GC ValuationPrinciplesUpdated0319

- valuation principles
Cesim Oy. | Arkadiankatu 21A | 00100, Helsinki | Finland | tel: +358 405 045 116 | www.cesim.com | Confidential | ©2012 Cesim Oy. | All rights reserved Presented in Full High Definition 1
Valuation
Total shareholder return (TSR, %) is the most commonly used winning

criterion in Global Challenge. Its influenced by the company’s dividend
payments and share price fluctuation. This document explains how the
share price is calculated.
Simulation
Decisions & Results
Valuation
Cesim Oy. | Arkadiankatu 21A | 00100, Helsinki | Finland | tel: +358 405 045 116 | www.cesim.com | Confidential | ©2012 Cesim Oy. | All rights reserved Presented in Full High Definition
Risk
Risk plays a big part in the valuation. Investors demand greater returns for
investments that are associated with higher risks.
There are several risks that are taken into account in the valuation. When
ever risks increase, the required rate of return increases as well.
Effectively, uncertain (future) cash flows are therefore worth less to
investors which decreases value of the company.
Country risk: Some countries are more
Credit
riskier to business than others
Country risk
risk
Credit risk: company that are perceived
Company more likely to default will have to pay
specific
risk higher interest rates to their debt
Company specific risk: Cash flows of the

company react aggressively to changes in
the market
Valuation methods
• Weighted average of different

valuations methods is used to
Discounted cash Multiple
calculate enterprise value for flow -valuation valuation
companies. • Risk based • Value of the company can be
• DCF valuation is often the • Projected future cash flows of estimated by comparing it to
the company are discounted to similar companies in the
dominating element while less back to today. market.
weight is given to multiple • The present value of those cash
valuation. flows equals to what the • The following multiples are
company is worth today to both used to value the company
• Each area is valued separately stock holders and debtors. • EV/SALES
• Enterprise value will be derived • EV/EBITDA
as a result of DCF valuation • EV/EBIT
• EV/NOPLAT
Valuation is not an exact

Weighted average
science and is always
subjective. Therefore the
model can be
parameterized to suit Enterprise value
specific needs.
How is TSR calculated?
How is • Enterprise value is a
enterprise value
weighted average of DCF
DCF valuation for Multiple valuation for calculated for
and Multiple valuation
area 1, Enterprise area 1, Enterprise each area?
value value
How is the
Weighted average • As a sum of the local
global
enterprise value enterprise values
Enterprise Enterprise Enterprise calculated?
value, Area 1 value, Area 2 value, Area 3 How is company’s
market • Market capitalization =
capitalization
calculated from Enterprise value – Market
the enterprise value of debt + excess cash
value?
Enterprise value of the company How is • Share price = Market
company’s
- Market value of debt capitalization / number of
share price
shares
calculated
+ Excess cash
• TSR is annualized rate of
Market capitalization What is TSR? return that stock holder
receives for his/her
/ Number of shares 5 investment
Share price Cumulative total shareholder return
( [Current share price + all paid dividend (+interest)] / Initial share price ) ^ (1 / number of round played)
DCF – Enterprise value
The following slide

Enterprise value is the
explains, how Free Cash
present value of future
Flow to Firm is
cash flows (Discounted
forecasted for future
Cash Flow)
years
Free Cash Flow to Firm is an

adjusted cash flow. It is an
indicator for the value that
company as an entity (all
stakeholders) receives
annually.
How is DCF calculated?
Future cash flows of the company are forecasted based on company’s historical performance from several rounds. Forecast of future cash
flows are also (positively) affected by company’s investments to future growth (marketing, RnD).
Historical performance Forecasted

1 2 3 Terminal value
Sales Sales Sales Sales Sales
EBITDA EBITDA EBITDA EBITDA

EBITDA % % % % %
Free cash Free cash Free cash

Free cash flow flow to
Free cash f flow to flow to
to Firm low to Fir Firm Firm Firm
m
7
Enterprise value Discounted

