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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
November 23, 2018
QoD18

Question of doubt in corporate valuation QoD#18: How can I distinguish between promised and expected yields when deriving the cost of debt?

Bernhard Schwetzler
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

Questions of doubt
November 16, 2018
QoD17

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?

Bernhard Schwetzler
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

Questions of doubt
November 9, 2018
QoD16

Question of doubt in corporate valuation QoD#16: Is there a general, more flexible „debt policy“ than MM and/or ME?

Bernhard Schwetzler
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

Questions of doubt
November 2, 2018
QoD15

Question of doubt in corporate valuation QoD#15: Is there anything special about negative Free Cash flows? (advanced)

Bernhard Schwetzler
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

Questions of doubt
October 19, 2018
QoD14

Question of doubt in corporate valuation QoD#14: What is a debt policy and how does it affect DCF valuation?

Bernhard Schwetzler
"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

Questions of doubt
October 12, 2018
QoD13

Question of doubt in corporate valuation QoD#13: Is there anything special about negative Free Cash flows? (simple version)

Bernhard Schwetzler
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

Questions of doubt
October 5, 2018
QoD12

Question of doubt in corporate valuation QoD#12: Shall I use nominal or effective tax rates/tax payments in DCF valuation?

Bernhard Schwetzler
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

Questions of doubt
September 28, 2018
QoD11

Question of doubt in corporate valuation QoD#11: Is there a difference between DCF Flow to Equity DCF and Dividend Discount models?

Bernhard Schwetzler
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

Questions of doubt
September 21, 2018
QoD10

Question of doubt in corporate valuation QoD#10: Which models are able to include fading growth into terminal value calculation? (Part II)

Bernhard Schwetzler
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

Questions of doubt
September 14, 2018
QoD9

Question of doubt in corporate valuation QoD#9: Which models are able to include fading growth into terminal value calculation? (Part I)

Bernhard Schwetzler
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
September 7, 2018
QoD8

Questions of doubt in corporate valuation QoD#8: Shall I apply fade factors on the growth rate in terminal value calculation?

Bernhard Schwetzler

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
August 31, 2018
QoD7

Questions of doubt in corporate valuation QoD#7: Gordon-Shapiro model or value driver model for terminal value caclulation?

Bernhard Schwetzler

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
August 24, 2018
QoD6

Questions of doubt in corporate valuation QoD#6: Does the Gordon-Shapiro growth model fully capture inflation?

Bernhard Schwetzler
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
August 10, 2018
QoD5

Questions of doubt in corporate valuation QoD#5: Are there sanity checks for the growth assumptions in the terminal value calculation?

Bernhard Schwetzler
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
August 3, 2018
QoD4

Questions of doubt in corporate valuation QoD#4: Are pension reserves part of the equity bridge in DCF valuation?

Bernhard Schwetzler
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
July 27, 2018
QoD3

Questions of doubt in corporate valuation QoD#3: Cost of capital of pension reserves

Bernhard Schwetzler
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
July 20, 2018
QoD2

Questions of doubt in corporate valuation QoD#2: Relevering/delevering beta factors: gross debt or net debt leverage?

Bernhard Schwetzler
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
July 13, 2018
QoD1

Questions of doubt in corporate valuation QoD#1: WACC and target capital structure – gross debt or net debt?

Bernhard Schwetzler
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