Financial Modelling

Turin, May 2016

The basic rules of an Excel model
The Rule!

«It is better to be roughly right than precisely wrong»

(John Maynard Keynes)

5
The basic structure of a model

Hystorical Data (financial statements, reports)

INPUT OUTPUT ANALISYS

• Hystorical Reclassified • Assessment

data Financial • Evaluation
Forecasting
• Economic and statements
INPUT of • Balance
financial • Debt
forecasting • BS
indices sheet sustainability
• IS
• Turnover and • Income
• CF • Simulations
growth statement
indices • CF • Other analysis

Market analysis Costs evaluation Sensitivity Graphics

Comparables Multiples Possible

Breakeven point
Scenarios

Personnel Customers

Suppliers Banks
6
A good EXCEL model must be «FAST»
FLEXIBLE: it must be able to change easily
the assumptions and to make different
scenario analyses from other different users
STRUCTURED: the organisation and the
layout must be consistent, this allow speed in
the preparation of the model and fast reading
by other users
ACCURATE: the model should indicate the
key drivers of the business without going into
unnecessary details. Do not forgot that a
model is a good replication of reality, not the
reality itself (e.g. taxation)
TRASPARENT: the model must be based on
clear and simple formulas that can be easily
understood by others and by the same
person after a long time
7
The basic rules of a good EXCEL model

LINK: all links must be directed to other cells in other work sheets or excel files
INPUT/COSTANTS: all numbers must be entered manually; they must be used for
hystorical datas and for input cells in the part of the model of assumptions.
FORMULAS: all formulas; even used for formulas that includes link to other sheets or
files but NOT DIRECT LINKS (e.g. Sum of two numbers that are both input)

TEXT: you can leave it in black, even though technically it should be blue because
manually enterd (you have tu use blue if our cell is a text input)
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The basic rules of a good EXCEL model

PARALLELISM BETWEEN THE SHEET COLUMNS (especially between input and output)

• EASYNESS TO READ: sheets with the same structure

• SPEED: dragging of the formula

• AFFORDABILITY: reducing the possibility of error

Foglio di Input Foglio di Output
anno p q 2014 % 2015 % 2016 % 2017
2014 1 400 Ricavi 400 100% 825 100% 2100 100% 2550
2015 1,5 550
2016 3 700
2017 3 850

Foglio di Input Foglio di Output

anno 2014 2015 2016 2017 2014 % 2015 % 2016 % 2017
p 1 1,5 3 3 Ricavi 400 100% 825 100% 2100 100% 2550
q 400 550 700 850

Foglio di Input Foglio di Output

anno 2014 2015 2016 2017 2014 % 2015 % 2016 % 2017
p 1 1,5 3 3 Ricavi 400 100% 825 100% 2100 100% 2550
q 400 550 700 850

9
The basic rules of a good EXCEL model

INSERTING CHECK ROWS

• BALANCE SHEET: Assets = Liabilities

• CASH FLOW STATEMENT: Cash Flow Variations = Net Cash Flow

• NET PROFIT: Income statement = Balance Sheet

• PROFITABILITY: IRR =Cost of Capital when NPV=0

2014 2015 2016 2017

Capitale Circolante Netto 100 120 140 160
Attivo Immobilizzato 50 65 80 95
Capitale Investito 150 185 220 300
Patrimonio Netto 75 89 103 117
Debito 75 96 117 200
Capitale Investito 150 185 220 317
check 0 0 0 -17

10
The basic rules of a good EXCEL model

The formatting:
• $, €: only in the first and in the last line

• Decimals: normally they do not enter decimal (exception is the stock price, if the numbers
are in thousands or millions or any important inputs, such as the price per liter of fuel)

• Percentages (x,x%): at most 1 decimal, in italics. Custom formatting - 0,0 %_);[Red]

(0,0%)

• Date: dd/mm/yyyy or only yyyy; to calculate the previous year and the next in Excel you
can use these formulas:

o Previous Year: =DATE(YEAR(Year_Cell)-1,MONTH(Year_Cell),DAY(Year_Cell))

o Next Year: =DATE(YEAR(Year_Cell)+1,MONTH(Year_Cell),DAY(Year_Cell))

• Multiple (0,0 x): for multiple like EV/EBITDA, EV/Revenue

• Text: Arial or Calibrì are the most widely used

11
The basic rules of a good EXCEL model

The Formatting
• Borders: used for the most important inputs and margins, in order to highlight subtotals.
Do not over-use the borders to enhance readability
• Alignment: generally keeps the left alignment for text and the right one for values. You
can centralize the most important inputs and use «Center across selection» for titles that
span multiple columns.
• DO NOT USE THE «MERGE» CELLS
• Bold:
o Major titles (Revenues, Earnings, EBITDA, Invested Capital, Etc)

o Date
o Important Input

o For all the column of the most recent period

• Italics:
o Percentages %
o Variations against the previous year

12
Introduction to corporate valuation methods
WHY VALUE A COMPANY?

14
The 3 myths and the 6 truths on valuation models

MYTH 1: the corporate valuation is an objective way to determine the “value”

• TRUTH 1.1: All the evaluations are estimates. The only question to ask is “how much” and “in which
direction”
• TRUTH 1.2: The direction and the size of the estimate is directly proportional to who pays you and how
much you are paid to make the valuation

MYTH 2: a good valuation provides a precise estimate of value

• TRUTH 2.1: There are not precise valuations
• TRUTH 2.2: The payoff of a valuation is bigger when is less accurate (identification of a range)

MYTH 3: more the valuation model is quantitative, more accurate will be the valuation
• TRUTH 3.1: the understanding of a valuation model is inversely proportional to the number of inputs
required for the model
• TRUTH 3.2: valuation models simple return better results than complex models

17
 REMEMBER!
In each valutation (no matter what method is used) it is
based on ASSUMPTIONS (which may be right or wrong)!

As already mentioned, there are NOT exact valuations!

But there are GOOD methods to reason/apply

the financial principles!

Every company is a specific case and we must reason

and apply the financial principles to valorize the society

19
Price vs Value ?

20
Price vs Value

Value creation is a way to define synthetically the company objectives:

Data expressed by the market. The price is the amount of money

PRICE
that a buyer is willing to pay

Estimations on cash flow forecasts, the appreciation of the risks (and

VALUE of the interest rates); they are therefore opinions and estimates.
The value can be seen as result of an analytical calculation using
quantitative and qualitative approaches that we will analyze

When prices and values coexist may not coincide in any way

WHAT ARE THE REASONS?

21
The variables that influence the value of an asset

Determinant of the absolute value (W) and of the price (P)

External variables Internal variables

General Sector Expected Specific Stock
variables variables CashFlow risks value

VALUE
(W)
Other external variables
Fluidity or rigidity of capital related to the businesses
Effectiveness of financial markets
Demand/supply cycle of the risk capital
Ongoing processes of concentration in the sector

Other internal variables

Capacity to diffuse value:
• Trasparency and effectiveness of the
communications
• Strategic and credibility

PRICE
(P)
22
The main categories used to determine the corporate value

Intrinsic valuation (or absolute)

The value of an asset is related to its intrinsic features: the
capacity to generate cash flows and the risk included in these
flows. The value of an asset is considered as the present value
of future cash flows expected for that asset.

