Discounted Cashflow

Valuation
(M&A in practice)

Sunday October 11th 2020

Joris Kersten, MSc BSc RAB
Kersten CF - Uden (The Netherlands)
Trainer/ Consultant

➢ Joris Kersten (1980);

➢ Independent M&A
consultant;
➢ Independent Trainer Globally
in Valuation and Financial
Modelling;
➢ Co-owner real estate DIY
sector;
➢ Trainer Financial Modelling at
AMT Training London, New
York and Hong Kong;
➢ Trainer Corporate Finance at
Leoron Institute Dubai/ UAE.
 Trainer/
Consultant
➢ Adjunct Lecturer Corporate Finance &
Accounting at: TIAS Business School,
Nyenrode University, Maastricht School
of Management (MSM);
➢ Adjunct Lecturer Corporate Finance &
Accounting at partner Universities of
MSM at: Peru/ Lima, Mongolia/
Ulaanbaatar, Surinam/ Paramaribo and
Kuwait/ Kuwait City.
➢ Education: MSc Strategic Management &
BSc Business Studies, both from Tilburg
University;
➢ Registered Advisor Business Acquisitions
– Tax & Legal (RAB);
➢ Degree to teach in Universities;
➢ Registered Valuator (RV) – Right now
following this education/ training myself.
Kersten Corporate ➢ Consulting in M&A and Valuation
Finance ➢ Training in Valuation and Financial Modelling
➢ Address: Gording 67 – 5406 CN Uden – The
www.joriskersten.nl Netherlands
www.kerstencf.nl
➢ Joris@kerstencf.nl / +31 (0)6 8364 0527
Face to face ➢ 6 days - Business Valuation & Deal
Structuring.
training
➢ 28, 29, 30, 31 October 2020 + 2, 3 November
Registration at 2020.
joriskersten.nl or email ➢ Location: Crown Plaza Hotel @ Amsterdam
joris@kerstencf.nl South (“Zuidas”)/ The Netherlands.
Face to face training
Registration at joriskersten.nl or
email joris@kerstencf.nl

➢ 6 days - Business Valuation &

Deal Structuring.

➢ 28, 29, 30, 31 October 2020 +

2, 3 November 2020.

➢ Location: Crown Plaza Hotel @

Amsterdam South (“Zuidas”)/
The Netherlands.
Early bird discount (registration
before 1st October 2020)

Course manual + registration form available

at: www.joriskersten.nl
Topic

Discounted Cashflow
Valuation (DCF)

