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Financing Plan for mymuesli

Lennart Einemann (92050@student.hhs.se)

Hossein Khanaki (khanaki@kth.se)

Santhakumar Mettampalayam Vaduganathan (skmv@kth.se)

Course Assignment

Finance for Start-ups 2010

Instructor: Anna Söderblom

Stockholm School of Economics

March, 12th 2010

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Content

Introduction .................................................................................................................................................. 3

1. Mymuesli ............................................................................................................................................... 3

2. The market ........................................................................................................................................... 4

3. Business model .................................................................................................................................... 7

4. Financial situation ............................................................................................................................... 9

5. Valuation techniques ......................................................................................................................... 10

5.1. Discounted Cash Flows (DCF) valuation ................................................................................... 10

5.1.1. Cash Flows to Entity model or WACC ............................................................................... 11

5.1.2. Cash Flows to Equity Valuation ........................................................................................... 12

5.1.3. Adjusted Present Value technique (APV) ........................................................................... 12

5.2. Relative Valuation/Multiple Valuation ....................................................................................... 12

5.2.1. Price/Earnings (PE) Multiple ............................................................................................... 13

5.2.2. Price Book Value (PBV) Multiple ........................................................................................ 13

5.2.3. Price/Sales (PS) Multiple ....................................................................................................... 14

5.3. Dividend Discount Model (DDM) .............................................................................................. 14

5.4. Net asset valuation ......................................................................................................................... 14

5.5. Real Options Valuation ................................................................................................................. 15

6. Valuation approach for mymuesli........................................................................................................ 15

Summary and Recommendations ............................................................................................................ 18

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Introduction

The content of this work is an evaluation and a finance plan for a young German start-up

company, called mymuesli. First we will describe the firm itself and the market they are engaged

in. Afterwards the business model will be explained and evaluated. Than the little given financial

information will be assessed and projections about the potential financial need and sources of

finance in the future will be made. Furthermore different valuation techniques will be described

and used for mymuesli. Finally there will be a DCF valuation for the company and possible

recommendations will be made.

1. Mymuesli

The story of mymuesli begins back in the summer of 2005. Three students from Passau, a city

near Munich in Germany, are on their way to the beach and listening to a famous radio

commercial from a big cereals and cornflakes producer. Then the idea was born to offer

customized “muesli” where people could choose their favorite ingredients on their own. Some

people like fruits in their cereals, other are more into wheat instead of corn, some prefer

chocolate in there. So the idea to offer a “breakfast 2.0” was born. Using the global trend of mass

customization and the customer need of multiple options, they had the idea to distribute

customized muesli ordered and chosen on the internet. This was all matched with the strong

trend in Europe and Germany in particular of sustainable ecological ingredients. Biological food

is a very big trend there with a huge demand. So the young company, founded in 2007, started to

provide the customers with a variety of 60 ingredients which could be mixed up to 566 billion

different combinations of cereals. The product is rather expensive, but the high demand shows

peoples willingness to pay for a healthy and tasty breakfast, designed on their own. The founders

were able to finance their activities in the beginning without venture capital. Using their own

money and savings as well as family funds, the type of financing can be described as

bootstrapping. This was possible since there were no big investments needed for the webpage

and the warehouse to act as a reseller and distributor of the customized cereals. The demand was

very high, so that they were in trouble to fulfill all the orders, but with over 30 short-term

employees (90 by the end of 2009) the problem was solved. This ongoing rapid growth is due to

the viral marketing strategies through blogs, social networks as facebook and very positive media

reports in general. Over the time two successful founders of a t-shirt customization startup firm

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entered the company as venture capitalist. They were able to bring in fresh money, needed for the

further expansion, as well as their own experience as successful founders and young

entrepreneurs in the internet based customization market. In 2008 the company expanded to the

Austrian, Netherland, UK and Swiss market. They even built a small production facility in

Switzerland.

2. The market

The market for breakfast cereals in 2008 was around 24.2 billion USD and it is expected to grow

to 28.7 billion USD in the year 2013 which accounts for a growth rate of around 17 %. The

volume of the global breakfast cereal market in 2008 was around 3.9 billion kilograms and it is

expected to grow up to 4.4 billion kilograms by 20131. In Europe, the breakfast cereal industry is

worth € 4.5 billion. Every year around 1.1 billion kilograms of breakfast cereals are produced and

the sector employs around 11000 people2.