Relative valuation
The value of an asset is estimated looking at the price of
«comparable» assets compared to a common variable such as
earnings, cash flows, book value or sales value

23
Corporate valuation as value
Absolute valuations
 Based on «formulas» that don’t contain an
irrational content
 Based on the validity of informations and
of the fundamental analysis; reliability of
the forecasts concerning expected cash
flows and the rationality of the discount
rates and capitalization rates
 It’s based on expected cash flows in the
medium-long term
 It produces results almost stable in time
FINANCIAL METHODS
INCOME METHODS
PATRIMONIAL METHOD
Relative valuations
 It contains rational components
(performance), efficiency factors of
markets as well as speculative and even
emotional
 It refers to very limited time horizons; the
results are formed on profit performance,
referring to current or short-term
 It produces results that may be volatile in
the short-term
METHODS:
COMPARABLE COMPANIES
COMPARABLE TRANSACTIONS
24
The financial model: asset side valuation and equity side valuation

The value of economic capital is estimated considering the cash flows generated by the
company

Asset side Equity side

 Estimate of value indirectly  Estimate of economic directly

 The value of the capital is  The value of is estimated
estimated starting from the value considering the cash flows that
of the Enterprise belong to the shareholders
 It considers operating cash flows (FCFE)

 Discount rate: WACC  Discount rate: cost of equity

25
The financial model: asset side valuation and equity side valuation

EQUITY
VALUE
FREE CASH FLOW TO FREE CASH FLOW TO
THE FIRM (FCFO) EQUITY (FCFE)
ENTERPRISE
VALUE

NET DEBT

WORKING CAPITAL NET ASSETS

_
VALUE VALUE
FINANCIAL DEBTS
(ASSET SIDE) (EQUITY SIDE)

26
The cash flow summarizes both documents

Net Operating Margin (EBIT)

Amortizations
Taxations
Cash generated from operating
Change in Working Capital assets (i.e. core business)
Change in Net Fixed Capital
Depreciations
Extraordinary events

FREE CASH FLOW

Interests
Long Term Debt Increases/Decreases
Cash to the capital providers
Capital Increases and Dividends (risk/debt)

Change in Cash
NET CASH FLOW
Short Term Debt changes

CHANGE IN CASH

27
Discounted Cash Flow (DCF)
DCF

Description

In the cash flows evaluation, the value of an asset is the present value
What is it?
of expected cash flows of the activity

Philosophical Each activity has an intrinsic value that can be estimated, based on its
basis
characteristics in terms of cash flows, growth and risks

Necessary • Estimate the duration of the activity

informations • Estimate the cash flows for the period
• Estimate the discount rate to be applied to the cash flows to get the
present value

Market
It’s assumed that the markets assessment of activities over time and
inefficiencies
that they will be correct over time, when they get new informations
about activities
35
DCF

36
Financial methods

 
Present Value

CF(t): cash flow expected at time t

r: discount rate
n: duration of activity

Proposition 1: because an activity has value, the expectation of cash flow should be
positive more than the activity’s duration

Proposition 2: activities that generate flows previously have more value than activities
that generate them later

37
DCF

1. The DCF valuation is less exposed to the moods and the perceptions of the market
2. The valuation forces you to think about the characteristics that form the basis of a company
and understand its implications
3. It requires much more infromations and implicit inputs compared to other valuation approaches
4. These inputs are difficult to estimate and can be manipulated by analysts
5. The quality of the analysts depends on how the latter are able to reduce the amount of handling
6. Theres is no assurance that the estimations are over or undervalued
7. Approach designed for companies that owe their value to the ability to generate cash flows in
the future
8. It works best for activities that have a long time horizon, allowing time to correct its errors of
valuation and the price to return to its true value

38
In estimating the Cash Flows do not forget the 10 commandments
1) The devaluation is not a cash flow, but concerns
only the taxation
2) Do not ignore investments in Fixed Assets
(Expenditures for Capital Assets)
3) Do not ignore investments in Net Working Capital
• Include only changes in Operating Working
Capital. Short-term debts, cash flows in
excess and securities market do not have to
be taken into consideration.
4) Separate funding decisions from investment
decisions: evaluating them as if fully financed by
equity
5) Estimate flows on incremental basis
• Forget sunk costs: occurred in the past and
are irreversible
• Include all the externalities – the effects of
the project on the rest of the company – for
example a possible cannibalization
6) The opportunity costs can not be ignored
7) Overheads
8) Do not forget the lasting value (terminal value o
residual)
• Liquidation value: estimate the profits from
the sale of assets after an initial planned
period. (Recovery of the investment in
working capital, tax shields or fixed assets but
loss in the value of on-going business)
• Perpetual growth: Assume that the cash flows
grow at a constant rate in perpetuity.
FCF
T
FCFt kg
W   D
t 1 1  k  1  k 
t T
9) Be consistent in considering the inflation
• Nominal cash flows (with inflation) – use of
the nominal cost of capital R
• Real cash flows (without inflation) – use of
real cost of capital r
10) Include cash flows in excess, real properties, pension
funds, bonds in stock options, and other important
elements of the budget.
39
The steps required to go to a proper application of the DCF

1°STEP Study the target company and determine the Key Performance Drivers

2°STEP Estimate the Free Cash Flow from operating activities

3°STEP Calculate the Weighted Average Cost of Capital (discount rate)

4°STEP Determine the Terminal Value

5°STEP Calculate the Present Value and determine the estimation of the value

6°STEP Determine a range of value through sensitivity analysis

40
STEP 1: study the target company and determine the Key
Performance Drivers
Analysis and study
• As with any method of evaluation is
necessary to know as much as
possible regarding the target
company:
 Market and customers
 Competitors
 Key risks
 Value proposition
• Evaluating a Public Company is
simpler than a Private as more
information is available
• Using all available information
(websites, articles, etc.)
Key Performance Drivers
• Determination of the «key drivers»
of performance of the target
company to estimate the Free Cash
Flow perspective:
 Revenue growth
 Profitability businesses
 Working Capital Projection
 Management evolutions
• Information available from internal
sources (eg. New stores) and
external (eg. M&A, taxation, legal)
• The cash flows are influenced by
many factors (eg. Management,
product mix, brand, etc.)
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STEP 2: estimate the Free Cash Flow from operating ectivities

Earnings Before Interest and Taxes (EBIT)

Less: Taxes (marginal tax rate)
Earnings Before Interest after Taxes
Plus: Depreciation and amortization
Less: Capex
Less: Increase/(decrease) of the Net Working Capital
Free Cash Flow

The FCF is the cash generated by the company after the release
generated by the operating activity, the associated taxes,
investments and the working capital.

The FCF is independent of the capital structure as it represents the

cash available to pay back the providers of the capital (debt/equity
holders)

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Some items to consider in drawing up projections of the plan
Situation «AS IS»
 The analysis of historical
data (growth rates, margins,
ratios) are the first
indicators of future
performance
 It’s important to analyze the
data «as is» most remote
possible, but the last the 3
years are a great proxy
 Purified from extraordinary
items (normalization from
extraordinary items)
Projection times Alternative cases
 Typically you use a time  Based on the data provided
horizon of 5 years but by management
depends on the industry, («management case»), you
from the stage of must define a «base case»
development and ease of prudential
predicting the future  The base case is
financial performance constructed from interviews
 The goal is to reach the targeting the key figures of
«steady-state»; new the company (commercial
markets (10yrs) – mature director, CEO, CFO, etc.)
markets (5yrs)  Implementation of «best»
and «worst» case
43
Output situation «as is», five-year projection and FCF
Operating Scenario 1
Mid-Year Convention Y Historical Period CAGR Projection Period CAGR
2005 2006 2007 ('05 - '07) 2008 2009 2010 2011 2012 2013 ('08 - '13)
Sales $780,0 $850,0 $925,0 8,9% $1.000,0 $1.080,0 $1.144,8 $1.190,6 $1.226,3 $1.263,1 4,8%
% growth NA 9,0% 8,8% 8,1% 8,0% 6,0% 4,0% 3,0% 3,0%
COGS 471,9 512,1 555,0 600,0 648,0 686,9 714,4 735,8 757,9
Gross Profit $308,1 $337,9 $370,0 9,6% $400,0 $432,0 $457,9 $476,2 $490,5 $505,2 4,8%
% margin 39,5% 39,8% 40,0% 40,0% 40,0% 40,0% 40,0% 40,0% 40,0%
SG&A 198,9 214,6 231,3 250,0 270,0 286,2 297,6 306,6 315,8
EBITDA $109,2 $123,3 $138,8 12,7% $150,0 $162,0 $171,7 $178,6 $183,9 $189,5 4,8%
% margin 14,0% 14,5% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0%
Depreciation & Amortization 15,6 17,0 18,5 20,0 21,6 22,9 23,8 24,5 25,3
EBIT $93,6 $106,3 $120,3 13,3% $130,0 $140,4 $148,8 $154,8 $159,4 $164,2 4,8%
% margin 12,0% 12,5% 13,0% 13,0% 13,0% 13,0% 13,0% 13,0% 13,0%
Taxes 35,6 40,4 45,7 49,4 53,4 56,6 58,8 60,6 62,4
EBIAT $58,0 $65,9 $74,6 13,3% $80,6 $87,0 $92,3 $96,0 $98,8 $101,8 4,8%
Plus: Depreciation & Amortization 15,6 17,0 18,5 20,0 21,6 22,9 23,8 24,5 25,3
Less: Capital Expenditures (15,0) (18,0) (18,5) (20,0) (21,6) (22,9) (23,8) (24,5) (25,3)
Less: Increase in Net Working Capital (8,0) (6,5) (4,6) (3,6) (3,7)
Unlevered Free Cash Flow $79,0 $85,8 $91,4 $95,3 $98,1

