![Page 51: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/51.jpg)
5151
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
Real option as investmentReal option as investment
R&D = valuate with Black and Sholes model Underlying asset = project itself
Maturity = uncertain, unknown
Strike = investment ,
Volatility = the risk of cash flows = substituate with the standard deviation
Options on extension, communication, to give up, to differ, etc
All of this opportunities give more and more value The « true value » is revealed with information
![Page 52: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/52.jpg)
5252
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
Black & Sholes modelBlack & Sholes model
)(..)(. 2100 dNePdNPW tRX
f
t
tRP
PLn
df
X
.
2
20
1
tdd 12
W = value of the callP0 = price of underlying assetPx = Stike pricet = maturityrf = risk free interest rateSigma = volatility of the assetN(.) = cumulative normal law
W = value of the callP0 = price of underlying assetPx = Stike pricet = maturityrf = risk free interest rateSigma = volatility of the assetN(.) = cumulative normal law
![Page 53: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/53.jpg)
5353
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
6.2 convertible bonds6.2 convertible bonds
Convertible bond = a bond including the right to exchange it to stock @ a given exchange ratio
Stage 1: classical bond ( coupon …) Stage 2: pay back time
No cash, but common stocks, Cash if the value of the stock is low
Advantages to the issuer Interest is tax save No cash to payout if exchange Delays the dilution induced by an equivalent capital
increase
![Page 54: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/54.jpg)
5454
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
Convertible bond issue by ABB April 2002 (968 M$) Issuing price : 1000 $ Date : 29 April 2002 expiration: 16 Mai 2007 coupon : 4,625% Reimbursement price: 1000 $ exchange : 87, 7489 actions per 1 bond Exchange period : from 29 April 2002 to 16 May 2007 Stock price ABB: 14,218 CHF (8,77$)
exampleexample
![Page 55: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/55.jpg)
5555
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
6.2 convertible bonds6.2 convertible bonds
Advantages to the bondholder Receives fixed interest vs random dividend,
Receives cash if low performance of stocks,
Gets shareholder if high performance
= option to get shareholder
Finance a company Low markets: convertible bonds,
High markets: capital increase
![Page 56: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/56.jpg)
5656
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
6.2. valuation of a convertible bond6.2. valuation of a convertible bond
In case of take over, initiator buys most of the shares Convertible bonds may create new shares in the future
Buy convertible bonds
Value of convertible bond under a take over: Arbitrage bond / share according the exchange ratio
+ discounted difference between subsequent dividends and coupons
![Page 57: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/57.jpg)
5757
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
6.3. the case of real assets in 6.3. the case of real assets in companiescompanies
Some companies do not hold real assets but rent. Extend to other assets
EBITDA, EBIT, NOPAT, Cash Flow change Multiples change
PV of Cash flow ( DCF) change
WACC ???
Adjust the multiples and DCF, is recommanded
![Page 58: 1 Dominique THEVENIN Financial valuation of companies 2009 Financial Valuation of companies Financial Valuation of companies](https://reader035.vdocument.in/reader035/viewer/2022070407/56649e435503460f94b35c2f/html5/thumbnails/58.jpg)
5858
Dominique THEVENINDominique THEVENIN Financial valuation of companies Financial valuation of companies 2009 2009
referencesreferences
Albouy, Décisions financières et création de valeur, Economica 2003 Fr
Sudarsanam: Creating Value from mergers and acquisitions. Prentice Hall 2004 (En)
Ottoo, Valuation of growth opportunities, Garland NY, 2000 (En)
Bryley & Meyers: principles of corporate finance (en) Vernimen (Fr)