Corp Fin 101 Equity Valuation

A zoom-in, zoom-out, connect-the-dots take on FCF models, Dividend discount models, and equity valuation

Last updated 2022-01-10 | 3.9

- Understand company valuation
- the role of cash flows
- risk and return
- Apply important types of models: Dividend-Discount models
- Free Cash Flow Models and Relative-Value models
- Calculate the cost of capital to a company

What you'll learn

Understand company valuation

the role of cash flows

risk and return

Apply important types of models: Dividend-Discount models

Free Cash Flow Models and Relative-Value models

Calculate the cost of capital to a company

* Requirements

* This course assumes no prior knowledge of accounting or finance

Description

A zoom-in, zoom-out, connect-the-dots tour of Equity valuation

Let's parse that

'connect the dots': Equity valuation is conceptually complex - that's why plenty of folks mechanically follow the procedures, but don't understand the valuation they end up with. This course makes sure that won't happen to you.
'zoom in': Getting the details is very important in equity valuation - a small change in an assumption, and the value output by your model changes dramatically. This course gets the details right where they are important.
'zoom out': Details are important, but not always. This course knows when to switch to the big picture.

What's Covered:

Equity Valuation Introduced: intrinsic value, price, valuation and market capitalisation.
Absolute Valuation Techniques focus on getting a point estimate of a company's intrinsic value. This is invariably done by discounting a series of cash flows projected into the future.
Net Present Value and Discounting Cash Flows: NPV is a crucial concept in finance - and in life. Understand what the present value of an asset is, how it relates to the rate of return on the asset, and how risky cash flow streams are handled.
CAPM, Weighted Average Cost of Capital and Required Equity Return: These are key concepts required in valuing the risky stream of cash flows that represent a company's value.
Dividend Discount Models: A family of absolute value models that discount the dividends from a stock. Despite their seeming simplicity, there is some real wisdom embedded into these models. Understand them.
Free Cash Flow Valuation: FCF valuation is a serious valuation tool. Understand how to use it right - and when not to use it.
FCFF and FCFE: The fine print on calculating Free Cash Flows to the Firm, and to Equity holders.

Who this course is for:

Yep! Business majors and aspiring MBAs
Yep! Finance professionals who are rusty on equity valuation
Yep! CFA Candidates
Yep! Accountants looking to strengthen their applied corporate finance skills
Yep! Non-finance professionals, aspiring entrepreneurs looking to understand how companies are valued

Course content

9 sections • 50 lectures

You, Us & This Course 1 lectures

You, Us & This Course Preview 01:50

This is a zoom-in, zoom-out, connect-the-dots take on equity valuation, ideal for finance professionals, MBAs, and aspiring entrepreneurs with an eye on the money.

Price, Value and Valuation 4 lectures

Intrinsic Value Preview 02:42

In finance, as in life, price and value are all too easy to mix up.

Valuation Models Preview 01:38

Intrinsic value is intangible, so it can only be estimated (by models), not measured.

Valuation and Market Cap Preview 04:38

For a publicly traded firm, market capitalisation is synonymous with valuation. The difference between value and valuation is what keeps the investing industry alive and awake, however.

A Taxonomy of Valuation Methods Preview 09:09

Going concern, liquidation, or sum-of-the-parts? Take your pick of valuation models.

NPV and Discounting Cash Flows 8 lectures

Absolute Valuation Models and NPV Preview 04:15

Absolute valuation models focus on a point estimate of intrinsic value. They are invariably based on the concept of Net Present Value.

Compound Interest and NPV Preview 10:28

The idea of Net Present Value (NPV) is one of the most fundamental in all of finance - and it all starts with compound interest.

NPV and Price Preview 07:28

NPV and price are related: if NPV > price, the asset is undervalued, and should be bought ASAP! If NPV < price, the asset is overvalued - don't buy it.

A Simple NPV Example Preview 04:35

Calculate the NPV of a cash flow in the future. The cash flow is deterministic, btw.

Future Value of a Present Cash Flow Preview 01:53

Semi-Annual Compounding Preview 04:11

The higher the compounding frequency on the risk-free instrument, the higher the discount rate.

Continuous Compounding Preview 03:43

Taken to its limit, compounding could be continuous. This yields the highest possible discount factor, given a certain discount rate.

NPV of a Stream of Cash Flows Preview 05:00

Calculating the NPV of a stream of cash flows in the future is one of the most common use-cases in all of finance. Its used across bond math as well as corporate finance.

Valuing Uncertain Cash Flows 11 lectures

Discounting Risky Cash Flows Preview 11:06

Discounting risky cash flows presents a challenge: you can either increase the discount rate (by risk-adjusting it) or decrease the cash flow (replace it with its certainty equivalent). Almost everyone does the former.

Risk Return Models Preview 11:17

Assets with the same risk should offer the same return. This is the principle underlying risk-return models. We see a simple example of a risk-return model, calculating the cost of debt for a firm from its credit rating and the duration of the borrowing.

The Capital Asset Pricing Model Preview 16:53

The CAPM is the most widely known and widely used risk-return model for equities. Understand how the CAPM works, what market beta is, and how the ERP can (or rather can not) be cleanly measured.

WACC: The Weighted Average Cost of Capital Preview 06:49

The overall cost of capital for a firm with both debt and equity is given by the wacc. This is a weighted average of the costs of debt and equity. The weights used in the average? The market prices of debt and equity respectively.