Attention!!!
It’s a mistake to focus on one template and on a rigid model always
keeping in mind the basic rules of financial modeling!

44
STEP 3: Calculate the Weighted Average Cost of Capital (discount
rate)

Definitions

What is it? • It’s the discount rate used and accepted anywhere in the world to calculate
the present value of the FCF and the Terminal Value of a company in the
DCF

• It’s the weighted average required to return on invested capital (usually

debt or equity)

• Since the Debt or Equity have different risk profiles and taxation, the
WACC depends on the capital structure of the target company

• It can be viewed as the opportunity cost of capital, or what an investor

expects performance as if invests in an alternative investment with a
similar risk profile

• Companies with different risk profile may have different capital costs for
different business each will have its specific WACC

49
STEP 3: Calculate the Weighted Average Cost of Capital (discount
rate)

Cost of debt % debt on capital % equity on capital

WACC = x + Cost of equity x structure
(after tax) structure

D E
WACC = (rd x (1-t)) x re x
D+E + D+E

re = cost of equity
rd = cost of debt
t = tax rate
D = market value of the debt
E = market value of the equity

50
The calculation of the WACC

Steps required to calculate the WACC

Determine the capital structure target

Estimate the cost of debt (rd)

Estimate the cost of equity (re)

Calculate the WACC

51
Determine the target capital structure (1/2)

• The WACC is determined by choosing the capital structure of the Company in the long-term goal:
D/D+E | E/D+E

• In the absence of specific guidance on the optimal structure of the capital, you can examine the
current and historical capital structure and the capitalization of the main competitors: for example
comparables listed companies

Usually it used as capital structure target the current structure

Listed companies

The optimal capital structure is generally the mean or median of

Unlisted companies
comparable companies

• Once you have chosen the ideal capital structure, it’s assumed to remain constant for the duration
of the plan

52
Determine the target capital structure (2/2)

Optimal capital structure

 In the absence of debt the WACC is

equal to the cost of equity

 With the increase of the portion of the

debt, WACC decreases, due to the tax
deducibility of interest, up to the point
of optimization of capital structure

 Beyond such a point, the cost of a

potential crisis exceeds the benefit
from deducibility of interest expense

 The greater the risk, the higher the

expected return

53
Estimate the cost of debt (rd)

The cost of debt reflects the credit profile and capital structure objective, which are
influenced by many factors:

• Dimension

• Sector

• Development forecasts

• Credit rating

• Statistics of credit

• Generation of cash flows

• Financial policies

• Acquisition strategies

54
Estimate the cost of debt (rd)

CAPITAL STRUCTURE TARGET Cost of debt obtained as interests arising

= from the current composition of the
CURRENT STRUCTURE external financing sources

CAPITAL STRUCTURE TARGET

Cost of debt achieved by comparable
=
listed companies
CURRENT STRUCTURE

55
Estimate the cost of equity (re)

 The cost of equity is the rate of return that you expect to receive those who take equity in
the company (including dividends)

 Unlike the cost of debt, obtained from the analysis of the creditworthiness of the
company, the cost of equity is not obtainable from the market

 For its calculation using the formula of «CAPITAL ASSET PRICING MODEL (CAPM)»

Cost of equity (re) = Risk-free rate + Levered Beta x Market Risk Premium

56
Estimate the cost of equity (re)

Cost of equity (re) = Risk-free rate + Levered Beta x Market Risk Premium

Cost of equity (re) = Rf + BL x (rm – rf) + SP

rf = risk-free rate
BL = levered beta
Rm = return expected by the market
Rm - Rf = market risk premium
SP = size premium
57
Estimate the cost of equity (re)

Definitions

• It’s the expected return from an investment in risk-free assets

rf = risk-free rate
• Government bonds are generally accepted by the market as risk-free
securities as they are covered by the performance of the accounts of an
entire country (in some countries today are no longer as «risk-free»!!!)

Source: sole 24 ore

58
Estimate the cost of equity (re)

Definitions

Market Risk • It’s the differential (spread) between the expected return from the market
Premium and the yield on a risk-free asset

• There are 3 approaches to calculate the Market Risk Premium:

• Market research: market analysis that identify the expected return

from the market for investment in equity stocks

• Historical data: calculation of the differential as the average relating

of a period of time (for example Ibbotson) – most used approach

• Analysis of market prices: starting from the current level of market

indices you can calculate the differential between the yield
demanded by the market and the performance of risk-free securities.

• Value that is based on the empirical concept that the more a company is
Size premium
small, the greater will be its intrinsic risk and therefore should have a
higher cost of capital.

59
Estimate the cost of equity (re): calculation of the beta

Definitions

• It’s the covariance between the expected rate of return of a share

BL = levered beta compared to the expected rate of return from the market («systemic risk»)

• The rate of return of the market is commonly enclosed by the rate of return
of the S&P 500

• A share with beta equal to 1, means that the expected return is equal to
that of the market

• A share with beta less than 1, means that the share has less systemic risk
than the market

• A share with beta greater than 1, means that the share has a greater
systemic risk than the market

• Mathematically, the CAPM holds that risk in fact to high beta you get an
increase in the cost of equity (higher risk = higher expected return)

60
The variables that influence beta

• The beta value depends on the elasticity of demand for

Products or
products/services and the costs of macroeconomic factors that
services
influence the market, for example companies with cyclical trend
have a beta higher than companies with no cyclical trend.

• The beta value is higher if the company has a disproportion of

Operating
leverage fixed costs compared to variable costs. A more rigid structure
increases the exposure to risk.

• The beta value depends on the level of indebtedness of the

Financial
leverage company. The higher is the debt the higher will be the beta of the
company. Debt creates fixed costs (interest) that increase the risk
exposure.

