Mario Massari
Corporate Valuation
Corporate Valuation
Measuring the Value of Companies in Turbulent Times
MARIO MASSARI
GIANFRANCO GIANFRATE
LAURA ZANETTI
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Copyright © 2016 by Mario Massari, Gianfranco Gianfrate, and Laura Zanetti.
All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data is available:
ISBN 9781119003335 (Hardcover)
ISBN 9781119003359 (ePDF)
ISBN 9781119003342 (ePub)
Cover Design: Wiley
Cover Image: © Alicia_Garcia/iStockphoto
Preface
A ROADMAP FOR THIS BOOK
The value of a business is essentially related to three main factors: its current operations, its future prospects, and its embedded risk. The advent of globalization, new technologies, and the consequences of the recent financial crisis completely reshaped these elements, thus making more elusive the definition of company “value” and of the metrics to measure it.
Firstly, firms do business in a context becoming progressively faster, more diverse, and more interconnected so that also valuing their current operations is a task less straightforward than in the past. Secondly, forecasting future macro and business related dynamics is getting less standardized in a business environment characterized by inherent difficulty in predicting changes – both on the upside and on the downside – and by constant innovation for companies that are more and more exposed to hyper-competitive industry dynamics. Thirdly, new types of risks and competition, so far unknown (think for example of climate change risks), are shaping both the operational and the financial side of enterprises, redefining the importance of managing uncertainty as a key element to achieve success.
In this context, the book is organized in three parts. In the first part of the book (Chapters 1 to 4), the main focus is on the relationship between value and business/economic uncertainty. In an environment characterized by an increased complexity where the concept of value itself is challenged, we provide a definition of corporate value based on a holistic approach, thus encompassing both the accounting and the financial perspective (Chapter 1).
Moving to relationship between uncertainty and value, we focus on the business modeling tools available to forecast corporate results and determine company value. Depending on the level of uncertainty, on the information available, and the time and effort investable in the analysis, it is possible to pick one out of three possible approaches. We start from a standard situation when uncertainty is limited and there is a clearly dominant, likely scenario (Chapter 2).
When there is a significant amount of uncertainty and there is one or more scenario(s) that are alternative to the most likely one and that could have extreme – either positive or negative – consequences for company's value, the scenario-based approach is to be preferred (Chapter 3).
Stochastic simulation (Chapter 4) is to be used when detailed data is available (or assumed) regarding the probability distributions of key variables affecting future cash flows. This approach, as discussed, is mathematically complex but it can be handled by software packages easily available.
Having tackled the uncertainty modeling aspects, the second part of the book is focused on the main valuation approaches that can be used in practice. The chapters from 5 to 13 present therefore the main principles of corporate valuation starting from the reorganization of the financial statement data and business plan figures (Chapter 5). The relationship between financial leverage and corporate value is then presented (Chapter 6), followed by the discussion of how corporate growth and, financial leverage are interrelated (Chapter 7).
Chapter 8 presents the main techniques and tools to estimate the cost of capital. From Chapter 9 to Chapter 11, the discounted cash flow analysis is presented in depth highlighting the various approaches that can be used in practice.