Business Valuation. A Basic Approach

This book includes the twelve chapters taken from the Polish edition titled “Wycena przedsiębiorstwa. Od teorii do praktyki”. Business valuation is invariably linked with the focus on value maximization. The goal of every company is to increase its equity, which requires the development and implementation of a long-term value creation strategy. The economic value of an enterprise is of primary importance here, such value being understood as the enterprise’s capacity for free cash flows generation. The emphasis is on the future, and not on the past; on real income and not on book profit.

The aim of this book is to present the theories, models and methods of business valuation while contrasting them with the practice of company value assessment. We begin our discussion with a detailed description of various approaches to, and types of, value categories – from historical and philosophical ones to those grounded in economic theory.

The history and the present practice of valuation leads us to the conclusion that valuation is both a theory (as one of the initial and most important components of Value Based Management) and an art, based on the experience and intuition of business appraiser. However, we should be fully aware of the fact that even the application of the best theories and methods of business valuation does not automatically reflect the real market value of the assets at hand (especially in the short-term).

Introduction
1. History, Standards and Techniques of Enterprise Valuation (Marek Panfil, Andrzej Szablewski)
1.1. Philosophical, Sociological and Economic Context of Value Categories
1.2. Development of Enterprise Valuation Techniques in the 20th and 21st Century
1.3. Enterprise Value Standards
1.4. Enterprise Value Drivers
1.5. Enterprise Valuation Approaches
1.6. Conclusions

2. Cost of Capital (Marcin Pęksyk)
2.1. Definitions and Practical Application
2.1.1. Basic Terms
2.1.2. Weighted Average Cost of Capital (WACC) vs. Microeconomic Perspectives
2.2. Models for Calculating the Basic Cost of Equity
2.2.1. Dividend Discount Model
2.2.2. Build-Up Method
2.2.3. Capital Asset Pricing Model
2.3. Models for Calculating the Basic Cost of Debt
2.3.4. Yield to Maturity Method
2.3.5. Challenges in Establishing the Cost of Debt
2.3.6. Estimating Cost of Capital in Emerging Markets
2.4. Calculating WACC: Case Studies
2.4.1. Peer Selection
2.5. Conclusions

3. Enterprise Risk Valuation (Jan K. Solarz)
3.1. Evolution of Risk Management
3.2. Types of Enterprise Risk
3.3. Influence of Risk Management Quality
3.4. Conclusions

4. Influence of Market Risk: KGHM Polska Miedź SA Case Study (Jarosław Romanowski, Radosław Załoziński)
4.1. Characteristics of KGHM
4.2 Financial Risk Management in Practice
4.2.1. Financial Risk Measurement
4.2.2 Goals and Motives
4.2.3. Influence of Market Risk Management
4.3. Impact of Hedging on P&L Statements
4.4. Influence of Market Conditions
4.4.1. Application and Impact of Discounts
4.4.2. Value Creation Strategies
4.5. Conclusions

5. Impact of Crude Oil Market Changes: Exxon Mobil Case Study (Wojciech Potocki)
5.1. Petrochemical Companies Overview
5.2. Influence of Macroeconomic Factors
5.3. Crude Oil Prices: Statistical Characteristics
5.4. Crude Oil Market: [Two Instability Dimensions]
5.5. Crude Oil Prices: Long-term Forecasting
5.6. Operating Profit Calculation Model
5.7. Conclusions

6. Real Estate Valuation vs. Enterprise Valuation in the Economy of Instability (Elżbieta Mączyńska)
6.1. Post-Industrial Economy of Instability
6.2. Economy and Valuation at the Crossroads
6.3. Global Dimensions of Valuation
6.4. Interpretation of Global Data
6.5. Enterprise Valuation vs. Real Estate in Poland
6.6. Conclusions

7. DCF Valuation (Marek Panfil)
7.1. Introduction to DCF
7.2. DCF Valuation Process
7.2.1. Financial and Strategic Analysis of the Enterprise
7.2.2. Future Free Cash Flow Forecast
7.2.3. Discount Rate Forecast
7.2.4. Discounting Future Free Cash Flow and Terminal Value
7.2.5. Interpretation of Valuation Results
7.3. Limitations of DCF
7.4. Valuation of Jutrzenka Holding SA
7.4.1. Company Description
7.4.2. Ownership
7.4.3. Peers
7.4.4. Main Risk Factors
7.4.5. Value Calculation Using DCF
7.4.6. Multiples Method
7.4.7. Establishing Fair Value
7.5. Conclusions

8. Dividend Discount Method (Andrzej Szablewski)
8.1. Capital Gains, Dividends and Buybacks
8.2. Dividend Forecasting
8.3. Dividend Discount Models
8.3.1. Assumptions
8.3.2. Basic Valuation Models
8.3.3. Constant Dividend Model
8.3.4. Constant Dividend Growth Models
8.3.5. Multistage Dividend Growth: Two- and Three-Stage Models
8.4. Conclusions

9. Measuring the Value of Customers (Barbara Dobiegała-Korona)
9.1. Value Exchange Basis
9.2. Assessment Methods
9.2.1. Historical Data Basis
9.2.2. Customer Lifetime Value: Forecast Data Basis
9.2.3. Customer Lifetime Value: A Narrow Approach
9.2.4. Customer Lifetime Value: A Broad Approach
9.3. Practical Application
9.4. Conclusions

10. Valuation of Intangible Resources (Monika Marcinkowska)
10.1. Intangible Resources Impact on Enterprise Value
10.2. Intangible Resources vs. Intangible Assets
10.3. Intellectual Capital
10.4. Valuation of Individual Items of Intangible Resources
10.4.1. Cost Approach
10.4.2. Market Approach
10.4.3. Income Approach
10.4.4. Real Option Valuation
10.5. Conclusions

11. IPO Valuation (Dorota Podedworna-Tarnowska)
11.1. Capital-Related and Capital-Unrelated Significance of Public Companies
11.2. IPO Requirements
11.3. IPO Value Drivers
11.4. Discounts and Underpricing
11.5. Underpricing Analysis: Warsaw Stock Exchange (2005–2010)
11.6. Case Studies
11.6.1. Infovide Matrix SA: Underpriced Flotation
11.6.2. K2 Internet SA: Overpriced IPO
11.6.3. Gino Rossi SA: Spot-On Valuation
11.7. Conclusions

12. Football Club Valuation: Juventus FC Case Study (Michał Głodowski)
12.1. Economics of the Football Business
12.2. Football Business Value Drivers
12.2.1. Europe’s Big Five Leagues
12.2.2. Ekstraklasa League in Poland
12.3. Impact of the Football Business on GDP
12.4. Publicly-Listed Football Clubs
12.4.1. Historical Trend Analysis: Premiership Case Study
12.4.2. Market Value of Selected Football Clubs
12.4.3. STOXX Europe Football Index
12.5. Football Club Valuation Methods
12.5.1. Value Drivers
12.5.2. Cash Flow
12.5.3. Juventus FC Case Study
12.6. 2012 European Championships and the Polish GDP
12.7. Conclusions

Final Conclusion – Business Valuation Challenges
Bibliography
Internet pages
Biographies