61
Calculation of the beta

The calculation of the WACC for a company requires that the beta of a group of
comparable companies that may or may not have a capital structure similar to the
structure target

After calculating the unlevered beta for each

BL
BU = comparable company, it determines the
1+D/E x (1-t)
average of the unlevered beta for the group
BL = levered beta of comparable companies
BU = unlevered beta
D/E = Debt-to-Equity ratio – market value of equity
t = tax rate

The average unlevered beta is relevered

using the capital structure target. The beta
BL = BU x (1+D/E x (1-t))
levered is used to calculate the cost of
D/E = Debt-to-Equity ratio – struttura del capitale
equity in the formula of the CAPM
obiettivo

62
Estimate the cost of equity (re): calculation of the beta

Local Currency Rating-based Total Equity Risk

Country Region
Rating Default Spread Premium

Abu Dhabi Middle East Aa2 0.50% 5.75%

Eastern Europe &
Albania Russia B1 4.50% 11.75%

Bangladesh Asia Ba3 3.60% 10.40%

Greece Western Europe Caa3 10.00% 20.00%

Hong Kong Asia Aa1 0.40% 5.60%

Italy Western Europe Baa2 1.90% 7.85%

Last updated: January 2014
Aswath Damodaran

63
Estimate the cost of equity (re): calculation of the beta

64
Calculate the WACC

D E
WACC = (rd x (1-t)) x re x
D+E + D+E

The high number of variables and estimates used to

calculate the WACC requires the realization of Sensitivity
analysis

65
Example of calculation of the WACC

WACC Calculation Comparable Companies Unlevered Beta

Capital Structure Predicted Market Market Debt/ Marginal Unlevered
Debt-to-Total Capitalization 30,0% Company (4)
Levered Beta Value of Debt Value of Equity Equity Tax Rate Beta
Equity-to-Total Capitalization 70,0% Adler Industries 1,11 $575,0 $2.600,0 22,1% 38,0% 0,98
Lanzarone International 1,08 515,0 1.750,0 29,4% 38,0% 0,91
Lajoux Global 1,35 715,0 1.050,0 68,1% 38,0% 0,95
Cost of Debt Momper Corp. 1,25 550,0 1.000,0 55,0% 38,0% 0,93
Cost of Debt 6,0% McMenamin & Co. 1,19 250,0 630,0 39,7% 38,0% 0,96
Tax Rate 38,0%
After-tax Cost of Debt 3,7% Mean 1,20 42,9% 0,95
Median 1,19 39,7% 0,95

Cost of Equity ValueCo Relevered Beta

Risk-free Rate(1) 4,0% Mean Target Target
Market Risk Premium(2) 7,1% Unlevered Debt/ Marginal Relevered
Levered Beta 1,20 Beta Equity Tax Rate Beta
Size Premium(3) 1,65% Relevered Beta 0,95 42,9% 38,0% 1,20
Cost of Equity 14,1%
WACC Sensitivity Analysis
Pre-tax Cost of Debt
WACC 11,0% 0,1 5,0% 5,5% 6,0% 6,5% 7,0%
Capitalization

10,0% 11,9% 11,9% 11,9% 11,9% 12,0%

Debt-to-Total

20,0% 11,3% 11,4% 11,5% 11,5% 11,6%

30,0% 10,8% 10,9% 11,0% 11,1% 11,2%
40,0% 10,3% 10,4% 10,6% 10,7% 10,8%
50,0% 9,8% 10,0% 10,1% 10,3% 10,4%

(1) Interpolated yield on 20-year U.S. Treasury

(2) Obtained from Ibbotson SBBI Valuation Yearbook
(3) Low-Cap Decile size premium based on market capitalization, per Ibbotson
(4) Sourced from Barra

66
Caso Machinery&Co: WACC
STEP 4: Determine the Terminal Value

THE DCF EXPECTS THE DISCOUNT OF ALL

CASH FLOWS (FCF) OF THE COMPANY, BUT
YOU CAN EXPECT CASH FLOWS INFINITE?

68
STEP 4: Determine the Terminal Value

NOT being possible to estimate the FCF infinite must capture in TERMINAL
VALUE (TV) the value of company’s FCF after the duration of the plan.

• Calculated considering the FCF (or the EBITDA as size that

approximates the FCF)

• Calculated the last year of the projections of the plan

• Usually, the TV has a very significant weight on the total of the

Enterprise Value (sometimes more than ¾)

• It’s importante thet the last year of projections has a regular level
of «maturity» and that does not reflect the cyclical nature of the
business

• Pay attention to estimate diligently variables underlying the DCF!!!

69
STEP 4: Determine the Terminal Value

TERMINAL VALUE

PERPETUITY GROWTH
EXIT MULTIPLE METHOD
METHOD

Check

70
Exit Multiple Method (EMM)

• The TV calculated with the Exit Exit Multiple Method

Multiple Method (EMM) is obtained
by multiplying the EBITDA (or EBIT)
of the last year of the plan with the
multiple
TERMINAL VALUE
• This multiple is generally obtained by
=
calculating the average of the
multiples of comparable companies
(LTM) EBITDAn x EXIT MULTIPLE

• The multiple of the market could be

influenced by variables of sector or
economic cycles, it makes sense to
normalize both the EBITDA and the
multiple, through the analysis of
historical data

71
Perpetuity Growth Method (PGM)

• The TV calculated with Perpetuity Perpetuity Growth Method

Growth Method (PGM) is obtained by
discounting the FCF last year of the
plan determined by providing a
growth rate established
TERMINAL VALUE
• This method is expected to estimate
=
the long-term sustainability of the
business
FCFn x (1 + g)
• Normally the rate of growth stems r-g
from the expectation of growth in the
market in which the target firm being
valued
FCF = unlevered Free Cash Flow
n = terminal year
g = perpetual growth rate
r = WACC

72
Caso Machinery&Co: Terminal Value
STEP 5: Calculate the Present Value and determine the value’s
estimation
Description Formula

Present value of a PV = FA x FC
Present Value future cash flow

Present value of a future 1

DF =
Discount factor payment of 1 € (1+r) t

Discount rate used to calculate r – discount rate od Risk Activity

Discount rate the PV of future cash flows equivalent in the capital market

The Interest Rate used to NPV = PV – necessary investiments

Net Present calculate the PV of the future
Value cash flows

74
 STEP 5: Calculate the Present Value and determine the value’s
estimation

Year 1 Year 2 Year 3 Year 4 Year 5

Enterprise FCF1 FCF2 FCF3 FCF4 FCF5

= 0.5
+ 1.5 2.5
+ 3.5
+ 4.5
Value (1 + WACC) (1 + WACC) (1 + WACC) (1 + WACC) (1 + WACC)

EBITDA5 x Exit Multiple

5
(1 + WACC)

EQUITY VALUE = Enterprise Value - PFN – (other components)

EQUITY VALUE
SHARE VALUE =
Number of shares in circolazione
75
STEP 6: Determine a range of value through sensitivity analysis

Enterprise Value
Cumulative Present Value of FCF $346,3

Terminal Value
Terminal Year EBITDA (2013E) $189,5
Exit Multiple 7,0x
Terminal Value $1.326,3
Discount Factor 0,59
Present Value of Terminal Value $787,1 Implied Equity Value and Share Price
% of Enterprise Value 69,4% Enterprise Value $1.133,3
Less: Total Debt (300,0)
Enterprise Value $1.133,3 Less: Preferred Securities -
Less: Noncontrolling Interest -
Plus: Cash and Cash Equivalents 25,0

Implied Equity Value $858,3

Utilizzo funzione «Data Table» Implied Share Price 50,0

Implied Share Price $17,17

76
Advantages and disadsvantages of DCF
ADVANTAGES
• Cash flow-based: reflects the value of
projected FCF that represents a more
solid method compared to market
multiples
• Market indipendent: it does not
consider potential changes due to
market bubbles or periods of crisis
• Self-sufficient: mainly used when you
do not have many information sources
(Bloomberg, FactSet, etc.) and whene
there are not many comparable
companies
• Flexibility: il allows you to make
multiple sensitivity of almost all the key
variables of the company. Leave wide
flexibility to manipulation.
DISADSVANTAGES
• It depends on financial projections:
define accurate projections of FCF
and very complex
• Sensitivity to assumptions: small
changes in WACC, Multiples, margins,
growth rates can produce significant
changes in the valuation range
• Terminal Value: the current value of
the TV can also represent ¾ of
evaluation, it does reduce the
relevance of the estimation of
estimated cash flows
• Costant capital structure: the DCF
does not allow to have flexibility in
terms of changes in the capital
structure
77
Caso Machinery&Co: Valuation range and sensitivity
The multiples of comparable companies
Multiples

Multiples method

Multiples of comparable Multiples of comparable

companies transactions

80
Multiples of comparable companies

Description

Methodology used to evaluate a company, division or business unit

Whats is it? (target). It provides a market benchmark (comparable companies) that
is used to evaluate a company unlisted or listed on a certain moment in
time.