Source used:
The real cost of capital: A business field guide to better financial decisions
(2004). Publisher: Prentice Hall Financial Times/ Pearson Education. Authors:
Tim Ogier & John Rugman & Lucinda Spicer.
Different DCF techniques
Most people who use the cost of
capital are interested in valuing
businesses or shares in a business.
And by far the most robust and
frequently used technique is the
discounted cash flow valuation
(DCF).
Different DCF techniques
Concerning DCF there are three widely
used methods to calculate the present
value of a company:
1. The standard WACC approach;
2. The flows to equity method;
3. The adjusted present value
approach.
Let’s now take a look at these methods in
more depth.
Standard WACC approach
The most commonly used method in
the world of corporate finance is the
standard WACC method.
The first step of the WACC approach
is to estimate the operating cash
flows that would be available to the
providers of capital to the business
after corporate taxes are paid.
Standard WACC approach
These cash flows are also called “free
cash flows”, a term you might have
heard before.
But be careful, these cash flows do
NOT take into account any
reductions coming from the “tax
shields” from interest payments.
Standard WACC approach
So we refer to the tax in the free cash
flow calculation as: “Unlevered tax”.
This because the tax is estimated on
the same basis as if the business was
unlevered.
So in this case the corporate tax is
not reduced by any tax relief on
interest payments.
Standard WACC approach
It is necessary to asses the cash flows
on this unlevered tax basis, because
our standard WACC formula already
includes an adjustment to the cost of
debt.
So this approach does not ignore the
implications of debt financing.
Standard WACC approach
This since all of the debt implications to
the equity holders of the business are
reflected in:
1. The gearing adjustment to equity
betas. These capture the increased
risk from the presence of debt;
2. The reflection of the tax benefit in the
WACC (tax adjustment to cost of debt
in WACC);
Standard WACC approach
3. The impact of debt on the overall
discount rate, where the cost of
debt is weighted in the capital
structure;
4. The deduction of debt (at its
market value) from enterprise
value to calculate the equity value.
Characteristics of a
standard WACC approach
The approach assumes that the
company adopts a single capital
structure for the projection period
and terminal value.
This assumption on the long-term
capital structure is made with
reference to actual data on both the
company and peer group industry
norms.
Characteristics of a
standard WACC approach
I have discussed this in more detail in
the previous blogs.
The approach typically uses the
CAPM (capital asset pricing model)
for the cost of equity calculation.
Characteristics of a
standard WACC approach
I have discussed this before, but it
means that equity providers require
a premium above the risk free rate
that reflect the “systematic risk”
(also called market risk) associated
with the investment.
Characteristics of a
standard WACC approach
Also a “leveraged equity beta” is
used and this beta reflects the
riskiness of shareholders returns that
arise as a result of fixed “debt
service” commitments.
Characteristics of a
standard WACC approach
The conventional formula that is
used to lever an asset beta
(unlevered beta) to a levered equity
beta is:
• Beta equity = Beta Asset * ( 1 +
debt/ equity ).
This formula is called the: “Harris
Pringle Beta Formula”.
Characteristics of a
standard WACC approach
At last, a terminal value is most often
calculated as a perpetuity.
This is calculated as the annual free
cash flow at the end of the
projection period.
And then plus one year’s growth
divided by the estimated long term
WACC less the growth rate.
Characteristics of a
standard WACC approach
This growth rate is that for the sector
in which the company or division
operates.
And normally it would expected to
be the same as the economy growth
rate to which the company is
exposed (GDP).
Flows to equity approach
A second DCF approach is the “Flows
to equity” (FTE) approach.
The FTE approach gets an estimate of
the present value of the equity
(market value of equity).
This based on a post-interest and
post corporate tax cash flow of a
business.
Flows to equity approach
So here you can notice that there is no
debt component in the discount rate.
The cash flows are discounted using a
“leveraged cost of equity”, the same cost
of equity that is used in a standard
WACC.
So the beta is here adjusted for the
financial risk of debt.
Flows to equity approach
This method does not require
practitioners to deduct a market
value of debt from the calculated
present value.
And this method is useful for valuing
financial services firms where the
company’s funding structure is there
to make money.
Flows to equity approach
These companies make money on
the spread between borrowing and
lending.
So debt financing is not a financial
engineering decision, but becomes
part of normal day-to-day business
