Course dates
Course objectives
'Valuation Modelling and Analysis: DCF, Earnings Multiples and LBO Models’ is designed to improve your practical skills in modelling and interpretation of other models through practical valuation and modelling exercises.
The course offers real life examples for addressing the difficult issue of terminal value when using the discounted cash flows. It provides A-Z analysis for valuation and financial analysis of a company beginning with review of financial statements and finishing with comprehensive valuation. The course also demonstrates alternative methods of valuation including analysis and modelling of leveraged buyout transactions and Monte Carlo Simulation.
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.
Summary of course content
- Valuation lessons from the financial crisis
- How structured financial models can be created to clearly define risks and value without being overly complex
- The fundamental factors that underlie valuation and how they can 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 delegates are interested in practical mechanics of excel (macros, combo boxes, offset
and indirect functions, etc.) these can be discussed after the course.
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
- Debt valuation spreadsheets, Monte Carlo simulation models, tornado diagram and sensitivity analysis
Computer-based exercises
All delegates should bring their laptops to facilitate in-class studies and exercises.
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 and Product Control
- Risk Management and ALM
- Research and Analysis
- Sales and Trading
- Investment Management
- Origination
- Securitisation and Syndication
- Structured Finance
- Money Markets and Repo
- Systems Programming
- Funding
- Government and Agency Funding and Investment
- Regulation and Compliance and Documentation
Supporting publication
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
- 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 alternative techniques and ensuring that the valuation techniques make sense
Valuation fundamentals and mechanics
General categories of valuation models will be introduced and a foundation in valuation mechanics will be established. 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 will work with multiples in developing valuations. The discussion and case studies focus 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
Real world issues 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 on day one 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. Some common valuation errors made in corporate models will be discussed. The errors are conceptual and logical mistakes in the model from a business perspective, rather than mechanical problems.
- 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 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
Corporate model case study
- 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
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. Adjusted PV is addressed 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.
Monte Carlo simulation exercise
- 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
Delegates review case studies that examine 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
LBO case study
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
Hilton Hotel Singapore, Singapore, Singapore
This programme takes place on a non-residential basis at Hilton Hotel Singapore. Non-residential course fees include training facilities, documentation, lunches and refreshments for the duration of the programme. Delegates are responsible for arranging their own accommodation, however, a list of convenient hotels (many at specially negotiated rates) is available upon registration.
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Ed Bodmer
Edward Bodmer has created innovative forward pricing, productivity measurement and investment valuation software for consulting clients throughout the United States. He has taught energy economics and finance throughout the world, and formulated significant government policy and corporate strategy in the U.S.
Mr. Bodmer's consulting clients include investment banks, commercial banks, research institutions and government agencies on a wide variety of complex valuation and advisory matters. He has constructed a unique framework for electricity price forecasting and valuation using production cost modelling techniques combined with option price theory and Monte Carlo simulation.
Mr. Bodmer is also an adjunct professor at leading University where he teaches courses in microeconomics. Along with his practical experience that covers a multitude of major advisory projects, he has taught specialised courses in financial modelling, electricity pricing, option valuation, mergers and acquisitions and contracting to investment banks, commercial banks, industrial corporations and electric utility companies.
Mr. Bodmer was formerly Vice President at the First National Bank of Chicago where he directed analysis of energy loans and also created financial modelling techniques used in advisory projects. He has used the models in providing expert testimony on subjects ranging from capital structure to investments in multi-billion dollar nuclear plants to complex valuation of new investments.
Mr. Bodmer received an MBA degree specialising in econometrics (with honours) from the University of Chicago and a BS degree in finance from the University of Illinois (with highest university honours). He has written many articles and is in the process of completing a textbook on valuation of electricity assets.
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