Comparable companies reflect an excellent comparison parameter to

Basis valuate a company as possessing similar margins, risks, performanca
indicators and financial characteristics.

Once you calculated multiples for the panel of comparable companies

Method is necessary to identify their average value (min e max) and, this
value, multiply it by the indicators/profitability of the company. Eg. The
average multiple EV/Ebitda of the reference panel will be multiplied by
the Ebitda of the target company. 81
Multiples of comparable companies

Description

Do not exist two perfectly equal societies therefore assign a valuation

Weaknesses of the
method based on multiples of comparable companies can sometimes be
misleading. For this reason it’s appropriate to use this method with
intrinsic valuations.

The multiples most commonly used in practice:

Types of multiples • P/E: price-to-earnings
• EV/EBITDA: enterprise value-to-ebitda; most widely used because it
does not consider the capital structure it can be influenced by
company policies

82
The steps required to go for a correct application of the method of
multiples of comparable companies

1°STEP Select the panel of comparable companies

2°STEP Obtain the financial information necessary for any society

3°STEP Calculate the Enterprise Value and the Equity Value

Depht analysis and determination of the comparable companies now

4°STEP
more comparable (closest comparable companies)

5°STEP Determine the range of valuation

83
The steps required to go for a correct application of the method of
multiples of comparable companies

1°STEP Select the panel of comparable companies

• Identification of comparable listed companies (activities very difficult in some areas)

• To identify the panel of comparable companies must investigate in detail the target
company
• The main sources used for research of comparable companies is achieved through
research online and through market reserach

2°STEP Obtain the financial information necessary for any society

• Through excel, they define indicators of performance and profitability (ex.

EBITDA, EBIT, ecc.) and useful indicators to estimate the Enterprise Value and
the Equity Value
• The main sources used for obtaining this informations are Bloomberg e FactSet,
equity research, consensus estimates

84
The steps required to go for a correct application of the method of
multiples of comparable companies

3°STEP Calculate the Enterprise Value and the Equity Value

• Calculation of the Enterprise Value and the Equity Value

• Calculation of profitability and performance indicators
• Adjusted for non-recurring items

Depht analysis and determination of the comparable companies now more

4°STEP comparable (closest comparable companies)

• Depht analysis of the panel of comprable companies and the determination of the
ranking by the companies most comparable to the less comparable
(benchmarking)
• The differences between each company’s panel of reference in terms of growth
rates, profitability, leverage, etc. It’s carefully compared with the parameters of the
target company

85
The steps required to go for a correct application of the method of
multiples of comparable companies

5°STEP Determine the range of valuation

• The multiples traded by comparable companies are the basis for determining
a valuation range of the target company
• Generally it determines the average and the median for the detection of the
reference range
• The indication of the value of “right” is taken from a small group of
comparable companies

86
1°STEP: selection of the panel of comparable companies

List of Comparable Companies

Equity Enterprise LTM
Company Ticker Business Description Value Value Sales
Vucic Brands VUC Manufactures and sells home and hardware products including $8.829 $14.712 $8.670
cabinetry, faucets, plumbing accessories, windows, and doors

Pearl Corp. PRL Manufactures and distributes building products in North 8.850 11.323 12.750
America and internationally including roofing, siding, and
windows
Spalding Co. SLD Manufactures and distributes paints, coatings, brushes and 7.781 8.369 8.127
related products to professional, industrial, commercial, and
retail customers
Leicht & Co. LCT Designs, manufactures, and sells floor covering products for 7.456 9.673 8.109
residential and commercial applications

Drook Corp. DRK Manufactures and markets power tools and accessories, 5.034 6.161 6.708
hardware and doors in the United States and Europe

Goodson Corp. GDS Manufactures and markets gypsum, ceiling systems, cabinets 4.368 5.534 6.125
and doors

The DiNucci Group TDG Produces residential and commercial building materials, glass 3.772 5.202 6.489
fiber reinforcements, and other similar materials for composite
systems
Pryor, Inc. PRI Designs, manufactures and markets tools, diagnostics, 3.484 4.764 4.223
construction equipment, and engineered products, primarily in
the United States and Europe

87
 2°STEP: obtaining necessary information for each company (1/2)

Market Valuation LTM Financial Statistics LTM Profitability Margins Growth Rates
Gross Net Sales EBITDA EPS
Equity Enterprise Gross Net Profit EBITDA EBIT Income Hist. Est. Hist. Est. Hist. Est. Est.
Company Ticker Value Value Sales Profit EBITDA EBIT Income (%) (%) (%) (%) 1-year 1-year 1-year 1-year 1-year 1-year LT
ValueCo Corporation NA NA NA $978 $372 $147 $127 $66 38% 15% 13% 7% 9% 8% 13% 8% NA NA NA

Tier I: Large-Cap
Vucic Brands VUC $8.829 $14.712 $8.670 $3.468 $1.739 $1.474 $603 40% 20% 17% 7% 11% 10% 11% 10% 11% 13% 16%
Pearl Corp. PRL 8.850 11.323 12.750 4.335 1.607 1.352 695 34% 13% 11% 5% 9% 7% 9% 7% 8% 9% 13%
Spalding Co. SLD 7.781 8.369 8.127 3.007 1.138 975 557 37% 14% 12% 7% 9% 6% 9% 6% 8% 6% 14%
Leicht & Co. LCT 7.456 9.673 8.109 2.879 1.281 1.014 525 36% 16% 13% 6% 9% 9% 9% 9% 8% 10% 11%
Drook Corp. DRK 5.034 6.161 6.708 2.415 885 738 407 36% 13% 11% 6% 10% 7% 9% 6% 10% 7% 10%

Mean 37% 15% 13% 6% 9% 8% 9% 8% 9% 9% 13%

Median 36% 14% 12% 6% 9% 7% 9% 7% 8% 9% 13%

Tier II: Mid-Cap

Goodson Corp. GDS $4.368 $5.534 $6.125 $2.144 $796 $613 $318 35% 13% 10% 5% 15% 7% 15% 7% 14% 8% 13%
The DiNucci Group TDG 3.772 5.202 6.489 2.271 779 454 213 35% 12% 7% 3% 10% 7% 10% 7% 1% 10% 15%
Pryor, Inc. PRI 3.484 4.764 4.223 1.563 657 507 261 37% 16% 12% 6% 10% 9% 13% 13% 10% 5% 14%
Adler Industries ADL 2.600 3.149 3.895 1.441 471 323 171 37% 12% 8% 4% 7% 8% 7% 8% 7% 9% 11%
Lanzarone International LNZ 1.750 2.139 2.286 846 299 252 131 37% 13% 11% 6% 8% 7% 9% 8% 7% 7% 15%

Mean 36% 13% 10% 5% 10% 8% 11% 9% 8% 8% 14%

Median 37% 13% 10% 5% 10% 7% 10% 8% 7% 8% 14%

Tier III: Small-Cap

Lajoux Global LJX $1.050 $1.650 $1.775 $641 $232 $198 $83 36% 13% 11% 5% 10% 8% 14% 9% 26% 11% 13%
Momper Corp. MOMP 1.000 1.500 1.415 508 215 175 85 36% 15% 12% 6% 8% 9% 8% 13% 17% 17% 15%
McMenamin & Co. MCM 630 705 571 221 97 70 32 39% 17% 12% 6% 5% 9% 10% 10% 9% 9% 14%
Trip Co. TRIP 321 441 486 170 66 49 21 35% 14% 10% 4% 13% 9% 13% 9% 13% 16% 12%
Paris Industries PRS 156 192 352 106 35 21 11 30% 10% 6% 3% 5% 8% 5% 8% 4% 7% 10%