Tax adjusting the cost of debt Preview 06:43

Interest expenses are pre-tax, while dividend payments are not. So, from the point-of-view of a firm, we need to reduce the cost of debt using an adjustment for the tax shield.

WACC for consistency Preview 02:21

Be careful to use the WACC for all cash flows related to a firm. This leads to a few strange situations (eg negative cash flows) but at least it is consistent and transparent.

Beta: Top-down or bottoms-up? Preview 05:57

Top-down betas are obtained from regression, but are very noisy (standard errors in regressions are quite large!) Instead, we should use bottoms-up betas, especially for conglomerates. Understand the intuition, as well as the outline of the procedure.

Market Beta or Total Beta? Preview 03:34

If you are valuing a private company, the beta you really ought to use in your WACC calculation is not the market beta, its the total beta.

Levering and Unlevering Betas Preview 02:55

The beta that we get via regression, or (on Yahoo FInance:-)) is a levered beta, which reflects the market co-movement of a company at its current level of leverage. There is a simple way to unlever and relever betas.

Debt and Operating Leases Preview 06:59

Debt is an important part of WACC. Don't forget to take operating leases as well.

Cost of Debt: Some additional factors Preview 01:41

Don't forget leases, including operating leases!

Dividend Discount Models 7 lectures

Dividend Discount Models Preview 09:10

Dividend Discount Models are a specific family of absolute value models that discount dividends. These can seem simplistic, but have a lot of simple wisdom embedded within.

Present Value, Future Value and Capital Appreciation Preview 05:38

DDM have a neat relationship between the price of a stock today, its price in the future, and the dividends in the period in between.

Modeling Future Dividends Preview 06:25

Depending on the company's growth and stage in its life-cycle, different DDM profiles can be applied to model its growth.

Cash Cows: Constant Dividends and Growth Opportunities Preview 09:34

A cash cow is a company with zero growth. Cash cows are not as uncommon as you might think - look no further than many state-owned resource firms.

Sustainable Growth Rate of Equity Preview 10:55

Gordon Growth Model Preview 05:27

The Gordon Growth Model works best for stable-growth, dividend paying companies.

The h-Model Preview 04:38

Micro Econ 101 dictates that firms experience a period of extra-ordinary growth early in their lives, before perfect competition sets in. At that point, growth subsides. We explore a few Dividend Discount Models that allow us to model this.

Free Cash Flow Models 1 lectures

Introducing FCF Valuation Preview 13:59

Free Cash Flow valuation is conceptually similar to Dividend Discount Valuation, but the FCF method can be used for a far wider range of firms, and in a far wider range of situations. This is the real deal in equity valuation.

FCFF and FCFE Details 7 lectures

Introducing FCFF and FCFE Preview 10:16

FCFF is free cash flow available to all providers of capital to the firm (both debt and equity). FCFE is the free cash flow available only to equity holders.

FCFF from CFO Preview 10:17

The easiest way to calculate FCFF is from the Cash Flow Statement. FCFF is basically Cash Flow from Operations (CFO), minus Investments in Fixed Assets, plus tax-adjusted interest expense.

FCFE from FCFF Preview 03:23

FCFE is simply FCFF minus payments from the equity holders to the debt holders, plus payments from debt holders to equity holders:-)

FCFF or FCFE? Also, the APV Method Preview 05:39

FCFF and FCFE each have their strengths and weaknesses. We also discuss an alternative discounting method of valuation, called the Adjusted Present Value (APV) method, which discounts FCFF using the cost of equity. This allows valuation with having to calculate the WACC, but it is tricky for another reason: determining the costs of financial distress.

Why not Net Income or EBITDA? Preview 06:57

There are 2 reasons why Net Income can't be used: for one, it does not take into account investments that are required to maintain the operations of the firm in the future, and for another, it includes various non-cash items, notably depreciation. EBITDA has both of these flaws, and in addition, it also has a third: it is a pre-tax measure. And of course taxes have to be deducted from any measure of cash flows to the capital providers of a firm (the government is not, usually, a capital provider!)

FCFF from Net Income or EBITDA Preview 08:26

Tying Up Loose Ends Preview 09:29

We discuss non-cash charges, preferred stock (include in FCFF, remove from FCFE), non-operating assets, and forecasting FCFF and FCFE

Relative Valuation 5 lectures

Introducing Relative Valuation Models Preview 06:36

The P/E Ratio: Pros and Cons Preview 06:05

Mechanics of calculating the P/E ratio Preview 08:38

Market P/E and Macro-economics Preview 04:31

Other Valuation Ratios: P/B and EV/EBITDA Preview 05:53

Capital Structure and the M-M Propositions 6 lectures

Capital Structure Introduced Preview 17:28

The proportion of debt and equity that a firm chooses is known as its capital structure. We also look at 3 important decisions that firms have to make: the investment decision, the financing decision, and the dividend decision.

Leverage, and the second M-M proposition Preview 16:21

The second of the famous Modigliani-Miller propositions is easier to arrive at intuitively than the first, so let's start there - we see how leverage makes good times better, and bad times worse.

No Free Borrowed Lunch: The First M-M Proposition Preview 13:14

We now circle back to the first, and more famous, Modigliani-Miller proposition: leverage, by itself can not change the value of a company.

Behind the Numbers: The Intuition Behind M-M Preview 07:53

The Inevitability of Taxes Preview 09:09

The M-M propositions, as we studied them so far, made some important assumptions about the world a firm operated in - the most important and unrealistic of these was the absence of taxes. Let's now factor in the effect of taxes.