(Present value of future cash flows) by WACC
Back to TSR
Components of DCF
The following slides explain

in more detail how some
critical components of the
DCF valuation are
calculated
Historical perfor Free cash flow t WACC

mance o firm
Historical performance
• Investors believe that management

Weight given to past performance which has managed the company well in
35% past is capable to do so in the future as
30% well.
25%
20%
Weight
15%
• Therefore, the latest round results are
10% not directly used as a base for the cash
5% flow forecasts. Instead, DCF valuation
0%
1 2 3 4 5 6 uses historical performance when
Round estimating sales and EBITDA%
marging that the future cash flows are
based on.
The game is more often won by a team
that performs well through out the
game, instead of just winning the last
round
Back to DCF
Free cash flow to firm
• DCF valuation forecasts Free Cash
Flow to Firm (FCFF) for the coming Historical The actual calculation
years. ”How is DCF calculated” -slide
presented simplified version of the weighted EBITDA
FCFF. The graph in this slide explains averages
the calculation in more detail. Depreciation &
Sales Amortization
• Historical weighted averages are used
to forecast future cash flow items. EBIT
EBITDA %
• E.g. a team that has historically had
low EBITDA % throughout the Depreciation &
Investment
adjustment
simulation, is excepted to continue Amortization, %
with similar strategy in the future as

Investment
well. Adjustement
Taxes
• This kind of calculation emphasizes the Change in Capital Expenditures

importance of long-term value creation Capex and and increase in
NWC, NWC
10 %
instead of maximizing value of the
company momentarily. The company is Free Cash Flow to
regarded as a going concern even Firm
though the simulation would end after
e.g. six rounds.
Back to DCF
How is risk measured?
WACC measures the risk associated with future cash flows of the company
Risk free rate + Market specific Interest coverage

Company specific risk Leverage
risk premium ratio
Required return on equity cost of debt
Company specific weighted average

cost of capital (WACC)
11
WACC is used to discount future cash flows to their present value. More risk means
that those cash flows are less valuable in today’s money
Back to DCF
What is company specific risk?
Company specific risk is based on the

historical performance of the company. A
company which operational profits react
strongly to external changes in the market, The following slide will present historical
bears more risk compare to its peers that performance of two teams in comparison to
are able to produce steady profit over a the market on average.
period of several years. Changes in the
profits may be positive or negative but
investors require higher rate of return to
compensate the extra risk.
Company specific risk
EBITDA comparison
1900
Low risk company.

Produces steady 1700
profits over time. 1500
1300
EBITDA
Market on average.
How companies on 1100
average react to
900
external shocks.
700
High risk company. 500

High uncertainty 1 2
13
3 4 5 6
Round
related to cash flows
when e.g. demand Market on average Low risk company High risk company
changes
Back to DCF
Multiple valuation – Enterprise value
Multiple valuation -method

compares company’s key The following slide
figures to other similar explains multiple valuation
companies which value is in more detail.
know.
14
How is multiple valuation calculated?
• Multiple valuation uses multiples of
comparable companies to estimate the
enterprise value of company.
• Multiple valuation assumes all Example

companies to be similar in prospects
and operating characteristics.
Company 1 Company 2
• Basic idea: companies that have e.g.
equal EBITDA, should trade at equal EBITDA 100k€ EBITDA 200k€
enterprise value.
Multiple Multiple
(EV/EBITDA) 10 (EV/EBITDA) 10
• The following multiples are used as a
default in the simulation: Enterprise value Enterprise value
(EBITDA*multiple) (EBITDA*multiple)
• EV/SALES 1000k€ 2000k€
• EV/EBITDA
• EV/EBIT
• EV/NOPLAT 15
• Key figures (sales, EBITDA, EBIT,

NOPLAT) are adjusted to counter
artificial changes to valuation which
would occur e.g. from transfer pricing.
Back to TSR
More Information
Cesim
Arkadiankatu 21
00100 Helsinki, Finland
Tel. +358 9 406 660
www.cesim.com
contact@cesim.com
Technical Support
support@cesim.com
16

GC ValuationPrinciplesUpdated0319

Uploaded by

Copyright:

Available Formats

You might also like

GC ValuationPrinciplesUpdated0319

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

GC ValuationPrinciplesUpdated0319

Uploaded by

Copyright:

Available Formats

- valuation principles

Total shareholder return (TSR, %) is the most commonly used winning

Company specific risk: Cash flows of the

• Weighted average of different

Valuation is not an exact

Share price Cumulative total shareholder return

The following slide

Free Cash Flow to Firm is an

Historical performance Forecasted

Sales Sales Sales Sales Sales

EBITDA EBITDA EBITDA EBITDA

Free cash Free cash Free cash

Enterprise value Discounted

The following slides explain

Historical perfor Free cash flow t WACC

• Investors believe that management

with similar strategy in the future as

• This kind of calculation emphasizes the Change in Capital Expenditures

Risk free rate + Market specific Interest coverage

Required return on equity cost of debt

Company specific weighted average

Company specific risk is based on the

Low risk company.

profits over time. 1500

High risk company. 500

Multiple valuation -method

• Multiple valuation assumes all Example

• Key figures (sales, EBITDA, EBIT,

You might also like