Mean 35% 14% 10% 5% 8% 9% 10% 10% 14% 12% 13%

Median 36% 14% 11% 5% 8% 9% 10% 9% 13% 11% 13%

Overall

Mean 36% 14% 11% 5% 9% 8% 10% 9% 10% 9% 13%

Median 36% 13% 11% 6% 9% 8% 9% 8% 9% 9% 13%

High 40% 20% 17% 7% 15% 10% 15% 13% 26% 17% 16%
Low 30% 10% 6% 3% 5% 6% 5% 6% 1% 5% 10%

88
 2°STEP: obtaining necessary informations for each company (2/2)
General Return on Investment LTM Leverage Ratios LTM Coverage Ratios Credit Ratings
Implied Debt / Debt / Net Debt / EBITDA / EBITDA EBIT /
Predicted ROIC ROE ROA Div. Yield Tot. Cap. EBITDA EBITDA Int. Exp. - Cpx/ Int. Int. Exp.
Company Ticker FYE Beta (%) (%) (%) (%) (%) (x) (x) (x) (x) (x) Moody's S&P
ValueCo Corporation NA dic-31 NA 13% 10% 6% NA 31% 2,0x 2,0x 7,2x 6,2x 6,2x NA NA

Tier I: Large-Cap
Vucic Brands VUC dic-31 1,05 13% 11% 4% 2% 49% 3,2x 3,1x 4,3x 3,7x 3,7x Baa2 BBB
Pearl Corp. PRL dic-31 0,95 19% 14% 6% 4% 42% 2,3x 1,5x 7,0x 5,8x 5,9x Baa2 BBB+
Spalding Co. SLD set-30 1,15 23% 15% 8% 4% 22% 0,9x 0,5x 14,8x 12,4x 12,6x A3 A-
Leicht & Co. LCT dic-31 1,25 16% 13% 6% NA 36% 1,9x 1,7x 7,7x 6,7x 6,1x Baa3 BBB-
Drook Corp. DRK dic-31 1,10 20% 17% 6% 2% 40% 1,9x 1,3x 10,9x 9,7x 9,1x Baa2 BBB

Mean 1,10 18% 14% 6% 3% 38% 2,0x 1,6x 8,9x 7,6x 7,5x
Median 1,10 19% 14% 6% 3% 40% 1,9x 1,5x 7,7x 6,7x 6,1x

Tier II: Mid-Cap

Goodson Corp. GDS dic-31 1,35 17% 12% 6% NA 33% 1,6x 1,5x 8,0x 4,9x 6,1x Ba1 BB+
The DiNucci Group TDG apr-30 1,23 12% 9% 3% NA 43% 2,4x 1,8x 7,0x 4,7x 4,1x Ba1 BBB-
Pryor, Inc. PRI dic-31 1,15 19% 16% 6% 3% 49% 2,4x 1,9x 7,6x 7,0x 5,9x Baa3 BBB-
Adler Industries ADL dic-31 1,11 12% 8% 4% NA 20% 1,2x 1,2x 10,0x 7,5x 6,8x Baa1 BBB+
Lanzarone International LNZ dic-31 1,08 19% 13% 6% 2% 34% 1,7x 1,3x 7,5x 5,8x 6,3x Ba1 BB+

Mean 1,18 16% 12% 5% 2% 36% 1,9x 1,5x 8,0x 6,0x 5,9x
Median 1,15 17% 12% 6% 2% 34% 1,7x 1,5x 7,6x 5,8x 6,1x

Tier III: Small-Cap

Lajoux Global LJX dic-31 1,35 15% 13% 5% NA 51% 3,1x 2,6x 3,7x 3,2x 3,1x B1 B+
Momper Corp. MOMP dic-31 1,25 16% 15% 6% 2% 48% 2,6x 2,3x 5,7x 4,9x 4,6x Ba2 BB
McMenamin & Co. MCM dic-31 1,19 17% 9% 5% 2% 42% 2,6x 0,8x 5,2x 3,7x 2,0x Ba2 BB
Trip Co. TRIP gen-31 0,85 14% 9% 5% NA 37% 2,1x 1,8x 4,3x 3,5x 3,2x Ba3 BB-
Paris Industries PRS dic-31 1,15 8% 5% 3% NA 39% 3,8x 1,0x 10,1x 4,5x 6,1x NA NA

Mean 1,16 14% 10% 5% 2% 43% 2,8x 1,7x 5,8x 4,0x 3,8x
Median 1,19 15% 9% 5% 2% 42% 2,6x 1,8x 5,2x 3,7x 3,2x

Overall

Mean 1,15 16% 12% 5% 3% 39% 2,3x 1,6x 7,6x 5,9x 5,7x
Median 1,15 16% 13% 6% 2% 40% 2,3x 1,5x 7,5x 4,9x 5,9x

High 1,35 23% 17% 8% 4% 51% 3,8x 3,1x 14,8x 12,4x 12,6x
Low 0,85 8% 5% 3% 2% 20% 0,9x 0,5x 3,7x 3,2x 2,0x
89
 Determination of the range of value

Current % of Enterprise Value / LTM Total Price / LT

Share 52-wk. Equity Enterprise LTM 2008E 2009E LTM 2008E 2009E LTM 2008E 2009E EBITDA Debt/ LTM 2008E 2009E EPS
Company Ticker Price High Value Value Sales Sales Sales EBITDA EBITDA EBITDA EBIT EBIT EBIT Margin EBITDA EPS EPS EPS Growth
ValueCo Corporation NA - NA NA NA NA NA NA NA NA NA NA NA NA 15% 2,0,x NA NA NA NA

Tier I: Large-Cap
Vucic Brands VUC $70,00 83% $8.829 $14.712 1,7x 1,6x 1,4x 8,5x 7,8x 7,2x 10,0x 9,3x 8,5x 20% 3,2,x 14,6x 13,6x 12,5x 16%
Pearl Corp. PRL 22,00 81% 8.850 11.323 0,9x 0,8x 0,8x 7,0x 6,7x 6,3x 8,4x 8,0x 7,4x 13% 2,3,x 12,7x 12,1x 11,3x 13%
Spalding Co. SLD 57,00 76% 7.781 8.369 1,0x 1,0x 0,9x 7,4x 7,1x 6,5x 8,6x 8,3x 7,6x 14% 0,9,x 14,0x 13,4x 12,3x 14%
Leicht & Co. LCT 85,00 82% 7.456 9.673 1,2x 1,1x 1,1x 7,6x 7,1x 6,7x 9,5x 8,9x 8,4x 16% 1,9,x 14,2x 13,3x 12,5x 11%
Drook Corp. DRK 78,25 74% 5.034 6.161 0,9x 0,9x 0,8x 7,0x 6,6x 6,2x 8,4x 7,9x 7,4x 13% 1,9,x 12,4x 11,7x 11,0x 10%

Mean 1,1x 1,1x 1,0x 7,5x 7,1x 6,6x 9,0x 8,5x 7,9x 15% 2,0x 13,6x 12,8x 11,9x 13%
Median 1,0x 1,0x 0,9x 7,4x 7,1x 6,5x 8,6x 8,3x 7,6x 14% 1,9x 14,0x 13,3x 12,3x 13%

Tier II: Mid-Cap

Goodson Corp. GDS $44,00 79% $4.368 $5.534 0,9x 0,9x 0,9x 7,0x 6,8x 6,6x 9,0x 8,9x 8,6x 13% 1,6,x 13,7x 13,5x 13,1x 13%
The DiNucci Group TDG 29,85 71% 3.772 5.202 0,8x 0,8x 0,7x 6,7x 6,4x 6,1x 11,5x 11,0x 10,4x 12% 2,4,x 17,5x 17,1x 16,1x 15%
Pryor, Inc. PRI 42,80 78% 3.484 4.764 1,1x 1,1x 1,0x 7,3x 6,9x 6,4x 9,4x 8,9x 8,3x 16% 2,4,x 13,4x 12,7x 11,8x 14%
Adler Industries ADL 47,00 82% 2.600 3.149 0,8x 0,8x 0,7x 6,7x 6,3x 5,9x 9,7x 9,2x 8,6x 12% 1,2,x 15,2x 14,4x 13,4x 11%
Lanzarone International LNZ 28,50 81% 1.750 2.139 0,9x 0,9x 0,8x 7,2x 6,7x 6,3x 8,5x 8,0x 7,4x 13% 1,7,x 13,3x 12,5x 11,6x 15%

