Valuation Project
Project Description
• This project is designed to apply the valuation techniques we learn in class on companies in the real world.
• It is a group project, with each person in the group picking one company to value.
Step 1: Pick the companies
• Pick a group of companies (one for each person in the group), making sure you have at least one which meets the following criteriat:
– A company which has negative earnings currently (You can download a data set that contains all firms that reported negative earnings in the most recent year and had high leverage)
– A company which has high-growth potential. Look for companies whose earnings or revenues are expected to grow > 50% over the near future. (You can download a data set that contains firms with revenue growth that exceeded 50% over the last year
– A non-U.S. company
– A service company (retail firm, financial service firm ..)
Step 2: Discounted Cashflow Valuation
Value the stock in each company using a discounted cash flow model (You have the discretion to choose the model that you think is most appropriate for that company)
• Estimate how sensitive your value estimates are to changes in your assumptions.
• What are the key drivers of value for your company? (Identify the key assumption or variable that you would focus on in doing your discounted cash flow valuation. Examples would include the growth rate assumption, the growth period assumption, the net capital expenditure assumption …..)
• Present your valuation in a picture, summarizing the assumptions that you have made. (Be as creative as you can in doing this.)
Step 3: Value relative to comparables
• Prepare a list of “comparable” companies, using criteria that you think are appropriate
• Choose a multiple that you will use in comparing firms across the group. (You might have to try a number of multiples out before making this choice)
• Evaluate your company against the comparable firms using the multiple that you have chosen for your valuation.
Step 4: Using Option Pricing Models
• If your negative earnings firm has high leverage, value it using the option pricing model.
• If it does not, do not use the option pricing model.
Step 5: Final Value Estimate and Recommendation
• Evaluate whether your firm is under or over valued.
• Consider the values you have obtained from the discounted cash flow, relative and option valuation models.
o How would you reconcile the different estimates of value?
