>Mario Massari
Corporate Valuation
Corporate Valuation
Measuring the Value of Companies in Turbulent Times
MARIO MASSARI
GIANFRANCO GIANFRATE
LAURA ZANETTI
The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation and financial instrument analysis, as well as much more. For a list of available titles, visit our website at www.WileyFinance.com.
Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding.
Copyright © 2016 by Mario Massari, Gianfranco Gianfrate, and Laura Zanetti.
All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.
Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com.
For more information about Wiley products, visit www.wiley.com.
Library of Congress Cataloging-in-Publication Data is available:
ISBN 9781119003335 (Hardcover)
ISBN 9781119003359 (ePDF)
ISBN 9781119003342 (ePub)
Cover Design: Wiley
Cover Image: © Alicia_Garcia/iStockphoto
Preface
A ROADMAP FOR THIS BOOK
The value of a business is essentially related to three main factors: its current operations, its future prospects, and its embedded risk. The advent of globalization, new technologies, and the consequences of the recent financial crisis completely reshaped these elements, thus making more elusive the definition of company “value” and of the metrics to measure it.
Firstly, firms do business in a context becoming progressively faster, more diverse, and more interconnected so that also valuing their current operations is a task less straightforward than in the past. Secondly, forecasting future macro and business related dynamics is getting less standardized in a business environment characterized by inherent difficulty in predicting changes – both on the upside and on the downside – and by constant innovation for companies that are more and more exposed to hyper-competitive industry dynamics. Thirdly, new types of risks and competition, so far unknown (think for example of climate change risks), are shaping both the operational and the financial side of enterprises, redefining the importance of managing uncertainty as a key element to achieve success.
In this context, the book is organized in three parts. In the first part of the book (Chapters 1 to 4), the main focus is on the relationship between value and business/economic uncertainty. In an environment characterized by an increased complexity where the concept of value itself is challenged, we provide a definition of corporate value based on a holistic approach, thus encompassing both the accounting and the financial perspective (Chapter 1).
Moving to relationship between uncertainty and value, we focus on the business modeling tools available to forecast corporate results and determine company value. Depending on the level of uncertainty, on the information available, and the time and effort investable in the analysis, it is possible to pick one out of three possible approaches. We start from a standard situation when uncertainty is limited and there is a clearly dominant, likely scenario (Chapter 2).
When there is a significant amount of uncertainty and there is one or more scenario(s) that are alternative to the most likely one and that could have extreme – either positive or negative – consequences for company's value, the scenario-based approach is to be preferred (Chapter 3).
Stochastic simulation (Chapter 4) is to be used when detailed data is available (or assumed) regarding the probability distributions of key variables affecting future cash flows. This approach, as discussed, is mathematically complex but it can be handled by software packages easily available.
Having tackled the uncertainty modeling aspects, the second part of the book is focused on the main valuation approaches that can be used in practice. The chapters from 5 to 13 present therefore the main principles of corporate valuation starting from the reorganization of the financial statement data and business plan figures (Chapter 5). The relationship between financial leverage and corporate value is then presented (
