Valuation Of Private Companies

1736 words, 7 pages

Intro Sample...


Strength: Reflects actual benefits that investors care about (cash flows) better than other methods. Weakness: Relies heavily on projections. Valuations are only as good as these projections!

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Different DCF Methods
Net Present Value Approach
Discount Free Cash Flows at WACC.

Adjusted Present Value
Calculate the value of the ‘all-equity’ firm, then add the present value of tax shields. Useful approach when leverage ratios are projected to change over time. This often occurs in buyouts.

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Valuing Firms using Discounted Cash Flows
VF = PV(FCFT) + PV(TVT) + NOA VF = the value of the business PV(FCFT) = the present value of the total free cash flows from operations during the forecast period PV(TVT) = the present value of the total terminal or residual value at the end of the forecast period NOA = the market value of excess or non-operating assets (including assets that could be sold without affecting operations such as excess land, an extra building, etc.)
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Valuing Firms Using Discounted Cash Flows
The total value of a firm also equals the sum of value of the claims against its cash flows.
where VD = the market value of debt and VE = the market value of the firm's equity.

VF = VD + VE

This suggests that the value of the equity claims against a firm can be calculated as: VE = VF - VD.
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Taxes and WACC
If you discount using the WACC approach, cash flows have to be projected just as you would for a capital investment project.
Do not deduct interest. Calculate taxes as if the company were all-equity financed. The value of interest tax shields is picked up in the WACC formula.

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The Weighted Average Cost of Capital (WACC) Formula

?D ? ?P ? ?E ? WACC = (1 ? Tc )? × rD ? + ? × rP ? + ? × rE ? V V V ? ? ? ? ? ?

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After-Tax WACC
Example - Sangria Corporation
Balance Sheet (Market Value, millions) Assets 125 50 25 50 Total assets 125 125

Debt Preferred Equity Common Equity Total liabilities

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