Course topics:

• prediction of unlevered cash flow
• discounting of cash flow
• calculation of capital costs of capital (e.g., WACC)
• sensitivity- and scenario analysis (e.g., the use of binomial trees)
• fundamentals underlying corporate valuation
• corporate valuation methods (e.g., multiples, certainty-equivalent cash flows, adjusted present value, NPV, IRR)
• the use of risk-free interest rates (theoretical spot rates; investment horizon issues)
• terminal value
• assessing and calculating historical performance
• amending the financial statement for the purpose of corporate valuation
• financial ratios
• corporate strategy and prediction of performance
• unlevered beta
• the functions of asset pricing models (e.g., CAPM and APT)
• integrating principles and thinking in finance, strategy and accounting in order to value assets, projects and corporations

The topics listed are not meant to be exhaustive, and may be amended.

The students will learn how to value projects and corporations of various sizes. This entails integrating the disciplines of finance, strategy, and accounting. The valuation process consists of many details and potential pitfalls, which we aim to overcome through this course. There is not one correct way of valuing a company or project, and we triangulate among several methods in order to ensure that we are in the ballpark of the best estimated value.  We will employ Excel in a way that will benefit you in a later job position with respect to valuation challenges.

You will learn how to convert accounting measures into free cash flow, which is the foundation for the much used discounting-valuation method. The separation between accounting measures and cash flow is crucial for all valuation, and even though you may know the calculations by heart, it takes time to think in cash-flow terms if you have a background from accounting or business economics. The course aims to naturally shift focus from the accounting statement to the cash-flow statement and related applications for valuation purposes. We will perform pro-forma financial statements in order to estimate future unlevered operational cash flow, a basis that is important for valuation.

We naturally also focus on estimation of the cost of capital for equity, debt, and the combined assets, and the effects of debt on project and company valuation. We take into account both personal and corporate tax rates. Estimation of the cost of capital is a complex and debated area, and we will therefore spend considerable amount of time on this topic. An overview of asset-pricing models is important in this respect, together with an understanding of theoretical spot rates, which can be used as estimates for risk-free interest rates at different maturities.

Alternative valuation methods include for instance free-cash-flow discounting, the adjusted-present-value (APV) method, the flow-to-equity approach, the WACC method, the portfolio-tracking method, and the certainty-equivalent method. We will combine these methods with scenario and sensitivity analyses, for instance by systematically changing growth estimates. In this regard, the binomial-tree valuation method is an important tool when taking into account the flexibility to continue or stop a project.

We will also look at how to compare the value of projects and corporations, and why you in most cases would prefer the NPV over the IRR criterion. Lastly, capital structure and dividend policy are short topics of the course. The value of debt depends partly on your personal and corporate tax rate, and we will discuss why, for instance, required return to equity holders increases with leverage. The theoretical perspectives by Modigliani and Miller are central for the treatment of capital structure.

BUS220, BUS210  or eqvivalent

Minimum requirements for entrance to higher education in Norway (generell studiekompetanse)