LECTURE VIDEOS | QUESTIONS of DOUBT in CORPORATE VALUATION
Bernhard Schwetzler has started a Youtube channel titled „questions of doubt in corporate valuation”..
Questions of doubt in corporate valuation QoD#24: Re-/Delevering: ßL = ßU (1+D/E) or ßL = ßU (1+(1-t)D/E) ?
Applying industry betas requires some adjustments in case of differences between the leverage of the industry and the leverage of firm to be valued. This adjustment is called the De-/Relevering of the beta factors. There are two popular versions of the corresponding equations for this procedure. This video discusses the requirements for both equations necessary to produce reasonable results. It also makes a judgement on the realism and the consistency of these requirements. (February 5, 2021). >more
Questions of doubt in corporate valuation QoD#23: Is there something wrong with unicorn valuation?
This video highlights potential flaws from applying simple post money valuation metrics on growth companies in VC financing rounds: Ignoring special cash flow rights like liquidation preferences yields significant overvaluation (November 10, 2019). >more
Question of doubt in corporate valuation QoD#22: Does the investor´s holding period have an impact on corporate valuation?
Infinite firm lifetime vs. limited holding period – a problem in corporate valuation? Standard DCF valuation models assume an infinite lifetime of the firm; this is in contrast to the limited holding period of many investors. This video discusses whether this disparity has to be taken into account in corporate valuation.
(November 1, 2019) >more
Question of doubt in corporate valuation QoD#21: What is the circularity problem and is a Newton approximation a good way to solve it?
Working with the DCF-WACC approach in corporate valuation requires to assume the firm´s capital structure as weights for the cost of capital in market values. That implies a circularity problem as the market value of equity is what just is supposed to be calculated. A so called Newton approximation is sometimes recommended as a solution to this problem. This video shows how it works and discusses some pros and cons of this proposal.
(May 22, 2019) >more
Question of doubt in corporate valuation QoD#20: How does the debt policy affect the firm´s beta?
A debt policy describes the adjustment sequence of the firm´s debt level towards the level according to the optimal leverage ratio. This video explains how this choice affects the link between the firm´s asset (unlevered) and the firm´s equity (levered) beta. It also highlights that the well known "Hamada" equation is almost never the correct link.
(January 18, 2019) >more
Question of doubt in corporate valuation QoD#19: Do I really need to care about a "debt policy" in DCF valuation?
Not too many analysts explicitly make an assumption about the firm´s debt policy, especially when using the WACC approach for corporate valuation. This video highlights that also under the WACC approach a debt policy has to be assumed in many cases as it affects the de-/re-levering equations of the beta factor.
(January 8, 2019). >more
Question of doubt in corporate valuation QoD#18: How can I distinguish between promised and expected yields when deriving the cost of debt?
The cost of debt take potential default into account and relate to the expected yield/return of the debtholder. This video shows how promised and expected yields can be derived based on a simple one-period binomial option pricing model. It requires some basic knowledge in option pricing theory.
(November 23, 2018). >more
Question of doubt in corporate valuation QoD#17: In case of defaultable debt: Can a firm´s cost of debt exceed its cost of equity?
Junk bonds may have yields well above 15%. The video discusses whether in this case cost of debt can exceed cost of equity. It also analyses whether bond yields are appropriate measures for the firm´s cost of debt.
(November 16, 2018). >more
Question of doubt in corporate valuation QoD#16: Is there a general, more flexible „debt policy“ than MM and/or ME?
This week´s QoD video introduces a general debt policy for corporate valuation models; the policy adjusts the level of debt towards a certain target value by multiplying the realized future firm value with a constant leverage ratio every k periods. The two well-known debt policies “MM” and “ME” are two polar cases of this general model. The video shows a general equation for the tax shield calculation and also gives a link of the general debt policy to default probabilities.
(November 9, 2018) >more
Question of doubt in corporate valuation QoD#15: Is there anything special about negative Free Cash flows? (advanced)
This video is the advanced and theoretical discussion of this question. It shows that there is actually is problem; the geometric random walk governing the free cash flow (FCF) development does not directly allow for changes in the sign of the FCF. This makes it difficult to properly model FCF of startup firms. It also causes problems when introducing potential bankruptcy of the firm.
(November 2, 2018) >more
Question of doubt in corporate valuation QoD#14: What is a debt policy and how does it affect DCF valuation?
"Debt policies" describe standardized future financing policies assumed for the company to be valued. This video discusses the most common assumptions and shows how they affect corporate value. It also highlights the common case of DCF valuation without explicitly assuming a particular debt policy and potential pitfalls connected to this case.
(October 19, 2018) >more
Question of doubt in corporate valuation QoD#13: Is there anything special about negative Free Cash flows? (simple version)
Negative Free Cash flows show up quite rarely in corporate valuation and valuators may sometimes be uncertain whether they require an adjustment. This video shows the potential reasons behind the negative sign of FCF and gives some guidance how to properly deal with it.
