Introduction to Business Valuation (CFI) Course Notes
https://corporatefinanceinstitute.com/course/introbusinessvaluation/
https://www.credential.net/6424b711a6894088b6f74e389cedff20
The examples and spreadsheets included in the course are super useful! All also available here: https://learn.corporatefinanceinstitute.com/resources/templates/
General Corporate Finance
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 preinterest, use enterprise value multiple (as unaffected by capital structure): EV/sales, EV/EBIDTA, EV/EBIT
If metric is postinterest, use equity value multiple (affected by capital structure due to interest payments): P/E, P/B
DCF Valuation
Pros and Cons
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 
Free Cash Flow
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
Difficulties
 Hard to estimate discount rate for private company
 Hard for young or financially distressed companies
Stage 1: forecast; stage 2: terminal value
UFCF =
 EBIT * (1  tax rate) + depreciation and amortisation  capital expenditures  net increase in working capital
 Note: EBIT (aka operating income) * (1tax rate) = net operating profit after tax (NOPAT)
 Net income + aftertax 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
WACC
 Yield not coupon
 Yield * (1  tax rate)
Capital Asset Pricing Model (CAPM)
 Riskfree rate (e.g. yield of longterm govt bond) + premium (beta [change in stock return vs overall market] * equity risk premium)
 Alpha = firmspecific 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
 Rsquared correlates stock and market → if too low, better to use industry beta
 Industry beta → unlever beta (levered beta / (1+(1tax rate) * (debt/equity)) → average → relever beta (unlevered beta * (1+(1tax rate)*(debt/equity))
Terminal Value
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
NPV
=NPV(rate,values_1,value_n)
Assumptions
 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
XNPV
=XNPV(rate,value,dates)
Assumptions
 Initial cash flow is not discounted
 Occur at regular intervals
 On a daily basis
Slightly more accurate because of leap years
IRR
Discount rate when NPV = 0 (hurdle rate)
IRR > CoC, profitable → invest!
=IRR(values,[guess])
Assumptions
 At least one positive and one negative value
XIRR
=XIRR(values,dates,[guess])
Assumptions
 First value is usually negative
 Values in chronological order
 Dates correspond to the periodic cash flows
Slightly more accurate because of leap years
Relative Valuation
Comparable Companies or Precedent Deals
Pros and Cons
Pros  Cons 

Simple  Can be too simplistic 
Observable data  All companies are different 
Reflects current market conditions  
For M&A, can show premium 
Multiples
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 longterm 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 nonbanks 
Process

Select companies for similar:
 Industry
 Geographical location
 Size and growth profiles
 Profitability
 Accounting policies
 Capital structure
 Extra for precendents
 Recent deals
 Buyer
 Strategic buyer will pay more to benefit from synergies
 PE buyer will pay less as no synergies to be gained
Capital IQ can provide this data

Enter data
 Note: Purchase price is effectively EV for precedent valuation

Value using multiples
Football Field Chart
x = valuation techniques, y = value
 Create table: min, midpoint, max for each valuation method
 Create stacked column
 No fill for max and min
 Data labels for max and min
 Average valuation = manually drawn line
 Textbox with formula (TEXT function for formatting)