Corporate Finance: Introduction & Financial Valuation Methods

The lecture 'Corporate Finance' by Dr. Stefan Obernberger introduces essential topics including logistics, motivation, and an outlook on financial valuation. It outlines the course structure with specific dates, topics, chapters from the textbook, and the lecturer for each session. The grading is based on a 120-minute multiple-choice digital exam with approximately 35 questions, where only one answer is correct for each. There are no negative points, encouraging educated guesses if unsure.

The lecture motivates the importance of financial valuation through real-world examples. It compares companies of vastly different sizes (e.g., in total assets, sales, and market value) to prompt thought on what drives company worth. Case studies like Uber's IPO performance and Google's acquisition of Fitbit highlight how market perceptions and strategic decisions impact valuation. The example of Sealed Air Corporation's leveraged special dividend demonstrates how financial policies, even seemingly drastic ones, can lead to significant increases in shareholder value and operational efficiency, illustrating Jensen's free cash-flow hypothesis.

The fundamental principles of investment involve investors providing equity or debt for an expected return, which corresponds to the firm's cost of equity or debt. An investment is deemed attractive if it at least covers these costs and creates shareholder value if it exceeds the weighted average cost of capital. Warren Buffett's perspective defines intrinsic value as the discounted value of all future free cash flows, emphasizing its subjective yet critical nature for evaluating investments. The intrinsic value is calculated as the present value of all future free cash flows (FCF), discounted by the cost of equity for an equity-financed project.

The lecture explains how taxes, specifically interest expense tax shields, impact valuation. Two primary methods are introduced to incorporate this: the DCF-WACC (Discounted Cash Flow – Weighted Average Cost of Capital) method, which discounts free cash flows at the WACC, and the Adjusted Present Value (APV) method, which separates the valuation of unlevered cash flows (discounted at the unlevered cost of capital) from the tax shield (discounted based on its specific risk profile). The lecture provides formulas and exercises to demonstrate their application.

Forecasting free cash flows is crucial for valuation. The process involves starting with current or assumed sales, then projecting sales growth (immediate and perpetual). Other cash flow relevant items are expressed as percentages of sales. Free cash flow is calculated as cash inflow (Sales - COGS) minus cash outflow (Capital Expenditure + investment in working capital + taxes). A detailed breakdown of FCF computation is provided, explaining how items like depreciation, CAPEX, and working capital affect the cash flow calculation.

The Broodje S.A. case study applies the learned valuation methods. It provides financial data, assumed growth rates, cost of debt, cost of equity, tax rate, and leverage. The WACC and unlevered cost of capital are calculated. The case study then demonstrates a step-by-step forecasting of free cash flows for Broodje S.A., including calculations for taxes, EBIAT, depreciation, CAPEX, and investment in working capital. Both the DCF-WACC and APV methods are used to value Broodje S.A., with the APV method further explored for scenarios involving changes in leverage due to financial engineering.

The lecture concludes by reiterating that corporate finance aims to maximize shareholder value through fundamental valuation techniques. It emphasizes the importance of computing and discounting free cash flows using appropriate rates, verifying valuations against strategic scenarios and industry benchmarks, and understanding critical assumptions, especially regarding terminal value. Further reading from 'Berk & de Marzo' and additional exercises are suggested, including proving the equivalence between APV and DCF-WACC and valuing Broodje using the Free Cash Flow to Equity (FCFE) method. The FCFE method and its components are briefly introduced.