Valuation Modelling & Analysis: DCF, Earnings Multiples & LBO Models

Valuation Modelling & Analysis: DCF, Earnings Multiples & LBO Models

Euromoney Training
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Course objectives 'Valuation Modelling and Analysis: DCF, Earnings Multiples and LBO Models’ will review lessons on valuation, risk assessment and forecasting that can be derived from the financial crisis. Participants will discuss mistakes made in valuing sub-prime loans and other famous valuation errors. This provides context for other subjects in the course. Summary of course content Valuation lessons from the current financial crisis How structured financial models can be created that clearly define risks and value without being overly complex The fundamental factors that underlie valuation and how can they be used in practice What lies behind multiples such as the P/E and the EV/EBITDA …

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Course objectives 'Valuation Modelling and Analysis: DCF, Earnings Multiples and LBO Models’ will review lessons on valuation, risk assessment and forecasting that can be derived from the financial crisis. Participants will discuss mistakes made in valuing sub-prime loans and other famous valuation errors. This provides context for other subjects in the course. Summary of course content Valuation lessons from the current financial crisis How structured financial models can be created that clearly define risks and value without being overly complex The fundamental factors that underlie valuation and how can they be used in practice What lies behind multiples such as the P/E and the EV/EBITDA ratios and how these multiples can be used in valuation How to effectively present risk analysis in valuation analysis models Whether Monte Carlo simulation and mathematical techniques can realistically be used to assess risk and compute value The valuation of debt and measurement of debt capacity to provide alternative ways to value investments The creation of models specifically used to evaluate LBOs, project finance and M&A Methodology Case studies, hands-on analysis and template models will be used as the primary teaching tools in the programme. If you are interested in practical mechanics of excel (macros, combo boxes, offset and indirect functions etc.) these can also be discussed after the course. Other than the instruction in how to build, use and analyse financial models, you will receive a comprehensive suite of financial modeling software on CD that includes a number of template models and Excel add-ins. The software consists of corporate models that accept historic financial data and generate alternative valuation measures; M&A models that consolidate two companies using alternative financing assumptions and produce accretion and dilution estimates; project finance models that measure the effect of alternative elements in a cash flow waterfall including debt service reserves, junior debt, covenants, defaults and pre-payments; LBO models that measure the debt capacity of a transaction; option pricing models that account for alternative structures; and debt valuation spreadsheets, Monte Carlo simulation models, tornado diagram and sensitivity analysis. Computer-based exercises This course will make extensive use of modelling exercises in Excel® All delegates should bring their laptops to facilitate in-class studies and exercises. Free CD to take away Delegates will receive a comprehensive suite of financial modelling software on a CD that includes a number of template models and excel add-ins. Pre-course survey Book early and fill in our pre-course survey to ensure your specific needs are met in the course by the trainer. Who should attend? Corporate Finance/Corporate Treasury Capital Markets Audit/Product Control/Risk Management/ALM Research and Analysis Sales and Trading Investment Management Origination Securitisation/Syndication Structured Finance Money Markets/Repo Systems Programming Funding Government/Agency Funding and Investment Regulation/Compliance/Documentation FTS Eligible This programme is approved for listing on the Financial Training Scheme (FTS) Programme Directory and is eligible for FTS claims subject to all eligibility criteria being met. Please note that in no way does this represent an endorsement of the quality of the training provider and programme. Participants are advised to assess the suitability of the programme and its relevance to participants’ business activities or job roles. The FTS is available to eligible entities, at a 50% funding level of programme fees subject to all eligibility criteria being met. FTS claims may only be made for programmes listed on the FTS Programme Directory with the specified validity period. Please refer to www.ibf.org.sg for more information.
Day 1: Multiples and discounted cash flow Key themes and concepts Measuring and managing risk as well as translating risk into valuation for decision making will be emphasised along with strategic and economic drivers of value. Mechanical aspects of valuation Understanding financial ratios used in valuation The appropriate use of multiples (P/E vs. EV/EBITDA) Choosing among alternative techniques and assuring that the valuation techniques make sense Valuation fundamentals and mechanics Introduce general categories of valuation models and establish a foundation in valuation mechanics. The discussion will focus on how value is created by a company. Real sources of value - cash flow, discounting and growth Valuation of risky bonds and excel short-cuts Derivation of P/E ratios and real world discounting problems Fundamental basis of DCF and major problems with the DCF Valuation using multiples Participants work with multiples in developing valuations, focusing on which multiple is most appropriate for alternative business circumstances. Valuation using multiples Examples of multiples Reconciliation between alternative multiples Appropriate multiples in different circumstances Problems with multiples Valuation using discounted cash flow Participants learn DCF valuation