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Advanced Valuation Techniques

This session covers the more advanced techniques used in relative and fundamental valuation. This includes the value driver for terminal value, discounting with a variable valuation date, the extended WACC formula, and sum of the parts valuation.

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11 Lessons (35m)

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  • Description & Objectives

  • 1. Value Driver Formula

    03:45
  • 2. Value Driver Formula Workout

    03:27
  • 3. Discounting with Variable Valuation Date

    04:08
  • 4. Discounting with Variable Valuation Date Workout

    04:58
  • 5. Extended WACC Formula

    03:10
  • 6. Extended WACC Formula Workout

    03:42
  • 7. Sum of the Parts Valuation

    03:23
  • 8. Sum of the Parts Valuation Workout

    02:47
  • 9. Sum of the Parts with Finance Operations

    01:52
  • 10. Sum of the Parts with Finance Operations Workout

    04:09
  • 11. Advanced Valuation Techniques Tryout


Prev: DCF Valuation Next: Pulling The Analysis Together

Discounting with Variable Valuation Date Workout

  • Notes
  • Questions
  • Transcript
  • 04:58

Calculating the DCF of a company mid-way through its fiscal year.

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Transcript

In this workout, an analyst has prepared some full-year forecasts and we're asked to use the assumptions and data provided to calculate enterprise value at the 1st of March 2022. Now, the first thing to note is that this is a company with a 31st of December year end. So we're valuing the company partway through its financial year. We've also been asked to assume that cash flows fall in the middle of each period, so we're gonna use mid-period discounting. Now, you can see below, we've been given a long-term growth rate assumption and a cost of capital assumption but the very first thing that we need to do is to calculate the cashflow date for each forecast period. Now, I'm gonna do that in row 14 and for the first forecast period, the cash flow date is the midpoint between the valuation date and the first financial year end. Now, we'll use the average function for this and we'll grab the valuation date and the financial year end. So that gives us a cashflow date of the 31st of July 2022 for our first forecast period. Now, in subsequent years, the cashflow date is the midpoint between financial year ends. So although I'm still gonna use the average function in subsequent years, it's gonna be the average of the financial years. So we can see that the cashflow date for our second forecast period is the 1st of July 2023 and I can then reuse that formula for subsequent years. So we now have our cashflow date. We need to convert that though into the number of days that we're gonna discount the cash flows over. And for that, I simply need to calculate the difference between my cash flow date and my valuation date. And if I lock my reference to the valuation date, I can reuse that formula in each forecast period.

So we now have the number of days that we need to discount our cash flows over, but for my discount factor, I need the number of years rather than number of days. So I simply need to take my days for discounting and divide them by 365, and that will give me my year count and I can reuse that formula for each forecast period. The next thing to do is to then take that year count and pop it into my discount factor. So I'll just use my standard discount factor formula, which is one divided by one plus my cost of capital and I'm gonna lock my reference to that cell so I can reuse the formula and that's raised to the power of my year count. So I have a discount factor for my first forecast period of 96.5%. And when I roll that forward, I then have a discount factor for each forecast year as well. The final step before we calculate enterprise value is to make an adjustment for my first forecast year's cash flows because I'm only going to be discounting 10 months' worth of cash flows because we're valuing it on the 1st of March. So I just need to calculate the amount of cash flows which are available for discounting. For that, I need to calculate the difference between the financial year end and my valuation date, divide that by 365, and then multiply that by the cash flows for the first forecast year. So that tells me that we actually have free cash flows available of 2,647.5. Now, the remaining steps are gonna be completely as we would for any other DCF calculation. So we need to calculate the terminal value. Now, the terminal value is gonna be calculated at the last cashflow date. That's the 1st of July 2025 because we're gonna use the growth perpetuity formula, which automatically calculates the terminal value at the last cashflow date. So we'll take our final year's forecast cash flow, multiply it by one plus the long-term growth rate, and then divide that by the cost of capital less our long-term growth rate. So that gives me a terminal value of 62,958.8. The final steps then are to calculate the present value of our free cash flows for each year. Remembering that in the first forecast period, we need to use the free cash flows, which are actually available for discounting. And in subsequent years, it's the full free cash flow, which is available multiplied by the discount factor.

So that gives us our present value of each free cash flow for each forecast period. We also need to calculate the present value of our terminal value. Now, because that terminal value is calculated at the 1st of July, 2025, we can use our discount factor in our final year for calculating the present value of that terminal value. So we take our terminal value and multiply it by our discount factor.

The final step is then just to calculate our enterprise value. So we'll add the present value of our terminal value and the sum of our present value of our free cash flows and that gives us an enterprise value of 58,343.3.

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