(October 12, 2018) >more
Question of doubt in corporate valuation QoD#12: Shall I use nominal or effective tax rates/tax payments in DCF valuation?
This video analyses tax loss carryforwards (TLC) as an important reason for differences between effective and nominal tax rates and tax payments. Several ways to incorporate TLCs into corporate valuation are discussed.
(October 5, 2018). >more
Question of doubt in corporate valuation QoD#11: Is there a difference between DCF Flow to Equity DCF and Dividend Discount models?
This video discusses potential differences and communalities of Flow to Equity and Dividend Discount models in corporate valuation. It also gives a recommendation which of the two approaches is in general to be preferred.
(September 28, 2018). >more
Question of doubt in corporate valuation QoD#10: Which models are able to include fading growth into terminal value calculation? (Part II)
This second video on the topic analyzes the case of fading excess returns combined with fading assets (invested capital) and shows how to implement this case into some standard valuation equations for terminal value calculation.
(September 21, 2018). >more
Question of doubt in corporate valuation QoD#9: Which models are able to include fading growth into terminal value calculation? (Part I)
In QoD #8 we have seen that directly applying fade factors on growth rates yields flawed and inconsistent valuations. This video analyzes the case of a fading asset base (invested capital) combined with constant excess returns and shows how to implement this case into some standard valuation equations for terminal value caclulation.
(September 14, 2018). >more
Questions of doubt in corporate valuation QoD#8: Shall I apply fade factors on the growth rate in terminal value calculation?
Many practitioners feel uncomfortable with the assumption of a constant infinite growth rate in the terminal value calculation. Some authors propose to limit growth by applying a fade factor on the growth rate. This video discusses and analyzes this idea.
(September 7, 2018). >more
Questions of doubt in corporate valuation QoD#7: Gordon-Shapiro model or value driver model for terminal value caclulation?
This video introduces the "value driver model" as an extension of the Gordon-Shapiro (GS) model for terminal value calculation. It discusses advantages and problems when comparing it against the GS model.
(August 31, 2018). >more
Questions of doubt in corporate valuation QoD#6: Does the Gordon-Shapiro growth model fully capture inflation?
This video discusses the relation between growth and inflation. It is shown that under consistent nominal valuation there is no need to "add" an additional growth factor caused by inflation. Also a recent critique on the Gordon-Shapiro model is discussed and rejected.
(August 24, 2018) >more
Questions of doubt in corporate valuation QoD#5: Are there sanity checks for the growth assumptions in the terminal value calculation?
The assumption about the permanent growth rate in the terminal value calculation is a standard battlefield in transaction negotiations. This video is first introducing the so called Gordon-Shapiro model for terminal value calculation and then shows that it is a powerful tool to check for reasonable growth assumptions and to sort out unreasonable ones. (Sorry for this video being so long; if you already know the Gordon-Shapiro model and are only interested in the sanity check you may jump to 16:40..)
(August 10, 2018). >more
Questions of doubt in corporate valuation QoD#4: Are pension reserves part of the equity bridge in DCF valuation?
Including (unfunded) internal pension liabilities into DCF valuation not trivial. This video discusses potential pitfalls and shows consistent treatments of pension reserves in corporate valuation with respect to Free Cash flow, WACC and Net Debt
(August 3, 2018). >more
Questions of doubt in corporate valuation QoD#3: Cost of capital of pension reserves
In Germany firms are allowed to keep pension liabilities for their employees and pensioneers (and the corresponding assets) on their own books. For some big firms these liabilities make up a billions absolute amount and a significant fraction of the firm´s balance sheet. This video tackles the question of the cost of capital of this funding source. There are significant differences in the approaches to estimate these cost and the results they deliver. The video shows that these differences are due to different (implied) assumptions on the substitution of cash wage by the annual service cost of the pension liability. You may use the pension´s interest cost shown in the P&L only, if you assume that the service cost are 100% substituting cash wage.
(July 27, 2018) >more
Questions of doubt in corporate valuation QoD#2: Relevering/delevering beta factors: gross debt or net debt leverage?
When transfering industry betas on individual firms in the same industry a standard adjustment, called "de-levering and re-levering" is performed to account for potential differences in the capital structure. This video tackles the question on whether this adjustment should be made based on the net debt to equity ratio or based on the gross debt to equity ratio.
(July 20, 2018) >more
Questions of doubt in corporate valuation QoD#1: WACC and target capital structure – gross debt or net debt?
In homemade video clips of max. length of 10 minutes he discusses and answers (or at least tries to) technical questions related to corporate valuation that may pop up in the day to day business of transaction advisors. The first video in this sequence is discussing the question “WACC and target capital structure – gross debt or net debt?”
(July 13, 2018) >more