Corporate Finance Valuation Lab
Class 10: Valuation and M&A
Week 10: Main Concepts Overview
This week covers the three primary valuation methods used in corporate finance and M&A transactions.
DCF Valuation
Values a company based on the present value of its expected future cash flows.
- Estimate Free Cash Flows (FCFs)
- Calculate Terminal Value
- Determine discount rate (WACC)
- Bridge EV → Equity → Share Price
Comparable Multiples
Values a company based on how similar companies are priced in the market.
- Select comparable companies
- Choose appropriate multiple
- Apply median/average multiple
- Convert EV → Equity if needed
Transaction Multiples
Values a company using prices paid in prior M&A transactions.
- Find relevant precedent deals
- Calculate premiums paid
- Apply premium to target price
- Premium must be justified by synergies
Key Formulas
Rearranged: Equity = EV − Debt + Cash
Premium compensates target shareholders for control transfer.
Pricing vs. Valuation
What something sells for — driven by supply/demand, market mood, momentum, and noise.
What something is worth — based on fundamentals: cash flows (level, growth, quality).
Common Multiples
Equity Multiples
- P/E — Price to Earnings (most common)
- P/B — Price to Book (capital-intensive)
- PEG — P/E to Growth (growth companies)
Enterprise Multiples
- EV/EBITDA — Less affected by D&A, capital structure
- EV/EBIT — When capital intensity is comparable
- EV/Sales — Crude but least accounting distortion
M&A Performance Patterns
~+20% abnormal returns at announcement. Higher with cash payment; lower when bidder is private.
Often negative to ~0% when buying public targets with stock. Better returns with private targets.
🎯 Key Exam Takeaway
DCF gives you Enterprise Value. To find share price: subtract debt, add cash to get Equity Value, then divide by shares outstanding. Never divide EV directly by shares — that's the most common exam trap!
📋 Quick Reference: Classic Exam Traps
High-frequency mistakes that cost points under time pressure.