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Introduction to Valuation
EPGP, IIM INDORE
Evaluation
•Group Assignment – 30 %
• Groups of 5 students
• Assignment 1. Valuation of Airthread Connections
• Valuation using a DCF approach, relative valuation approach, including sensitivity analysis.
• 1st submission due before the start of Session 10, and 2 submission due with 2 days after the case discussion.
• Assignment 2. Select any M&A deal that has happened in the past 3 years
• Select a deal which has a publicly listed target
• Use relative valuation, comparable company analysis and precedent transaction analysis, comment on the deal price, and prepare
a partial football field (Relative valuation –all types and 52 week high low).
Growth Assets
Expected value that will Investments Equity Owner’s funds
be created from the yet to be made
future investments
Summary of Approaches to Valuation
Present Value Models, also called as DCF Models
◦ Value of an asset is the present value of future benefits (cash flows) on that assets
◦ FCFF, CCFF, FCFE, APV
Multiples / Relative
◦ Law of one price for similar assets
Relevance of Cash flows in Value Creation
•Value creation at the Heart of any Business Decision
•Reliance on Cash flows for understanding the value of an asset / firm
•First principles: To create value, the firm must generate more cash than it uses
• Sufficient cash flow, after taxes, to compensate investors for providing the firm with financing
• FCF –cash available for distribution to investors
• The value of a firm depends on its expected FCFs
Value: A Leitmotif
•Present Value of Future Cash Flows
•Can be formally written as:
𝐶𝐹1 𝐶𝐹 𝐶𝐹3 𝐶𝐹
• 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎 𝐹𝑖𝑟𝑚 / Asset = 𝐶𝐹0 + + (1+𝑟2 )2 + + …… + (1+𝑟𝑛 )𝑛
(1+𝑟1 )1 2 (1+𝑟3 )3 𝑛
• Cannot forecast too far in the future: Terminate the forecasts
• PV of TV
1 10000 8928.57
2 4000 3188.78
3 4000 2847.12
4 4000 2542.07
5 24000 13618.24