Mean 0,9x 0,9x 0,8x 6,9x 6,6x 6,3x 9,6x 9,2x 8,7x 13% 1,9x 14,6x 14,0x 13,2x 14%
Median 0,9x 0,9x 0,8x 7,0x 6,7x 6,3x 9,4x 8,9x 8,6x 13% 1,7x 13,7x 13,5x 13,1x 14%

Tier III: Small-Cap

Lajoux Global LJX $15,00 83% $1.050 $1.650 0,9x 0,9x 0,8x 7,1x 6,8x 6,4x 8,3x 8,0x 7,5x 13% 3,1,x 12,6x 12,1x 11,3x 13%
Momper Corp. MOMP 20,00 80% 1.000 1.500 1,1x 1,0x 0,9x 7,0x 6,7x 6,3x 8,6x 8,1x 7,5x 15% 2,6,x 11,8x 11,1x 10,0x 15%
McMenamin & Co. MCM 16,50 78% 630 705 1,2x 1,2x 1,1x 7,3x 7,1x 6,6x 10,1x 9,8x 9,1x 17% 2,6,x 19,9x 19,3x 17,9x 14%
Trip Co. TRIP 11,25 78% 321 441 0,9x 0,9x 0,8x 6,7x 6,5x 6,1x 9,1x 8,7x 8,2x 14% 2,1,x 15,6x 15,0x 14,0x 12%
Paris Industries PRS 10,25 73% 156 192 0,5x 0,5x 0,5x 5,5x 5,3x 5,0x 9,1x 8,9x 8,3x 10% 3,8,x 14,3x 14,0x 13,1x 10%

Mean 0,9x 0,9x 0,8x 6,7x 6,5x 6,0x 9,0x 8,7x 8,1x 14% 2,8x 14,8x 14,3x 13,3x 13%
Median 0,9x 0,9x 0,8x 7,0x 6,7x 6,3x 9,1x 8,7x 8,2x 14% 2,6x 14,3x 14,0x 13,1x 13%

Overall

Mean 1,0x 1,0x 0,9x 7,0x 6,7x 6,3x 9,2x 8,8x 8,2x 14% 2,3x 14,3x 13,7x 12,8x 13%
Median 0,9x 0,9x 0,8x 7,0x 6,7x 6,3x 9,1x 8,9x 8,3x 13% 2,3x 14,0x 13,4x 12,5x 13%

High 1,7x 1,6x 1,4x 8,5x 7,8x 7,2x 11,5x 11,0x 10,4x 20% 3,8x 19,9x 19,3x 17,9x 16%
Low 0,5x 0,5x 0,5x 5,5x 5,3x 5,0x 8,3x 7,9x 7,4x 10% 0,9x 11,8x 11,1x 10,0x 10%

90
 Determination of the range of value

Balance Sheet Data

2007A 30/09/2008
Cash and Cash Equivalents $14,0 $7,9
Adjusted Income Statement Accounts Receivable 152,6 161,3
Reported Gross Profit $292,5 $320,9 $351,5 $254,8 $274,9 $371,6 Inventories 115,6 122,2
Non-recurring Items in COGS - - - - - - Prepaids and Other Current Assets 9,3 9,8
Adj. Gross Profit $292,5 $320,9 $351,5 $254,8 $274,9 $371,6 Total Current Assets $291,5 $301,3
% margin 37,5% 37,8% 38,0% 38,0% 38,0% 38,0%
Property, Plant and Equipment, net 650,0 650,0
Reported EBIT $93,6 $106,3 $120,3 $87,2 $94,0 $127,1
Goodwill and Intangible Assets 175,0 175,0
Non-recurring Items in COGS - - - - - -
Other Assets 75,0 75,0
Other Non-recurring Items - - - - - -
Total Assets $1.191,5 $1.201,3
Adjusted EBIT $93,6 $106,3 $120,3 $87,2 $94,0 $127,1
% margin 12,0% 12,5% 13,0% 13,0% 13,0% 13,0%
Accounts Payable 69,4 73,3
Depreciation & Amortization 15,6 17,0 18,5 13,4 14,5 19,6 Accrued Liabilities 92,5 97,8
Adjusted EBITDA $109,2 $123,3 $138,8 $100,6 $108,5 $146,7 Other Current Liabilities 23,1 24,4
% margin 14,0% 14,5% 15,0% 15,0% 15,0% 15,0% Total Current Liabilities $185,0 $195,6

Reported Net Income $40,4 $49,1 $60,1 $43,2 $49,2 $66,1

Total Debt 350,0 300,0
Non-recurring Items in COGS - - - - - -
Other Non-recurring Items - - - - - - Other Long-Term Liabilities 25,0 25,0
Non-operating Non-rec. Items - - - - - - Total Liabilities $560,0 $520,6
Tax Adjustment - - - - - -
Adjusted Net Income $40,4 $49,1 $60,1 $43,2 $49,2 $66,1 Noncontrolling Interest - -
% margin 5,2% 5,8% 6,5% 6,4% 6,8% 6,8% Preferred Stock - -
Shareholders' Equity 631,5 680,7
Total Liabilities and Equity $1.191,5 $1.201,3
Balance Check 0,000 0,000

91
Determination of the range of value (approximate method)

High Low

EV/EBITDA = 7,2x x 5x

x x

EBITDA = €146,2m €146,2m

= =
Enterprise Value = €1.052,6m €730m

PFN €317,1m €317,1m

Equity Value = €735,5m €419,9m

92
Determination of the range of value (specific method)

93
The multiples in different sectors

94
Advantages and disadvantages of multiple method of comparable
companies
ADVANTAGES
• Market-based: the analysis is based
on multiples of public current
transactions of comparable companies
and reflect the market condition
• Relativity: this approach allows you to
transparently reflect the performance
of the business in terms of indistry and
period
• Quick and convenient: the evaluation
can be identified through a few inputs
• Current: the evaluation derives from
the informations of the current market
DISADVANTAGES
• Market-based: multiples can be
distorted by a particularly negative
period
• Absence of relevant comparable:
“pure play” comps can be difficult to
identify
• Potential disconnect from cash
flow: valuations based on market
multiples could have points of
disconnection from large assessments
based on other methods (DCF)
• Company-specific issues: target’s
valuation is based on the assumption
that the other comparable companies
reflect the strenghts, weaknesses,
opportunities and risks of the business
reference
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The multiples of comparable transactions
Multiples

Multiples method

Multiples of comparable Multiples of comparable

companies transactions

97
Multiples of comparable transactions

Description

Methodology used to evaluate a company, division or business unit

What is it? (target). It provides a market benchmark (comparable transactions)
that is used to evaluate a company unlisted or listed on a certain
moment in time.

Selection of an appropriate universe of transactions (acquisitions,

Basis mergers, transfers, etc.) comparable. Best transactions are those that
involve companies that have characteristics comparable to those of
the target company.