in theory and practice. Construction of simple valuation model for computing DCF Problems with valuation ranges in the DCF Use of multiples in terminal value Valuation from earnings growth Case study: Implementation of valuation Real world issues in applying the DCF model Participants learn how to deal with real world complications that arise in applying the DCF model. Computation of stable working capital changes for terminal value Realistic relationships between growth and cost of capital Construction of value drivers to determine appropriate EV/EBITDA multiples Appropriate modelling of deferred taxes and NOL carryforwards Alternative ways of dealing with management stock options Incorporation of high coupon debt in valuation Relationship between capital expenditures and depreciation Derivative valuations and the DCF model Day 2: Corporate modelling for valuation The models created in the first day are extended to include the central corporate finance issues of measuring value and assessing risk, culminating in a comprehensive corporate model. Corporate model structure Forecasting models are the centrepiece of most valuation analyses. Common valuation errors made in corporate models will be discussed. The errors are normally conceptual and logic mistakes in the model from a business perspective. In discussing model structure, the course covers: Model objectives Mistakes in modelling (base case definition, ignoring financial ratios, capital expenditure consistency, growth rates, business cycles) Model structure for alternative transactions (corporate, project finance, leveraged buyout and M&A models) Model layout (inputs, working analysis, debt structure, financial statements) Financial statement analysis for modelling Model complexities (depreciation, taxes, circularity, minority interest, deferred taxes) Construction of a corporate model Participants will construct a corporate model from A to Z. The model exercise includes a discussion of spreadsheet conventions such as the positive number convention, organisation of spreadsheets, use of range names and construction of "cork screw" accounts. Objectives of well designed models Model organisation (sheet order, repeating inputs, sheet colours, sheet columns) Spreadsheet conventions (positive number, switches, corkscrews, switches) Simple formulas (formula length, max and min statements, range names) Model documentation (macro names, column titles, units) Auditing and error checking Case study: Corporate model Construction of working analysis, debt structure and financial statements Calculation of debt and cash plugs Use of history in forecast Scenario and sensitivity analysis Template corporate model Day 3: Risk analysis, valuation and modelling This module covers risk analysis as well as options pricing exchange rate risk, interest rate risk and debt management. Traditional risk analysis tools and mathematical approaches to measure risk are examined. Debt management issues include credit analysis, forwards, swaps and financial engineering. The final subject is computation of value at risk (VaR) for foreign exchange and interest rate risk. Sensitivity analysis, scenario analysis and tornado diagrams in valuation The most time spent on valuation analysis is developing the economic assumptions that form a base case. Evaluating risks and developing sensitivity analysis should be an integral part of valuation. A case study is used to develop economic assumptions and to demonstrate use of sensitivity analysis, break-even analysis and tornado diagrams. Risk analysis of economic drivers Break even analysis and credit Sensitivity analysis Scenario analysis Tornado diagrams Cost of capital and adjusted present value (PV) Application of cost of capital is discussed with emphasis on discount rates in real world circumstances. The final topic addresses adjusted PV where all-equity cost of capital is applied. Survey of cost of capital techniques Estimation of beta and working with stock prices Details of computing weighted average cost of capital in valuation Risk neutral valuation, and arbitrage pricing model Adjusted net present value Monte Carlo simulation Options can be valued with Monte Carlo simulation and binomial trees. Monte Carlo simulation can also be used to compute the probability of default in credit analysis. Monte Carlo simulation involves developing time series analysis and incorporating scenarios in a financial model. Exercise: Monte Carlo simulation Time series analysis parameters Mean reversion, price boundaries and equilibrium Application of Monte Carlo simulation Computation of probability of default with alternative structural enhancements Day 4: Alternatives to DCF and multiples - leveraged buyout (LBO), structured finance and M&A valuation The final day examines valuation issues associated with LBOs, structured finance and M&A. Issues include modelling cash flow waterfalls in LBOs and structured finance as well as accounting and economic issues associated with valuing M&A transactions. Valuation in structured finance The debt capacity in valuation provides an alternative way to assess risk and make valuations. We review the theory and practice of using structured finance as an alternative to DCF. Overview of valuation models that do not require estimation of WACC or terminal growth Theory of using debt capacity to assess risk and value Alternative forms of structured finance – project finance, LBOs and asset backed securities Construction of simple structured finance model Valuation in LBOs LBO and project finance valuation involve computing the present value of free cash flows and allocating that value to alternative debt and equity instruments. Issues include: Building an LBO model Valuation with equity and project IRR Debt capacity and equity valuation Case study: LBO M&A case study Valuation of M&A transactions involves valuing synergies and considering accounting and tax issues. M&A terms M&A transaction and accounting modelling M&A consolidation and earnings accretion/dilution Case study
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