Financial Valuation and Modelling
eBook also available for institutional users
Post-Covid 2019, the business world has entered a fast-forward era of disruption, digitization, realignment of value chain activities, and innovation. Valuation has become an integral part in every sphere of day-to-day business activities. Financial Valuation and Modeling is a comprehensive guide to valuation concepts, application, valuation models, and investment banking. This book also covers emerging concepts and approaches for patent & IPR valuation, brands, startup valuation, real-options valuations, M&A valuation, merger modeling, relative valuation, LBO valuation and modeling, and undervaluation and financial distress. This book uses valuation methods that are currently used by valuators across the globe, Wall Street, and Dalal Street. With each method and concept, it builds a chronological knowledge base and understanding, defining key terms, financial concepts, valuation methods, various approaches, and modeling processes throughout the book.
The book takes the readers through the various underlying concepts, methodologies, Excel-based valuation models, and simulation models to better understand the valuation concepts. The book contains tables, graphs, illustrations, real business cases, and Excel models to understand valuation across assets and investment decisions. With simple and lucid language and excellent presentation, this book would be immensely useful for MBA (Finance) students, chartered accountants, company secretaries, lawyers, and management professionals as it provides deep understanding of valuation and valuation models.
Understanding DCF Valuation
Discounted cash flow (DCF) is a valuation model used to estimate the value of a firm, project based on its expected future cash flows.
FCFF, or Free Cash Flow to Firm, is the cash flow available to all stakeholders, such as debt holders, common shareholders, etc. It is the unlevered cash flow or surplus cash flow available to a business if it was debt-free. FCFF is used to value the firm using DCF approach.
Cost of Capital
Cost of capital measures the return required to compensate the stakeholders for the risk they take. The model calculates the weighted average cost of capital raised from different stakeholders. For cost of equity, we use CAPM model.
Capital structure model helps to ascertain the capital structure modelling various debt and equity values. The model simulates the return to stakeholders and return to equity owners at different debt levels.
Beta calculated with market price data can be unlevered for various business decision applications. The three broad applications are built on unlevered beta model to determine the adjusted beta.
Undervaluation and Financial Distress
The Altman Z-score model is popularly used for determining whether a company, especially in the manufacturing space, is headed for bankruptcy.
Valuation model where relative peer comparable companies are used for valuation. The peer group comparable are selected based on the business model, target markets segment, size, etc.
Valuation model where relative peer groups transactions are used for valuation of similar transactions.
Term sheet and start-up valuation model for pre-money and post-money valuation and share issuance for a start-up firm.
M&A Valuation and Merger Modelling
Merger model is a comprehensive end-to-end M&A simulation model that models the proforma combination of acquirer and target in an M&A deal, with purchase price ratio (PPR) analysis, sources and uses of funds, proforma balance sheet with adjustments, EPS accretion and dilution deal analysis, valuation of target with DCF model, comparable model, transaction multiple model, and football field.
LBO Valuation and Modelling
Leveraged buyout (LBO) Model 1 simulates end-to-end leveraged buyout deal incorporating sources uses of funds, equity purchase price, proforma balance sheet and debt schedule, IRR return with exit values, with two-factor sensitivity analysis.
Leveraged buyout (LBO) Model 2 is about simulating end-to-end leveraged buyout deal incorporating equity purchase price, sources uses of funds, debt schedule, cash flow balance, MOIC, and IRR return with exit values, with one-factor sensitivity analysis.
Real-option model using Black–Scholes for valuing investment options to expand, delay, and abandon investments.
Intellectual Property Rights and Patent Valuation
Patent valuation model values the patent using royalty rate with DCF approach.
