Valuation Methods and Shareholder Value Creation

Abstract

This book contains materials of the MBA and executive courses that I teach in IESE Business School. It also includes some material presented in courses and congresses in Spain, US, Austria, Mexico, Argentina, Peru, Colombia, UK, Italy, France and Germany. The chapters have been modified many times as a consequence of the suggestions of my students since 1988, my work in class, and my work as a consultant specialized in valuation and acquisitions. I want to thank all my students their comments on previous manuscripts and their questions. The book also has results of the research conducted in the International Center for Financial Research at IESE. Part I – Basics of Valuation Methods and Shareholder Value Creation Part II – Shareholder Value Creation Part III – Rigorous Approaches to Discounted Cash Flow Valuation Part IV – Real options and brands The third part examines in greater depth discounted cash flow valuation and starts with the analysis of the eight most commonly used methods for valuing companies by cash flow discounting: - Free cash flow discounted at the WACC; - Equity cash flows discounted at the required return to equity; - Capital cash flows discounted at the WACC before tax; - APV (Adjusted Present Value); - The business’s risk-adjusted free cash flows discounted at the required return to assets; - The business’s risk-adjusted equity cash flows discounted at the required return to assets; - Economic profit discounted at the required return to equity; and - EVA discounted at the WACC. It is shown how all eight methods always give the same value. This result is logical, since the methods analyze the same reality under the same hypotheses; they only differ in the cash flows taken as starting point for the valuation.