The breakfast cereal market in the US is roughly two third of the world‟s market. They account

for 64.9% of world‟s market. The industry is well established in the US and it is dominated by a

few giants like Kellogg‟s, General Mills, Post Foods and Quaker Oats. The success in this

established market largely depends on the pricing of the product and also on the brand image. It

is very important to do extensive marketing to gain market share in this segment dominated by

established companies.

Top Cereal Producers3

Market share for 1999, 2005, and 2008.

Manufacturer 1999 2005 2008

Kellogg's 32% 32% 33%

General Mills 31% 26% 25%

Post 16% 15% 15%

Private Labels 8% 14% 14%

Quaker Oats 9% 6% 7%

Malt-O-Meal 3% 5% 5%

All Other 1%

1 http://www.the-infoshop.com/report/dc108460-breakfast-cereals.html

2 http://www.ceereal.eu/documents/bw_flyer.pdf

3 http://www.lavasurfer.com/cereal-stats.html

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The market of hot cereals grains which have to be soaked or boiled to eat, accounts for just over

10% and the market is clearly dominated by ready to eat cereals, which accounts for 88% of total

revenues. Even though the growth rate of the overall cereal market is low in recent years, the

companies have to bring in new products every now and then to retain their market share. If we

see the trends in the cereal industry, some of the new products have grown considerably in

capturing the market share even though the overall market remains the same. This is one of the

welcome signs for new products and companies entering the industry. Brand extension is done

for the established brands. New products are introduced under the same brand label and the

brand is broadened with the specific line of products.

Most Popular Cereal Brands4

Market share for 1995, 1999, 2005 and 2008.

Cereal 1995 1998 2005 2008

General Mills Cheerios 6.5% + 7.6% + 11.30% 12.60%

Kellogg's Special K < 2.0% < 2.0% 4.00% 5.40%

Post Honey Bunches of Oats < 2.0% < 2.0% 4.10% 4.90%

Kellogg's Frosted Flakes 4.20% 3.90% 4.10% 3.80%

Kellogg's Frosted Mini Wheats < 2.0% 2.90% 3.20% 3.50%

Kellogg's Raisin Bran 2.70% 2.70% 2.90% 3.00%

Kellogg's Froot Loops < 2.0% < 2.0% 2.50% 2.60%

General Mills Cinnamon Toast Crunch < 2.0% 1.90% 2.60% 2.40%

General Mills Lucky Charms 2.00% 2.20% 2.40% 2.40%

Quaker Oats Cap'n Crunch < 2.0% < 2.0% 2.40% 2.40%

Quaker Oats Life < 2.0% < 2.0% 2.30% 2.30%

Kellogg's Rice Krispies 2.80% 1.90% 2.10% 2.30%

Kellogg's Corn Flakes 3.00% 2.60% 2.10% 1.90%

All Others Combined 72.20% 74.30% 54.00% 50.10%

4 http://www.lavasurfer.com/cereal-stats.html

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Mymuesli has a clearly identified market segment. They sell premium quality, organic muesli and

the customers can customize the product according to their wishes. As of now, the company

concentrates on people who are either interested in customizing their own cereals or people who

are interested in buying organic food. Both the customization industry and the organic food

industry are growing in recent times.

The total amount of organic food sold in the US in 2006 was about 3.6 billion USD which is

double the amount compared to 2000. And also from 2004 to 2006, sales of organic food in

super market and mass merchandisers (e.g. Wal-Mart) were grown 38.4%5. It is also estimated

that the sales of growth in organic foods will increase by 71 % from 2006 till 2011. If we take the

organic bread and grain market, the sales increased from 422 million USD to 551 million USD in

two year period from 2006 till 2008 and it is estimated that the growth will continue and by 2011

the sales will be around 859 million USD. The breads and grains share of market out of whole

organic food market is shown in the figure below6. In Europe, the organic cereal market

penetration is very low with only about 0.06 % in UK7 and with the current mindset of people,

there is a big scope of opportunity to grow in this sector.

