Valuation Fundamentals

FACT SHEET

Enterprise Value or Equity Value?

Enterprise value Equity value
CALCULATED DERIVED
FROM MULTIPLES OR DCF

◦ Non core assets ◦ Debt and debt equivalents

◦ Equity affiliates THE BRIDGE ◦ Preference shares
◦ Cash and cash equivalents ◦ Non controlling interests

Equity value Enterprise value

CALCULATED DERIVED

s
SHARE PRICE DILUTED NUMBER OF SHARES OUTSTANDING

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Key points to remember
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Enterprise value Equity value
◦ Operating assets less operating liabilities ◦ Total assets less total liabilities
◦ Operating focus ◦ Ownership focus
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◦ Unaffected by financing ◦ Affected by financing

◦ Driven by business performance ◦ Driven by performance and financing
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Relative Valuation
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Enterprise value multiples Equity value multiples

Uses profits available to equity and debt holders – income before financing Uses profits to equity holders - Net Income

Main ratios Main ratios

◦ EV / EBITDA ◦ P/E Ratio = Price (per share) / EPS (earnings per diluted share)
◦ EV / EBIT ◦ Equity Value / Book Value
◦ EV / Sales

Calculate EV or Establish the value driver:

Calculating the ratios 1
equity value
2
EBIT, EBITDA or EPS
3 Calculate the multiple

Absolute Valuation The main method is to calculate EV using Discounted Cash Flows (DCF)

Forecast FCF Calculate WACC Calculate terminal value using Discount cash Cross the bridge
(5-10 years) perpetuity formula or multiple flows to today

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Valuation Fundamentals
FACT SHEET

Free Cash Flow Decrease in net

D&A Decrease in OWC operating assets
A non cash item Cash released by Cash released by reduced
reduced OWC other operating net assets
NOPAT / EBIAT
EBIT Free cash flow
Adjusted Net operating profit Cash flow produced
operating profit after taxes by operations
Increase in other
Tax on EBIT Capex Increase in OWC net operating assets
EBIT x long run tax rate Cash used by extra Cash used by extra investment
investment in OWC in other operating net assets

Calculating WACC

s
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Cost of net debt x (1 – tax rate) Net debt / (net debt + equity)
WACC
Weighted average cost of capital
COST OF EQUITY Risk free rate + equity risk premium x beta Equity / (net debt + equity)
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Financial Maths Fundamental Formulas
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1
n
1 FV
Present value PV = FV x Future value FV = PV x (1 + r)n Yield r= -1
(1 + r)n PV
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Perpetuities Cash flows which never end. Can be constant or constantly growing.

PMT PMT
Constant perpetuity value PV = Constantly growing perpetuity value PV =
r (r - g)
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Annuities Constant or constantly growing cash flows for a fixed period of time.
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[1 - (1 + r)-n] PMT (1 + g) n
Constant annuity value PV = x PMT Growing annuity value PV = x 1-
r (r - g) (1 + r)

Applying Financial Maths to a DCF Valuation

NOW PERIOD 1 PERIOD 2 PERIOD 3 PERIOD 4 PERIOD 5

FCF 1 FCF 2 FCF 3 FCF 4 FCF 5

TV

1 1 1 1 1
Discount factor
(1 + WACC)1 (1 + WACC)2 (1 + WACC)3 (1 + WACC)4 (1 + WACC)5

Present value FCF x Discount factor

Sum of PV of FCFs FCFs 1 to 5 x Discount factor 1 to 5

PV of TV TV x Discount factor 5

Enterprise value Sum of PV of FCFs + PV of TV

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