It’s selected a panel of comparable transactions from which we

Method
extrapolate the multiples of the operations. After having calculated the
average, this applies to indicators/profitability of the target company.
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Multiples of comparable transactions

1°STEP Select the panel of comparable transactions

2°STEP Obtain financial informations of any «deal»

3°STEP Calculate the Enterprise Value and the Equity Value

Depth analysis of comparable transactions and determination of those

4°STEP
most comparable (closest comparable companies)

5°STEP Determine the range of valuation

99
Where to find the necessary informations?

100
1°STEP: selection of the panel of comparable transactions
($ in millions)
List of Comparable Acquisitions
Date Transaction Equity Enterprise LTM
Announced Acquirer Target Type Target Business Description Value Value Sales
03/11/2008 Pearl Corp. Rosenbaum Public / Public Manufactures roofing and related products primarily in $2.000 $2.000 $1.375
Industries North America

30/10/2008 Goodson Corp. Schneider & Public / Public Manufactures, distributes and markets high-quality 932 1.232 1.045
Co. ceramic tile products globally

22/06/2008 Pryor, Inc. ParkCo Public / Private Manufactures vinyl wood-clad and fiberglass windows 650 875 798
and aluminum doors

15/04/2008 Leicht & Co. Bress Public / Public Manufactures engineered wood products for use in 1.301 1.326 825
Products commercial construction

01/10/2007 The Hochberg Whalen Inc. Sponsor / Manufacturers kitchen, bathroom and plumbing 225 330 255
Group Private accessories for the home construction and
remodeling markets

08/08/2007 Cole Gordon Inc. Public / Public Manufactures and markets carpeting, rugs, and other 2.371 2.796 1.989
Manufacturing flooring products and accessories

06/07/2007 Eu-Han Capital Rughwani Sponsor / Manufactures and distributes a variety of exterior 1.553 2.233 1.917
International Public building materials for the residential construction
market

09/11/2006 The Meisner Kamras Sponsor / Manufacturers interior and exterior doors primarily in 916 936 809
Group Brands Public North America and Europe

21/06/2006 Domanski Neren Sponsor / Manufactures residential building products, including 1.248 1.798 1.889
Capital Industries Public air conditioning and heating products, windows,
doors, and siding

20/03/2006 Lanzarone Falk & Sons Public / Private Manufactures and distributes a wide range of outdoor 360 530 588
International and indoor lighting products to the commercial,
industrial and residential markets
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2°STEP: obtaining necessary informations for each company

Enterprise Value / LTM Equity Value /

Date Transaction Purchase Equity Enterprise LTM LTM LTM EBITDA LTM
Announced Acquirer Target Type Consideration Value Value Sales EBITDA EBIT Margin Net Income
03/11/2008 Pearl Corp. Rosenbaum Industries Public / Public Cash $1.700 $2.000 1,5x 8,0x 9,1x 18% 13,6x

30/10/2008 Goodson Corp. Schneider & Co. Public / Public Cash / Stock 932 1.232 1,2x 7,6x 8,7x 16% 13,9x

22/06/2008 Pryor, Inc. ParkCo Public / Private Cash 650 875 1,1x 7,1x 8,1x 15% 12,0x

15/04/2008 Leicht & Co. Bress Products Public / Public Stock 1.301 1.326 1,6x 8,5x 12,5x 19% 14,4x

01/10/2007 The Hochberg Group Whalen Inc. Sponsor / Cash 225 330 1,3x 7,7x 9,2x 17% 13,3x
Private
08/08/2007 Cole Manufacturing Gordon Inc. Public / Public Stock 2.371 2.796 1,4x 8,0x 10,7x 18% 17,7x

06/07/2007 Eu-Han Capital Rughwani International Sponsor / Cash 1.553 2.233 1,2x 7,5x 9,3x 15% 12,4x
Public
09/11/2006 The Meisner Group Kamras Brands Sponsor / Cash 916 936 1,2x 7,3x 8,3x 16% 13,1x
Public
21/06/2006 Domanski Capital Neren Industries Sponsor / Cash 1.248 1.798 1,0x 7,2x 8,3x 13% 16,0x
Public
20/03/2006 Lanzarone International Falk & Sons Public / Private Cash 360 530 0,9x 6,5x 8,1x 14% 10,6x

Mean 1,2x 7,5x 9,2x 16% 13,7x

Median 1,2x 7,5x 8,9x 16% 13,4x

High 1,6x 8,5x 12,5x 19% 17,7x

Low 0,9x 6,5x 8,1x 13% 10,6x

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 Determination of the valuation range

Balance Sheet Data

2007A 30/09/2008
Cash and Cash Equivalents $14,0 $7,9
Adjusted Income Statement Accounts Receivable 152,6 161,3
Reported Gross Profit $292,5 $320,9 $351,5 $254,8 $274,9 $371,6 Inventories 115,6 122,2
Non-recurring Items in COGS - - - - - - Prepaids and Other Current Assets 9,3 9,8
Adj. Gross Profit $292,5 $320,9 $351,5 $254,8 $274,9 $371,6 Total Current Assets $291,5 $301,3
% margin 37,5% 37,8% 38,0% 38,0% 38,0% 38,0%
Property, Plant and Equipment, net 650,0 650,0
Reported EBIT $93,6 $106,3 $120,3 $87,2 $94,0 $127,1
Goodwill and Intangible Assets 175,0 175,0
Non-recurring Items in COGS - - - - - -
Other Assets 75,0 75,0
Other Non-recurring Items - - - - - -
Total Assets $1.191,5 $1.201,3
Adjusted EBIT $93,6 $106,3 $120,3 $87,2 $94,0 $127,1
% margin 12,0% 12,5% 13,0% 13,0% 13,0% 13,0%
Accounts Payable 69,4 73,3
Depreciation & Amortization 15,6 17,0 18,5 13,4 14,5 19,6 Accrued Liabilities 92,5 97,8
Adjusted EBITDA $109,2 $123,3 $138,8 $100,6 $108,5 $146,7 Other Current Liabilities 23,1 24,4
% margin 14,0% 14,5% 15,0% 15,0% 15,0% 15,0% Total Current Liabilities $185,0 $195,6

Reported Net Income $40,4 $49,1 $60,1 $43,2 $49,2 $66,1

Total Debt 350,0 300,0
Non-recurring Items in COGS - - - - - -
Other Non-recurring Items - - - - - - Other Long-Term Liabilities 25,0 25,0
Non-operating Non-rec. Items - - - - - - Total Liabilities $560,0 $520,6
Tax Adjustment - - - - - -
Adjusted Net Income $40,4 $49,1 $60,1 $43,2 $49,2 $66,1 Noncontrolling Interest - -
% margin 5,2% 5,8% 6,5% 6,4% 6,8% 6,8% Preferred Stock - -
Shareholders' Equity 631,5 680,7
Total Liabilities and Equity $1.191,5 $1.201,3
Balance Check 0,000 0,000

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Determination of the range of value (approximate method)

High Low

EV/EBITDA = 8,5x x 7,5x

x x

EBITDA = €146,2m €146,2m

= =
Enterprise Value = €1.242,7m €1.096,5m

NFP €317,1m €317,1m

Equity Value = €925,6m €779,4m

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Comparison between valuation range

Multiples method of comparable transactions

High Low

Equity Value = €925,6m €779,4m

Multiples method of comparable companies

High Low

Equity Value = €735,5m €419,9m

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Comparable transactions vs comparable companies

WHY WITH THE METHOD OF MULTIPLES OF

COMPARABLE TRANSACTIONS, YOU OBTAIN
A HIGHER VALUE?

106
Comparable transactions vs comparable companies

AWARD FOR CONTROL: the buyer is generally willing to pay a surplus

since acquired a majority of the company

STRATEGIC SYNERGIES: the strategic buyer has the opportunity to

realize synergies with the company so it’s willing to pay a surplus

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Advantages and disadvantages of multiple method of comparable
transactions
ADVANTAGES
• Market-based: the analysis is based
on multiples of current operations of
comparable transactions
• Current: recent operations allow to
reflect M&A operations to current
market conditions
• Relativity: this approach allows you to
transparently reflect the performance
of the business in terms of industry
and period
• Simplicity: an evaluation can be
anchored to a few multiples easily
justifiable
• Objectivity: does not allow the use of
assumptions to estimate the future
performance
DISADVANTAGES
• Market-based: the multiples can be
distorted by the historical period and
the capital market
• Time lag: transactions that occurred in
the past may not reflect current market
conditions
• Existence of comparable
acquisition: in some cases it’s very
difficult to find a panl of comparable
transactions then they make
adjustments that reduce more the
objectivity
• Availability of information: reduced
informations can be a significant lack
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