5 http://www.productcenter.msu.edu/documents/Working/organicfood1.pdf

6 http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/sis8434

7 http://hgca.com/publications/documents/Breakfastcereals_REVISED_JULY_2007.pdf

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Another important component of their product is customization. Research has shown that

around 75% of American adults like to have customized products and they are willing to pay

more money for a customized product (R. Gardyn, „Swap meet‟, American Demographics, July

2001). A lot of companies started selling customized products recently. For example companies

like zazzle, cafepress and spreadshirt (whose founder joined mymuesli as a venture capitalist in

the first round of finance and is now holding 5% of the company) sell customized T-shirts online

and a company called misterspex.de sells customized spectacles. The trend towards customizing

the product favors the company and its business model well.

The penetration of the cereal market in developing countries in Asia and other parts of the world

is very low. The sale of cereals in Russia and China is small compared to global terms with 263

million USD and 71 million USD of sales8 in a 24 billion USD cereal industry. These markets are

growing fast and have a huge potential lying ahead. As of now the company is selling cereals only

via its website and it is delivered to the customer‟s home. They have a partnership with DHL, a

huge logistics company for the delivery. Considering the fact that 77.5% of cereals are distributed

via supermarkets and hypermarkets9, the company should concentrate on adding another valuable

distribution channel like supermarkets. So we think it was a great step that mymuesli started to

sell their products in trendy coffee shops in Berlin. This is a good step to test and develop

another distribution channel. If the sales turn out to be a success they could easily expand this

strategy. Possible partnerships with huge coffee store chains like Starbucks or Waynes Coffee

could be a step towards supermarkets and other distribution channels.

3. Business model

The business model of mymuesli is very innovative. People can mix, customize and order their

desired muesli online. One can choose from 60 different ingredients and mix billons of

combinations. After the order online the customized product is delivered via mail to the

customer. This simple so called build-to-order principle is very rewarding. First of all there are no

large investment costs for production facilities. Since the ingredients are ordered from various

suppliers the company just needs small space for mixing the product in the desired way. The

marketing is highly innovative and rather cheap as well. There were no high costs for

8 http://www.euromonitor.com/Cereal_Partners_Worldwide_exploits_developing_markets 9 http://www.the-infoshop.com/report/dc108460-breakfast-cereals.html

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commercials on national TV, radio or newspapers at the beginning. The “Web 2.0” was used very

effectively through various social media channels such as blogs and youtube or social networks

like facebook. This viral marketing turns out to be quite successful and to popularity was

increasing exponentially. The distribution process is efficient, rather cheap and fast. The value

they add to the product is the mixing of the ingredients as well as a trendy and nice package.

This business model gained several rewards and from the success of the first 3 years we know

that it develops very successful. In general the idea of customization is not entirely new. It is

more the specific product the founders chose. In an interview one of the founders said they

made a survey in order to estimate the demand for customized muesli with 450 persons.

Although the results are not published in detail, we know from him that they should rather not

have founded the company if they had followed them. But in general the market is tremendously

big, if we expect that almost everyone on earth is eating breakfast. A large proportion is eating

cereals and since global trends like biological, functional and healthy food products as well as the

desire of people to customize products to their specific needs are more and more evolving they

found a niche to the right time. The uniqueness of this idea is still a problem since it can easily be

copied. So it depends on whether they are able to build such a strong brand during the first years

that they can preserve a competitive advantage over the time. At the moment there are no real

competitors but this is subject to be changed for sure. For example if a big supplier like Kellog‟s

with its multibillion marketing budget is starting to build an online shop, offering a customization

opportunity we can‟t predict for sure how mymuesli could compete. Maybe they are more

comparable to other startups which are offering chocolate, coffee or juice mixed and customized

for the specific needs of potential buyers. Since these businesses are all rather new and young we

can‟t project if they have a place in the market in the long run. But overall the business model of

mymuesli is viable and fundable. The entrepreneurs all have a strong personality and with the

successful venture capitalists from a former startup company on board the management team

seems to be able to be successful in the future. In addition the business model generates positive

cash flows right from the beginning because of the high prices and the build-to-order principle.

Moreover the awards they got for their business model are an indicator that the venture capitalist

scene in Germany and Europe believes in that business.

