FINANCIAL MODELING FOR VALUATION

Course instructor: Simon Benninga
e-mail benninga@wharton.upenn.edu
http://finance.wharton.upenn.edu/~benninga

Note: This is a typical 3-day course which I have given. Courses can be from 2 – 5 days; in many cases they include a strong consulting component (i.e., we work with very few people on client-specific problems). For more details, contact me at the above e-mail address or look at my website for other information about what I do.

Course description

This short course addresses a comprehensive set of modeling and valuation techniques needed for enterprise valuation. It assumes that the background knowledge of participants include some finance and accounting. Since the implementation of most valuation techniques requires a spreadsheet, it also assumes some basic knowledge of Excel (advanced techniques, where necessary, will be explained during the course).

The course emphasizes the techniques needed to implement the relevant financial concepts. It will be taught in a computer lab, so that participants can practice as they learn.

Overview

Course topics include:

· Preparing and analyzing financial projections

· Building integrated financial valuation models

· Discounted cash flow (DCF) analysis

· Cost of capital calculations and their use in equity and firm valuations

· Valuation using multiples

· Valuing real options (useful for natural resource valuation)

· Sensitivity analyses

Texts and materials:

· Benninga/Sarig, Corporate Finance: A Valuation Approach, McGraw-Hill, 1997 (listed below as BS)

· Benninga, Financial Modeling, MIT Press, 1997 (listed below as FM)

· Lecture notes/slides and case materials:

q “Brown-Forman Distillers”—a comprehensive valuation case. A model solution and Excel file will be distributed with the case.

q “Hotel Case” handout

q Handout on calculating the cost of capital

q Handout on multiples

q Handout on EBITDA

q Handout on basic finance techniques with Excel

q “Gulf Oil Company”—valuation case. A model solution and Excel file will be distributed with the case.

q “MW Petroleum Corporation (A)”—valuation case with real options.

· A disk to accompany the course

Additional topics

The following topics will require either more time or will require the replacement of some of the above topics:

· Valuation of convertible debt securities

· Valuation of risky debt

· Valuation of warrants

Schedule
(Note: We will maintain some flexibility to answer specific needs of the participants)

Day 1	Mergers and Acquisitions
Morning	Basic valuation techniques · The valuation process · DCF methods · Dividends and the cost of capital · Market risk and cost of capital · Cost of capital and valuation by multiples · Incorporating inflation in valuation problems · Computing the free cash flow Case: Valuing a hotel: in this basic valuation case, we will illustrate the following aspects: · From cash management to cash flows · Real versus nominal cash flows · Whole firm value versus equity value	BS: Chapters 1 – 3 FM: Chapters 20, 23 Handout on introductory finance techniques with Excel (for warmup)
Afternoon	Modeling financial statements · Basic pro-forma modeling · Analyzing the firm’s environment Case: “Brown-Forman Distillers.” Brown-Forman is acquiring Southern Comfort. The case illustrates: · Projecting financial statements for an equity valuation · Analysis of firm debt capacity · Sensitivity analysis on cash flows	BS: Chapter 4 FM: Chapter 1 “Brown-Forman” case and solution

Day 2
Morning	Case: “J.M. Smucker” · Predicting sales · Analyzing the firm’s operations · Valuing the equity of Smucker Cost of capital calculations	BS: Chapter 7, 9 Handout on cost of capital
Afternoon	Case: “Brown-Forman Distillers” (continued). Having projected cash flows and the financial statements for the acquisition, we now use market information to: · Estimate cost of capital: cost of equity, cost of debt, and weighted average cost of capital · Value the equity of Brown-Forman · Estimate the impact of the form of the acquisition on the valuation · Integrate the valuation into the pro forma model	“Brown-Forman” case and solution

Day 3
Morning	Valuation by multiples · Basic P/E multiples · Choosing logical multiples for an industry · Trailing versus leading multiples · Whole firm versus asset-specific multiples · Using multiples for valuation · Integrating multiple analysis with financial models Case: “Gulf Oil Company” · Comparing market values to intrinsic values · Selecting an appropriate multiple for valuation · Valuing exploration and development · Valuing Gulf’s shares vs whole firm	BS: Chapter 10 Handout on multiples Handout on EBITDA
Afternoon	Real options and valuation · Black-Scholes option pricing · Real options The object of this session is to incorporate option aspects into the valuation process (so-called “real options”). This can be particularly effective for natural resource companies.	FM, Chapter 13 BS, Chapter 12 “MW Petroleum Corporation”—case and solution