Other books by Dr. Sheeba Kapil
About the Author
Chapter 1 The Valuation Business
1.2 Valuation Approach
1.3 Valuation Spectrum
1.4 Asian Economies and Shareholder Return
1.5 Valuation and Share Price
Chapter 2 Business Valuation
2.2 The Historical Cost Approach
2.3 The Residual Income Approach
2.4 The Multiples Approach
2.5 The Dividend Discount Model
2.6 The Discounted Cash Flow Approach
2.7 Economic Value Added
Chapter 3 Understanding DCF Valuation
3.2 Components of DCF
3.3 Valuing Firm with DCF
3.4 Unlevering Beta and Firm Valuation
Chapter 4 Cost of Capital
4.2 Defining Cost of Capital
4.3 Opportunity Cost of Capital
4.4 Mode of Financing
4.5 Sources of Funds
4.6 Cost of Debt
4.7 Cost of Debt and Tax Advantage
4.8 Determining Cost of Debt
4.9 Synthetic Credit Rating
4.10 Cost of Equity ke
4.11 Weighted Average Cost of Capital
Chapter 5 Undervaluation and Financial Distress
5.2 Trading and Earnings Multiples and Undervaluation
5.3 Enterprise Value Multiples
5.6 Financial Distress and Undervaluation
5.7 Managing Financial Distress
Chapter 6 Relative Valuation
6.2 Steps in Comparable Analysis
6.3 Equity Value
6.4 Enterprise Value
6.6 Gross Profit Margin
6.7 Growth Metric
6.8 Credit Profile
6.9 Precedent Transaction Analysis
Chapter 7 Start-Up Valuation
7.2 Convertible Debt for Start-Ups
7.3 Equity Series Round
7.4 Pre- and Post-Money Valuations
7.5 Future Dilution
7.6 Option Pool
7.7 Preferred Stock and Liquidation Preference
Chapter 8 Private Equity and Valuation
8.2 Functions of a PE Firm
8.3 Structure of a PE Firm
8.4 Private Equity and Hedge Funds
8.5 PE Investment Strategy
8.6 Types of Private Funds
8.7 Regulation of PE Market
8.8 Factors Responsible for Private Equity Growth
8.9 PE in India
Chapter 9 M&A Valuation and Merger Modelling
9.2 Purchase Price and Stock Payment
9.3 Pro Forma Balance Sheet
9.4 Valuation of Target with Multiples
Chapter 10 LBO Economics
10.2 LBO Sponsors
10.3 LBO Mode of Target Acquisition
10.4 Criteria for Selecting LBO Candidates
10.5 LBO Capital Structure
10.6 Concept of Financial Leverage and Risk
10.7 History of LBOs
10.8 Role of Private Equity Investors
10.9 Theories of LBOs
10.10 Exit Strategies for LBO
10.11 LBOs in India
Chapter 11 LBO Valuation and Modelling
11.2 LBO Economics
11.3 LBO Valuation
Chapter 12 Real-Option Valuation
12.2 DCF and Real Options
12.3 Option Basics
12.4 Real-Option Binomial Model Approach
12.5 Real Option with the Black–Scholes Model
12.6 The Black–Scholes Equation
12.7 Categories of Real-Option Opportunities
Chapter 13 Brand Valuation
13.2 M&A and Brand Valuation
13.3 Brand Valuation Methods
13.4 IFRS and Brand Valuation
13.5 Intangible Assets
13.6 Value Drivers for Valuation
Chapter 14 Hedge Funds
14.2 Hedge Funds and M&A
14.3 Characteristic Features of Hedge Funds
14.4 Growth of Hedge Funds
14.5 Hedge Fund Indices and Databases
14.6 Types of Hedge Fund Investors
14.7 Hedge Fund Investment Strategies
Chapter 15 Investment Banks
15.2 Investment Bank Structure
15.3 Investment Bank Functions
15.4 Investment Bank Fee
15.5 Regulation of Investment Banks
15.6 Investment Banks in India
Chapter 16 Intellectual Property Rights and Patent Valuation
16.2 Categories of Intangible Assets
16.3 India and Trips
16.4 Indian IPR Regulations
16.5 Patent Law in India
16.6 Accounting for Intangible Assets
16.7 IFRS 3 and Intangible Assets
16.8 Valuation of Intangible Assets
16.9 Valuation Methods
16.10 IPR and Patent as Financial Asset
16.11 IPR and Patent Taxation
After quickly skimming the contents and a few chapters, I think the book aims to build a thorough and fundamental framework of financial valuation and modeling through various theoretical approaches and coverage of business implications in the capital market. This book also provides the comprehensive knowledge and tools that the readers may seek for addressing the increasingly complicated valuation of the businesses and investments in the real business environment.
—Dennis Wu, Managing Director, Blue Point Capital Partners
Dr. Sheeba’s book is wonderfully insightful. This is a rare book that integrates financial management concepts and practical aspects of business valuation. Complex valuation techniques as business goes through different life cycle are explained in a simplified manner. A must read.
—Ajay Garg, Director, Ernst & Young
Dr. Kapil has created a valuable resource for students and entry-level investment banking analysts. Her concise and readable text gives relevant examples and guidance on best-practice valuation techniques for the entire range of investments and acquisitions. I also recommend Dr. Kapil’s text as a good resource for more experienced practitioners who need to value an unfamiliar investment type or situation.
—Dr. Jack Farmer, Academic Director, New York Institute of Finance (NYIF)
The book Financial Valuations and Modeling is an extremely practical and great guide to anyone entering to learn valuation markets and also those working in this field. The book is very well defined, incisive, oriented and comprehensible including a lot of examples and numerical illustrations which are very handy to understand the true concepts of underlying Valuation and Modeling. I must say that this book is one of the finest books on this subject and can be used as an academic and as well as a reference book in the global corporate world. I highly recommend Dr. Kapil’s book, to all those who seek to know and understand the Financial Valuation and Modeling 'As IT IS'.
—Ritesh Kumar, Vice President, Bank of America, Dallas (DFW Markets)
A very comprehensive book on valuation providing up-to-date insights and practical advice on how to create, manage, and measure an organization's value. The case studies perfectly illustrate the valuation techniques and application in the real-world situations. The sections on Start-up valuation, Brand, and IP valuation are very appealing. A good read for both beginners and experts.
—Arvind Modi, General Partner, IFA Private Equity Fund