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4. Financial situation

From an interview with the founders of mymuesli we know that they were able to start the

business in 2007 without external funding and without the help of venture capitalists. Somehow

they managed to raise the funds necessary on their own with the so called bootstrapping method.

This was possible since the initial investments were not that high. The founders developed the

website which was not too expensive and started packing the ordered muesli in the basement of a

small store in Passau, Germany. This was mostly done on their own handcraft. The marketing

costs were not too high either, since they used social media in a smart way. But all in all we have

only very little financial information given about the company. This is kind of an advantage

sometimes but also a bit complicated for the stakeholders. Since they are unlisted they don‟t have

to publish financial information, which makes it quite complicated to evaluate and valuate the

business from a financial perspective. The policy not to disclose too much financial data might be

reasonable for them at this stage, since the company is still growing and already profitable. It was

kind of a special situation, that they were generating positive cash flows right from the beginning.

This must be due to the special business model with the build-to-order principle. The customers

had to pay the orders in advance and it was delivered after roughly one week. This is part of the

bootstrapping finance method and one of many reasons of the early success of mymuesli. After

venture capitalists joined the company in 2008 in order to finance the expansion to other

European countries like Great Britain, Switzerland and Austria they published at least some basic

income and expense numbers. At this stage of development the next financial steps should be

raising more money in a second round from venture capitalists. Since the first round investors are

former successful entrepreneurs themselves, engaged in a similar business (T-shirt customization)

they somehow have character of business angels in terms of the region in Germany as well as the

amount of money they can be expected to be engaged in the company (ca. 1 mSEK). So although

we don‟t have enough concrete data we can say that it is too early for private equity buyout fund

to invest and hence too early as well to think about an IPO. But to finance mymuesli‟s further

growth and expansion plans there will be needed fresh venture capital. We estimate the financial

need for the upcoming three years with roughly 1 million Euros (10 mSEK). This money is

needed for further market penetration through traditional marketing methods such as

commercials to build a strong brand. Moreover some packaging facilities will be needed in the

future to mix, pack and deliver the orders faster. Since the brand is already quite strong in

Germany, we know that they sell a couple of different pre-mixed mueslis to go in some coffee

shops in Berlin. This new distribution channel as well as acquiring and developing more of them

is capital intense as well. But with respect to the positive cash flows right from the beginning 1

10

million Euros of external funding should be sufficient for the second financing round because

there is the possibility of organic growth through retained earnings and internal financing from

the revenues.

5. Valuation techniques

In this section we want to describe some valuation methods in theory before applying one of

them on mymuesli later. This will be a difficult task since there is only very little financial data

give from 2008, so that we have to project and estimate the future free cash flows (FCF) derived

from the earnings before interest and taxes (EBIT) on our owns.

There are three dominant models to value target companies including simple to elaborate models.

5.1. Discounted Cash Flows (DCF) valuation

Since expected future cash flows are one input of this valuation technique, this model is

appropriate for companies whose future cash flows can be estimated reliably. Moreover, the

estimated cash flows should be essentially positive. Furthermore the so called discount rate is

another input of this technique and the risk contributes in the discount rate calculation.

Implementing this technique for the valuation of distressed companies (with negative cash

flows/earnings), cyclical companies (whose earnings are a function of economic and business

cycles, hence with a high elasticity) and companies with unrealized assets, properties, patents or

products can be misleading.

The Cash Flows to Entity model or WACC (weighted average costs of capital) is the most widely

used method that implements the discounted cash flows approach for the valuated companies.

The Cash Flows to Equity model is another method implementing DCF (discounted cash flows)

to valuate companies, which initial endowment or investment was financed just by equity. For

companies with dynamic capital structures the adjusted present value (APV) is the most

appropriate method. The DCF approach relies on the analysis of the company and the market it

operates in, so it can be very subjective since it depends on the person who prepares the DCF

spreadsheet.

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5.1.1. Cash Flows to Entity model or WACC

Expected future free cash flows (FCF) are the most important parameters that should be

calculated in advance to be used for valuating a company by WACC. Free cash flow is defined by

the EBITDA (earnings before interest, taxes, depreciations and amortization), minus taxes on

EBITDA, plus/minus capital expenditures, plus depreciations, adjusted by the change in working

capital and other net assets. The WACC is the weighted average cost of capital that defines the

yearly discount rate.

