Introduction to Business Valuation (CFI)


The examples and spreadsheets included in the course are super useful! All also available here:

Asset valuation technique (based on replacement cost, liquidation value) isn’t used much so not in this course

Enterprise value (assets) = equity value (market cap = shares * price) + net debt (debt - cash)

Capital structure = debt to equity ratio

Payment order: vendors/employees (COGS) → debt holders (interest) → government (tax) → shareholders (net earnings)

Enterprise value and equity value both have pros and cons for valuation

If metric is pre-interest, use enterprise value multiple (as unaffected by capital structure): EV/sales, EV/EBIDTA, EV/EBIT

If metric is post-interest, use equity value multiple (affected by capital structure due to interest payments): P/E, P/B

Pros Cons
Theoretically most correct Only as good as the inputs (of which there are many)
Opportunity to learn about the company/industry Easier to manipulate (by adjusting inputs)
Less prone to market conditions Complex doesn’t necessarily mean precise

Unlevered free cash flow (UFCF)

  • A.k.a. free cash flow to the firm
  • Before paying debt
  • More common
  • DCF derives EV
  • Use WACC

Levered free cash flow (LFCF)

  • After met debt obligations


  • Hard to estimate discount rate for private company
  • Hard for young or financially distressed companies

Stage 1: forecast; stage 2: terminal value


  • EBIT * (1 - tax rate) + depreciation and amortisation - capital expenditures - net increase in working capital
    • Note: EBIT (aka operating income) * (1-tax rate) = net operating profit after tax (NOPAT)
  • Net income + after-tax interest expense (interest expense * (1 - tax)) + depreciation and amortisation - capital expenditures - net increase in working capital
  • EBITDA - unlevered cash tax (note: harder to get) - capital expenditures - net increase in working capital


  • Yield not coupon
  • Yield * (1 - tax rate)
  • Risk-free rate (e.g. yield of long-term govt bond) + premium (beta [change in stock return vs overall market] * equity risk premium)
  • Alpha = firm-specific risk
    • Diversification of stocks removes alpha within a portfolio
  • Beta = market risk (beta of market = 1)
    • If company has beta of 1.25 then it is riskier than the market → market +/- 1%, stock +/- 1.25%
  • Return vs risk graph shows risk premium
  • R-squared correlates stock and market → if too low, better to use industry beta
  • Industry beta → unlever beta (levered beta / (1+(1-tax rate) * (debt/equity)) → average → relever beta (unlevered beta * (1+(1-tax rate)*(debt/equity))

Note: Both must discounted back to present value

Note: Assume last day of fiscal year

Perpetuity Growth Method

TV = Last forecast UFCF * (1 + g) / (WACC - g)

Note: g is often market growth rate

Terminal Multiple Method

TV = Last forecast EBITDA * EV/EBIDTA

Note: Not always EBITDA, but commonly



  • Discounts all cash flows
  • Occur at regular intervals
  • Occur at end of the period/year

For cash flow occurring in middle of period/year: =NPV(rate,values_1,value_n)*(1+rate)^0.5



  • Initial cash flow is not discounted
  • Occur at regular intervals
  • On a daily basis

Slightly more accurate because of leap years

Discount rate when NPV = 0 (hurdle rate)

IRR > CoC, profitable → invest!



  • At least one positive and one negative value



  • First value is usually negative
  • Values in chronological order
  • Dates correspond to the periodic cash flows

Slightly more accurate because of leap years

Comparable Companies or Precedent Deals

Pros Cons
Simple Can be too simplistic
Observable data All companies are different
Reflects current market conditions
For M&A, can show premium

Multiples affected by

  • Growth rates
  • Management team
  • Mispricing
  • Accounting policies
  • For precendents:
    • Age of deal
    • Lack of deals
Multiple Pros Cons
EV/Revenue Younger companies haven’t reached profitability Doesn’t account for costs

Revenue is an incomplete measure of performance
EV/EBITDA Commonly used

Used for industries with large amounts of long-term assets
Net income is the bottom line

EBITDA doesn’t include reinvestment
P/E Used for mature, publicly traded companies Demoniator based on accrual accounting which can be manipulated
P/B Used for banks Limited usefulness for non-banks


  1. Select companies for similar:

    1. Industry
    2. Geographical location
    3. Size and growth profiles
    4. Profitability
    5. Accounting policies
    6. Capital structure
    7. Extra for precendents
      1. Recent deals
      2. Buyer
        1. Strategic buyer will pay more to benefit from synergies
        2. PE buyer will pay less as no synergies to be gained

    Capital IQ can provide this data

  2. Enter data

    1. Note: Purchase price is effectively EV for precedent valuation
  3. Value using multiples

x = valuation techniques, y = value

  1. Create table: min, midpoint, max for each valuation method
  2. Create stacked column
    1. No fill for max and min
    2. Data labels for max and min
    3. Average valuation = manually drawn line
    4. Textbox with formula (TEXT function for formatting)