1. Balance
sheet methods
Generally, it
is a very poor basis on which to value a company
Balance
sheet at book value
(million CHF)
| |
End 2023 |
| Net fixed Asset |
2
700 |
| Equity |
1 650 |
| Long Term Debts |
1 050 |
| Total Liabilities
& Owner's Equity |
2
700 |
Source
: STARWORLD
GROUP |
2. Multiple
of profits method
Method based
on PER (Price Earnings Ratio)
Value of the company = Market
Value of Equity + Market Value of Debts
Market Value of Equity = [ PER
. PAT ]
PAT = Profit After Tax
PER = [ P / EPS ]
Mareket
Value of the company = [ PER . PAT ] + Value
of Debts
Method based
on market capitalization
Market Value of the company
= Market Value of Equity + Market Value of
Debts
Market Value of Equity = [P
. N ]
P = market
Value per share ; N =
Number of shares
Market
Value of the company = [ P . N ] + Value of
Debts
Notice concerning the market
value of Equity
In fact, as developed below
concerning the market value of Equity,
[PER . PAT] = [P. N]
Market Value of Equity
= PER . PAT
PER = [ P / EPS ]
Market Value of Equity = [ (P
/ EPS) . PAT ]
EPS = [ PAT / N ]
Value of Equity = [ P / (PAT/
N) ] . PAT
Value of Equity = P . (N / PAT)
. PAT
Market Value of Equity
= P . N
Value
of the company = [ P . N] + Value of Debts
Financial
Data of STARWORLD
GROUP
| |
End 2023 |
| PER |
3.14 |
| PAT |
715 million
CHF |
| Net Debts
of the group |
1 050 million
CHF |
| Number of
shares (12/31) |
22 million |
| EPS |
32.49 CHF |
| Price of
share 12/31 (last) |
102.00 CHF |
Source
: STARWORLD
GROUP
Market
value of the group
Method
based
on PER (million CHF)
| Equity : PER . PAT
= 3.14 x 715 million CHF |
2
245 |
| Debts |
1 050 |
| Market Value of the
company |
3
295 |
Method
based on market capitalization (million
CHF)
| Equity : p . N =
CHF 102.00 x 22 million shares |
2
244 |
| Debts |
1 050 |
| Market Value of the
company |
3
294 |
|
.Non quoted company
Find a quoted company which
is in similar business and using its PER.
Adjust that PER to allow for the fact that
the unquoted company you are valuing may have
worse prospects and higher risk than the quoted
company (a reduction of 25-40 % is common).
Determine the sustainable profit after tax
(PAT) of the unquoted company. The PAT is
the profit you believe will be maintainable
in the future.
Multiply the adjusted PER by
the adjusted sustainable profit, to give a
valuation.
3.
Discounted cash flow basis
The value of the company represents
the present value of the future cash flows
it is expected to generate.
Steps :
1. Determine a suitable
initial time period for the valuation, generally
the period over which you expect the company
to maintain a competitive advantage
2. Estimate the
free cash flows (FCF) : amount of cash generated
by the business before allowing for financing
Operating profit
(EBIT) |
- Taxes |
+ Depreciation |
|
|
= FCF |
3. Estimate the
Terminal value (TV) - what you think the business
will be worth at the end of that initial period
How to evaluate TV ?
TV could be :
- TV = Assets value (poor basis)
- TV = PAT . PER
- TV = Annuity in year x :
eg. 300 in year 6
- TV = Constant perpetuity
or growing perpetuity
4. Determine a suitable
WACC
(discount rate) for the investment
5. Discount the
cash flows, using the WACC
6. Add the value
of non-operating assets
At this point you have calculated
the enterprise value - the value of the whole
business, which has been financed in several
ways.
7. In order
to calculate the value of the equity of the
company, deduct the current amount of debt
from the enterprise value
Case : Valuate
STARWORLD
GROUP
Forcast
of Free Cash Flows |
2024 |
2025 |
2026 |
| EBIT |
1052 |
1063 |
1074 |
| - Tax rate 30 % |
-316 |
-319 |
-322 |
| + Depreciation |
400 |
440 |
470 |
| - Capex |
-600 |
-640 |
-670 |
| + / - Change in Working Capital |
-80 |
-100 |
-120 |
| = FCF (millions €) |
457 |
444 |
432 |
Other informations :
Tto see the source, click :
Starworld Group
Debts
: 1050 millions CHF
From year 2025, FCF will growing
at rate of 1 % per year
Net cost of debt :
(Interest / Debt . 100) - tax rate = [ (21
/ 1050) . 100 ] - 30 % = 1.40 %
Expected return for
shareholders : CAPM = 0,656 % + 0,90
( 8,327 % -0,656 %) = 7,56%
WACC = 7,56
% (2244 / 3294) + 1.40 % (1050 / 3294) = 5,60 %
Steps to Calculate the Economic Value of Starworld
Group
1.
Present Value (PV) of Free Cash Flows (FCF)
2. Terminal value
(TV) at the end of year 2025 : [(432 . 1,01)
/ (0,0574 - 0,01)] = 9'185
| |
2024 |
2025 |
2026 |
= 1197
|
| PV of FCF = |
457 |
444 |
432 |
(1,056)1 |
(1,056)2 |
(1,056)3 |
3. PV of TV :
[432 . 1,01) / (0,056 - 0,01] . [1,056]-3 = 8'053
4. Economic
Value of the Company :
1'197 + 8'053 = 9'250 million CHF
5. Economic
Value of Equity : 9'250
- 1 050 = 8'200 million CHF
Reasons justifying
the evaluation of a company :
- Issue of new shares
- Acquisition of a Firm
Different values
of shares :
|
|
|
| Book value of share |
Common stock / N |
1100
/ 22 |
50.00
CHF |
| Equity value of the share |
Common stock + Retained earnings / N |
1100 + 550 / 22 |
75.00 CHF |
| Market value of the share |
Market price (end year 2022 last) |
|
102.00 CHF |
| Economic value of
share |
Economic value of equity / N |
7913 / 22 |
359,68 CHF |
.
Reasons for Acquisition of a Firm
.
.
© Bernard Jaquier, Professor Emeritus & Dr Honoris Causa, Lausanne, 2024