𝑃𝑉𝑒𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 =𝐹𝐶𝐹1

1 + 𝑊𝐴𝐶𝐶 +

𝐹𝐶𝐹2

(1 + WACC)2+ ⋯ +

𝐹𝐶𝐹 𝑎𝑡 𝑡𝑕𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑡𝑕𝑒 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡𝑒𝑑 𝑝𝑒𝑟𝑖𝑜𝑑

1 + 𝑊𝐴𝐶𝐶 𝑛

+ 𝑃𝑉𝑐𝑜𝑛𝑡𝑖𝑛𝑢𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒

𝑃𝑉𝑐𝑜𝑛𝑡𝑖𝑛𝑢𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 =𝐹𝐶𝐹𝑒𝑛𝑑 𝑜𝑓 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡𝑒𝑑 𝑝𝑒𝑟𝑖𝑜𝑑 ∗ (1 + 𝑔)

(1 + 𝑊𝐴𝐶𝐶)𝑛 ∗ (𝑊𝐴𝐶𝐶 − 𝑔)

𝑊𝐴𝐶𝐶 = 𝑟. 𝑑𝑒𝑏𝑡 ∗ 1 − 𝑡 ∗𝑃𝑉𝑑𝑒𝑏𝑡

𝑃𝑉𝑒𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒+ 𝑟. 𝑒𝑞𝑢𝑖𝑡𝑦 ∗

𝑃𝑉𝑒𝑞𝑢𝑖𝑡𝑦

𝑃𝑉𝑒𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒

The costs of equity can be calculated by the formula below, called Capital Asset Pricing Model

(CAPM):

𝑟. 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝑟𝑓 + 𝑟𝑚 − 𝑟𝑓 ∗ 𝛽

𝑟𝑓 is the risk-free interest rate

𝑟𝑚 is the return of the market index (market portfolio)

β is the risk factor calculated based on the market and equity risk of the company

𝑃𝑉𝑒𝑞𝑢𝑖𝑡𝑦 = 𝑃𝑉𝑒𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 − (𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 − 𝑐𝑎𝑠𝑕 − 𝑠𝑒𝑙𝑙𝑎𝑏𝑙𝑒 𝑎𝑠𝑠𝑡𝑒𝑠)

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5.1.2. Cash Flows to Equity Valuation

This model can be implemented whenever the only source of finance for company is equity that

results in the simplest form of DCF. Here, Cash Flows To Equity (CFTE) should be used as

input instead of Free Cash Flow (FCF).

𝑃𝑉𝑒𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 =𝐶𝐹𝑇𝐸1

1 + 𝑟. 𝑒𝑞𝑢𝑖𝑡𝑦 +

𝐶𝐹𝑇𝐸2

(1 + r. equity)2+ ⋯+

𝐶𝐹𝑇𝐸𝑒𝑛𝑑 𝑜𝑓 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡𝑒𝑑 𝑝𝑒𝑟𝑖𝑜𝑑

1 + 𝑟. 𝑒𝑞𝑢𝑖𝑡𝑦 𝑛

+ 𝑃𝑉𝑐𝑜𝑛𝑡𝑖𝑛𝑢𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒

𝑃𝑉𝑐𝑜𝑛𝑡𝑖𝑛𝑢𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 =𝐶𝐹𝑇𝐸𝑒𝑛𝑑 𝑜𝑓 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡𝑒𝑑 𝑝𝑒𝑟𝑖𝑜𝑑 ∗ (1 + 𝑔)

(1 + 𝑟. 𝑒𝑞𝑢𝑖𝑡𝑦)𝑛 ∗ (𝑟. 𝑒𝑞𝑢𝑖𝑡𝑦 − 𝑔)

CFTE is measured as what the company can pay out to the equity owners and is calculated as

free cash flow, plus the tax shield, plus new debt issues, minus interest and debt payments. Since

most of the free cash flows at first years of the investment are allocated to cover debt and

interest, a result of CFTE will be close to zero for first years. Consequently, the usage of Cash

Flows to Equity Valuation for leveraged buyouts (LBO) should be questioned. Furthermore,

based on this formula the value of the company is affected by changes in financing issues. For

example, based on this model issuing new debt will increase the value of company inconsistently

and incorrectly.