decisions.
Adjusted present value
approach
A third approach to DCF valuation is the
adjusted present value (APV) approach.
It basically claims that the value of an
asset is dependent on two factors:
• The fundamental value from the
operation of the asset;
• The value associated with the finance
structure (basically interest tax shields).
Adjusted present value
approach
The method treats a company like it
is debt free in order to calculate the
fundamental value of the business.
And then it looks at the value that
comes from the debt financing in a
separate calculation.
Adjusted present value
approach
For the value of the operations, post-
tax unlevered cash flows are
discounted using an unlevered cost
of equity.
This implies that the assumption is
made that there is no debt.
Adjusted present value
approach
And then there is the value from the
interest tax shield.
The discount rate that should be
used to calculate the present value
of the interest tax shield, should
reflect the risk associated with
obtaining the tax deductions.
Adjusted present value
approach
Fixed level of debt financing
(irrespective of enterprise value)
If a company is able to maintain a fixed
level of debt financing, which will never
need to vary in response to changes in
the market value of equity (and
enterprise value), then the risk to the
interest tax shield arises from the risk to
the company's tax rate and the risk to the
company’s existence.
Adjusted present value
approach
These risk factors are probably
the best reflected in the “cost of
debt”, as they are similar to the
risk that bond holders in a
company face.
Adjusted present value
approach
So with this assumption (being
able to maintain a fixed level of
debt, irrespective of enterprise
value) the “cost of debt” is
probably the right discount rate
for the present value of the
interest tax shield.
Adjusted present value
approach
Constant gearing ratio
(depending on enterprise value)
When a company needs a
constant gearing ratio then the
level of debt financing will vary to
the variation in enterprise value.
Adjusted present value
approach
As we know, the "unlevered cost of
equity" estimates the discount rate
that investors use to calculate
enterprise value, when the company
is entirely financed with equity.
Adjusted present value
approach
But as the interest tax shield will vary
in line with enterprise value (when
there is a constant gearing ration
assumption), this suggests that the
unlevered cost of equity is the right
discount rate to use to value the
interest tax deductions for such a
business.
Adjusted present value
approach
In practice …
The freedom of a company to control
its capital structure will lie between
the two extremes mentioned above:
• fixed level of debt and constant
gearing ratio.
Adjusted present value
approach
For example, let's assume a
company faces pressure to
maintain the gearing ratio
broadly in line with the “target
ratio”.
Adjusted present value
approach
But it does not need to change
it's gearing ratio instantly in
response to a change in
enterprise value.
Adjusted present value
approach
Then the appropriate discount
rate would lie in between the
"unlevered cost of equity" and
"cost of debt".
And judgement is still needed
from the practitioner!
Source used
Handbook:
The real cost of capital:
A business field guide to better financial
decisions (2004).
Prentice Hall Financial Times/ Pearson
Education.
Tim Ogier & John Rugman & Lucinda
Spicer.
9780273688747.
Job vacancies
Introduction: Job vacancies
Kersten Corporate Finance (KCF) is a boutique
style corporate finance consulting firm
founded by Joris Kersten (1980) five years ago
in 2015.
The office of KCF is located in Uden, a middle
sized town in The Netherlands.
This at about 30 minutes by car east from city
Den Bosch and 30 minutes north of city
Eindhoven.
Job vacancies
Accidently founder Joris was asked to
provide training in Business Valuation,
Financial Modelling and Mergers &
Acquisitions in The Netherlands at banks
and financial institutions.
But soon (due to social media/ linkedin)
Joris was providing training in Corporate
Finance all over the world.
Job vacancies
This at the biggest (“bulge bracket”)
investment banks in New York, London,
Hong Kong and the Middle East.
And also at Universities over the globe,
for example in Peru/ Lima, Mongolia/
Ulaanbaatar, Surinam/ Paramaribo,
Kuwait/ Kuwait City etc. etc.
Job vacancies
Now due to Covid-19 flying/ travelling
came to a stop, so KCF decided to move
back to its core business:
➢Consulting/ deal making in M&As.
This for SMEs (small & medium sized
enterprises) in The Netherlands.
Job vacancies
Activities KCF:
➢Buy side M&A consulting of SMEs in The Netherlands;
➢Sell side M&A consulting of SMEs in The Netherlands;
➢Business Valuations in The Netherlands/ Globally;
➢Financial Modelling in The Netherlands/ Globally;
➢Attracting financing (banks loans/ private equity) in The
Netherlands;
➢Providing a 6 day valuation training 2 times a year in
The Netherlands. During spring at town: Uden and
