The Duke MBA Finance Club

1. The Duke MBA Finance Club Education Series Session 3 – Introduction to Valuation

2. Table of Contents • Discounted Cash Flow Analysis • Comparable Companies Analysis • Selected Transactions Analysis • Sum-of-the-Parts Valuation

3. Valuation Categories Relative Intrinsic Discounted Cash Flow Comparable Company Comparable Transaction

4. Summary Valuation Analysis - Example

5. Discounted Cash Flow Analysis • Derives the inherent value of an enterprise or asset • By determining the NPV of the expected future cash receipts and outflows (i.e. cash flow) generated by such enterprise or asset to all providers of capital (i.e. the unlevered FCF) • Using the weighted average cost of capital (“WACC”) as a discount rate to reflect the time value of money and the riskiness of the cash flows • As of a specific valuation date

6. DCF Analysis (Cont’d)

7. Building Blocks of Unlevered FCF

8. DCF Valuation Output - Example

9. Unlevered Free Cash Flow EBIT (IS) Less: Taxes (IS) Plus: Depreciation (IS or CF) Less: Capital Expenditures (CF) + / - : Changes in Working Capital (BS) Unlevered Free Cash Flow Sources:

10. Terminal Value • Terminal Value can represent as much as 80% of total company value • Two ways to calculate: • Perpetuity Growth Model: Free Cash Flows x (1 + growth rate) (WACC – growth rate) • Exit multiple:EV/EBITDA multiple from comps applied to unlevered free cash flows of company in terminal year

11. DCF Analysis Summary – Example

12. Comparable Companies Analysis Used to perform relative valuations of public companies or to generate benchmarks for the valuation of private companies

13. Commonly Used Multiples

14. Selected Companies Analysis – Example

15. Comparable Transactions Analysis Used to derive multiples from relevant precedent transactions. It is based on selected precedent transactions in the same industry as the target company to establish valuation benchmarks in a change of control scenario • Cons • Public data on past transactions can be limited and misleading • Precedent transactions are rarely directly comparable • Not all aspects of a transaction can be captured in multiple valuation (e.g. commercial agreements, governance issues, specific findings from due diligence, synergistic benefits) • Values obtained often vary over a wide range and, therefore, can be of limited use • Market conditions at the time of a transaction can have substantial influence on valuation (e.g. business or industry cycle considerations, competitive environment at the time of the transaction, scarcity of the asset at the time of the transaction) • Pros • Based on public information • Realistic in the sense that past transactions were successfully completed at derived multiples. The analysis, therefore, indicates a range of plausibility for offered multiples or premia to unaffected stock prices • May show trends within industry segments such as rapid consolidation of certain sub-segments, foreign purchasers and financial purchasers • Provides guidance to assess likely interlopers and their willingness to pay

16. Selected Transactions Analysis – Example

17. Sum-of-the-Parts Valuation – Example