5.1.3. Adjusted Present Value technique (APV)

Unlike the WACC technique, that takes the tax shield into consideration by adjusting debt costs

when calculating the WACC, the APV technique discounts future taxes directly to adjust tax

issues through interest payments.

5.2. Relative Valuation/Multiple Valuation

If we suppose that capital markets value companies correctly and there are lots of companies that

are listed on the financial markets, the relative valuation technique is the quickest way to value a

company and its assets. Since there are no companies that are completely similar in the terms of

risk and growth, the definition of “comparable” is subject to biased judgment. Hence, relative

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valuation relies on some assumptions that sometimes left unstated, while the DCF approach

always tries to state every assumption clearly to avoid manipulation. However for simplicity

reasons, the relative valuation technique is a part of all valuation procedures. The multiple

valuation can be very subjective since it is based on the selection of comparable companies. That

means for example, exaggerated parameters of the chosen competitors will result in a wrong

valuation of the target company itself.

5.2.1. Price/Earnings (PE) Multiple

This ratio depends on the payout ratio, the forecasted growth rate (g) and the consistent discount

rate (r).

𝑃𝑟𝑖𝑐𝑒

𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠= 𝑃𝐸 =

𝑃𝑎𝑦𝑢𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜 ∗ (1 + 𝑔)

(𝑟 − 𝑔)

Obviously, an average amount of earnings should be used to calculate the payout ratio.

Otherwise, companies with temporary negative earnings or cyclical companies with volatile

earnings will be valued incorrectly. When the discount rate and the growth rate are close to each

other this multiple will be useless.

5.2.2. Price Book Value (PBV) Multiple

The difference between the book value of a company‟s assets and liabilities yields to the book

value of the entity. The book value of assets is the purchase price of assets minus depreciation

based on accounting convention or method. The advantage of this multiple is the ability to value

companies even with negative earnings. However, this multiple is not applicable to value services

companies that don‟t have considerable assets. Here the concept of valuation is to measure a

market value of a company by comparing its book value with those of other companies in the

business.

𝑃𝑟𝑖𝑐𝑒

𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒= 𝑃𝐵𝑉 =

𝑅𝑂𝐸 ∗ 𝑃𝑎𝑦𝑢𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜 ∗ (1 + 𝑔)

(𝑟 − 𝑔)

A high PBV with a low ROE (return on equity) indicates an overvaluation. Similarly, a low PBV

with high ROE implies an undervaluation.

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5.2.3. Price/Sales (PS) Multiple

PS is the most reliable valuation multiple that uses revenues (sales) instead of earnings and book

value in PE and PBV. Hence, the result of the PS multiple is applicable even if the company has

negative earnings or doesn‟t have significant assets. However, the negative side of PS is the

inability to detect cost control problems that probably exists.

𝑃𝑟𝑖𝑐𝑒

𝑆𝑎𝑙𝑒𝑠= 𝑃𝑆 =

𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 ∗ 𝑃𝑎𝑦𝑢𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜 ∗ (1 + 𝑔)

(𝑟 − 𝑔)

5.3. Dividend Discount Model (DDM)

This model is used to value the price of a stock by discounting the predicted dividends back to

the present value. Here the net present value of the expected dividends is used to value the

company. If the value calculated by the DDM is higher than the price of the outstanding shares

which are currently traded, then the stock is probably undervalued.

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑆𝑡𝑜𝑐𝑘 =𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠𝑕𝑎𝑟𝑒

(𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒 − 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑔𝑟𝑜𝑤𝑡𝑕 𝑟𝑎𝑡𝑒)

5.4. Net asset valuation

This valuation technique relies on the assumption, that the value of a company is the book value

of its assets minus the book value of its liabilities. This method is similar to the PS multiple;

however the Net Asset Valuation will not work compared with other comparable companies.

Here, the core idea of the business is supposed to be worthless. This technique cannot be used to

valuate start-up companies relied on entrepreneurs‟ ideas or intellectual property rights.