during Autumn at Amsterdam South (Zuidas).
Job vacancies
1 or 2 Corporate Finance analysts needed
Note: Analyst needs to be fluent in Dutch with
both speaking and writing (this on top of
English).
KCF works mainly for Dutch clients with
annual reports and documents in the Dutch
language which makes being fluent in Dutch
an absolute must!
For increased work in M&A consulting KCF is
looking for 1 or 2 Corporate Finance analysts.
Their work will consist out of:
Job vacancies
➢Conducting business valuations in Microsoft excel
for SMEs in The Netherlands. Think of valuation
with “multiples”, discounted cash flow valuation
(DCF) and leveraged buyout analysis (valuation with
check on internal rate of return (IRR) with certain
financing structure);
➢Writing “information memoranda” for sell-side
M&A projects;
➢Searching and selecting candidate buyers (e.g.
strategic parties, private equity parties etc.);
➢Searching and selecting candidate sellers (target
M&A companies);
Job vacancies
➢Providing (helping with) corporate finance
input to Letters of Intent (LOIs);
➢Providing (helping with) corporate finance
input to Share Purchase Agreements (SPAs);
➢Providing (helping with) corporate finance
input for fiscal issues (tax issues in M&A);
➢Coordinating (helping with coordinating)
due diligence.
Job vacancies
Characteristics of the Corporate Finance analyst
For this job you need to possess or have the following
characteristics:
➢A Master of Science (MSc) degree in Finance or
Accounting;
➢0 to 3 years working experience in Corporate Finance.
So you either come straight from University with a
master in Finance/ Accounting, or you have a few years
working experience in Corporate Finance;
➢A past internship in M&A at an Investment Bank, M&A
boutique or Corporate Finance department of an
Accounting firm or corporate is a pre;
➢Extra-curricular activities conducted within the field of
M&A and/ or Corporate Finance is a pre;
Job vacancies
➢Financial Modelling skills in excel is a pre. But a basic
understanding of Microsoft Excel is enough (you will
learn financial modelling with keyboard excel shortcuts
on the job);
➢Skills to build presentations in power point is a pre. But
a basic understanding of building presentations is
enough (you will learn these skills on the job);
➢Excellent writing skills in both Dutch and English;
➢Excellent speaking skills in both Dutch and English;
➢Living within 45 minutes from town Uden (office
location KCF) is an absolute must since M&A is still
“people business”. So you need to be able to attend at
face to face meetings in Uden very regularly (e.g.
negotiations, client meetings, discussing deal structures
with colleagues etc.).
Job vacancies
What you will get:
➢With this job you will start off with a free 6 day valuation
training of KCF to learn advanced modelling and valuation
skills for the job (training takes place in Spring or Autumn);
➢Market based salary;
➢Bonus based salary based on M&A deal flow;
➢Ability to grow in this relatively young and very ambitious
M&A boutique;
➢Working in a team with high class Investment Banking
valuation techniques with focus on SMEs in The
Netherlands;
➢Working in a highly entrepreneurial team and possibilities to
grow up to ‘partner’ when you work hard and show right
characteristics (e.g. analytical skills, communication skills,
networking skills, entrepreneurial mindset).
Job vacancies
Process of application:
Please write your motivation letter to: joris@kerstencf.nl
Please just type your motivation in the email itself, so no
attachments.
And please provide the link to your LinkedIn profile, so please
no curriculum vitae in attachment, but just link to your
LinkedIn page.
Suitable candidates will be contacted in October/ November
2020.
And the first acquaintance meeting will take place in
December 2020. This face to face at the office of KCF in Uden/
The Netherlands.
Second meeting will take place in January 2021. This face to
face at the office of KCF in Uden/ The Netherlands. And
potentially a third meeting will take place in February 2021.
Starting date job: Quarter 2 of 2021.
Job vacancies
Office KCF at Uden/ The Netherlands.
www.joriskersten.nl
 Do not hesitate to contact me with
End any questions:

Any Questions ??
➢Joris@kerstencf.nl
Contact
Details

Kersten Corporate Finance

Joris Kersten
Joris@kerstencf.nl
+31 (0)6 8364 0527
www.joriskersten.nl

130 recommendations on
the training sessions of
Joris can be found at:
https://www.joriskersten.
nl/nl/reviews
Recommendations

130 recommendations on Joris’

training sessions can be found
on:
www.joriskersten.nl/nl/reviews
Training Dubai:
18-22 October
2020
Certificate
Investment Banking:
✓Valuation;
✓Deal Structuring;
✓DCF Analysis;
✓LBO Analysis;
✓M&A Analysis.
60 free articles on
valuation !

Please visit my LinkedIn page for 60 of

my free articles on the topics:

➢ Business Valuation, Financial

Modelling and Mergers &
Acquisitions.

www.linkedin.com/in/joriskersten

130 recommendations on the training

sessions of Joris can be found at:
https://www.joriskersten.nl/nl/reviews