Business Valuation Modeling — Microsoft Excel
In this article, we will walk you through the fantastic journey of learning business valuation modeling in finance using excel.
Business Valuation is a operating procedure of any company where professionals leads the entire organization strategically that place to success.
When a company is called a going concern company, there are three main valuation methods used by professionals.
- Comparable Company Analysis
- Precedent Transactions
- Discounted Cash Flow Analysis
Comparable Company Analysis
It is a relative valuation method in which we compare the values and various ratios withs peer companies.
The analysis is dependent on the peer group, which consists of comparable
businesses of a similar size in the same sector or locale. Enterprise Value To Sales
(EV/S), Price To Earnings (P/E), Price To Book (P/B), and Price To Sales (P/S) are
the most commonly utilized valuation metrics in comparable business evaluation. The company is overvalued if its valuation ratio is higher than the average for its
peer group and it is undervalued if the valuation ratio is lower than the average for its peers.
Precedent Transaction
Precedent traction analysis utilizes a company’s prior performance data to estimate its value. Using data from previous merger and
acquisition (M&A) deals, precedent transaction analysis is a technique for valuing businesses.
Discounted Cash Flow
This approach is the most popular. For instance, the income approach’s discounted cash flow valuation method evaluates a company by adjusting or discounting, its projected cash flow to its present value.
Let’s talk about discounted cash flow in more detail.
For business valuation, DCF is employed. The Net Present Value (NPV) is a
projection of a company’s unlevered free cash flow discounted back to today’s value.
The value of an investment is ascertained using discounted cash flow analysis and the investment’s projected cash flows. The aim of a DCF analysis is to calculate the adjusted time value of a financial
investment that an investor has made or intends to make.
Unlevered free cash flow is the cash generated by a business that is available for repayment or distribution to investors or for being reinvested into the business. This FCF is applicable for both equity and debt.
If DCF is higher than the current cost of investment, it means the opportunity is profitable, if DCF is lower than the current cost of investment, it is not a good
investment. The investor must also determine the discount rate for DCF, which can be separate for different projects, industries or companies. The value of WACC is
also considered as the discount rate.
DCF Formula:
Where,
CF1, CF2F is the cash flows of every year and r is the discount rate.
Let’s take an example.
WACC = 15%
Initial Investment = 12 lakh
Year wise cash flow
Year 1 – 1.5 lakh
Year 2 – 2 lakh
Year 3 – 4 lakh
Year 4 – 5 lakh
Year 5 – 7 lakh
As we can see, the total of net adjusted DCF is -0.79, so we should not invest in this project.
WACC is considered as discounted rate.
If the investment is ₹9 lakh, let’s see what changes will be made.
Just change the value of -12 to -9.
As we can see in the above figure, the net adjusted DCF is 2.21, so the investment could be good.
Conclusion
Finally, we will take a descriptive drive of learning business valuation modeling and along with that we also understanding how business valuation is important in business and how professional use best decision that was strategic and best for making a company better and also elevate a company to the success.
