Enterprise Valuation- Prepare a 3 to 4 page tutorial that explains the logic of what enterprise valuation

QUESTION

Enterprise Valuation instructions

Prepare a 3 to 4 page (double-spaced)
tutorial that explains the logic of what enterprise valuation is, and how it
compares and contrasts to security valuation (stock and bond) and how it is an
application of core valuation principles.
In particular, your tutorial should explain how valuation models such as
the various discounted cash flow models and relative valuation models can be
applied to enterprise valuation. Compare
and contrast these applications of the valuation models (to enterprise
valuation vs stock vs project valuation).
Your tutorial should explain the differences (and similarities) of the
core input values (i.e. cash flows, discount rates, multiple inputs, etc.)
associated with enterprise valuation versus applications for stock or project
valuation. Your tutorial should address
various considerations for determining comparable firms for implementing
relative valuation tools. IMPORTANT
NOTE: Use the questionsat the bottom of the page to prepare
your tutorial.

You should explain the concepts of
EBITDA and Firm FCF, if necessary or applicable, and why these are appropriate
input variables for enterprise valuation.
You should also address some accounting dilemmas to be aware of during a
valuation analysis. You may use
resources from the homework as well as the internet. To enhance your tutorial,
consider using some examples from data sources such as Yahoo Finance Key
Statistics that can be used to illustrate relative valuation multiples. Click here to go to.yahoo.com/q/ks?s=CAG”>Yahoo
Finance Key Statistics Link (.yahoo.com/q/ks?s=CAG”>http://finance.yahoo.com/q/ks?s=CAG) for some examples of relative valuation metrics
applications to stock valuation and enterprise valuation.

Use appropriate subject headings
within your tutorial to organize your material as you present various topics
regarding enterprise valuation.

OQEV.1.
General thought regarding Perpetuity DCF vs
Relative Valuation Comparison – Relating the 2 Models. As a general matter, relative valuation
models suggest that price divided by some standard, or some cash flow proxy is
equal to some multiple, M. In other
words, P/CF = M, and thus the P = value = CF times M. Given this core logic, compare the perpetuity discounted cash flow valuation model to the
general relative valuation model P/CF = M and determine what “M”
equals. Hint: Perpetuity DCF model => Value = PV = CF/r,
while relative valuation multiple model => Value = PV = CF * multiple M. Thus equating these 2 values indicates that
CF/r = CF*M. Thus, what does M equal?

OQEV.2.
General thought regarding Constant Growth DCF
vs Relative Valuation Comparison – Relating the 2 Models. As a general matter, relative valuation
models suggest that price divided by some standard, or some cash flow proxy is
equal to some multiple, M. In other
words, P/ CF0 = M, and thus the P = value = CF0 times
M. Given this core logic, compare the constant growth discounted cash
flow valuation model to the general relative valuation model P/CF = M and
determine what “M” equals. Hint: Growing Perpetuity, aka Constant Growth DCF
model => Value = PV = CF0 (1+g) / (r-g), while multiple model
=> Value = PV = CF0 * multiple M.
Thus equating these 2 values indicates that CF0 (1+g) / (r-g)
= CF0 * M. Thus, what does M equal?, multiple = (1+g)/(r-g)

OQEV.3.
“Small
share block” vs “market for control or larger share block”discussion. What is
the relevance of this distinction? Note: this distinction is part of the
differences between “equity (security) valuation” vs “enterprise valuation”
perspectives. Which one (small share vs
market/large share) would be most aligned & related to enterprise
valuation? Note the mention that
enterprise valuation “…almost always necessitates
the payment of a premium above current market value” (p70). This premium is generally based on market
experience, market conditions, and negotiations, though various
industries/sectors would have “common/reasonable/typical” premium ranges that
most transactions fall within.

OQEV.4.
What is the relevance of “permanent earnings” with
regards to earnings multiples valuation approaches? How can an analyst try to identify permanent
earnings vs non-permanent earnings? If
an analyst saw an entry for “extraordinary items” or “earnings from
discontinued operations” on the income statement, what would you recommend that
they do with this amount to estimate “permanent earnings”?

OQEV.5.
Compare and contrast the “trailing multiple vs forward
multiple” perspectives. Note that a trailing multiple is also commonly
known as a current multiple. Which would
be more “objective”? Which would be more
vulnerable to subjectivity of estimates or forecasts? Given the fundamental tenant that value is
driven by future cash flows, which perspective would ideally be best for
estimating value? Note however that this
“ideal” approach is countered by the reality that this approach introduces more
uncertainty about the estimates of future variables. This difficulty is an inherent part of the
reality that valuation is fundamentally based on future outcomes, and future
outcomes are never known with certainty and thus there is always the difficulty
and risk associated with estimating future events and outcomes. Also note the balance of the simplicity of a
relative valuation multiple approach and the inherent difficulty of estimating
future operations and cash flows. This
difficulty motivates the use of market data services as noted. For an additional brief overview of this
topic, you may review Investopedias review at.investopedia.com/articles/investing/041013/differences-between-forward-pe-and-trailing-pe.asp”>http://www.investopedia.com/articles/investing/041013/differences-between-forward-pe-and-trailing-pe.asp

OQEV.6.
One of the key first steps in apply a relative
valuation multiple approach is the identification
of comparable companies. This is a key step, as multiples can vary
considerably between industries and companies.
What are some considerations when identifying comparable companies? Use your own thoughts and/or information from
the text and/or internet.

OQEV.7.
Why
is a valuation range generally more
relevant and meaningful and credible than a “point estimate” valuation? Explain the logic of a valuation range. Explain how the valuation range concept
relates to sensitivity analysis or scenario analysis, and simulation analysis.

ANSWER:

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