Corporate Valuation in Developed and

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1 Corporate Valuation in Developed and Emerging Markets Summer 2017 Professor: Javier P. Epstein, CFA MBA, University of Michigan Ross School of Business (1994). CFA Charterholder. Managing Partner of JPE Capital Management, an independent advisory firm for individual and institutional investors. Prior to that, he has held executive positions in leading investment banks in New York City. He was Vice-President of Santander Investment Securities, Senior Vice-President of Bankers Trust & Co, and Associate Director of Bear Stearns & co. Finance professor at and other business graduate schools in Argentina. Página 1 de 5

2 Main Topics Corporate valuation techniques both for public and private companies with a focus on those established in Emerging Markets. Discounted Cash Flow Model and Valuation Multiples applied in Emerging Markets. Financial Statement Analysis. Cash flow elaboration under volatile macroeconomic contexts. Course objectives Main purposes of the course are: Review valuation techniques used in developed markets and understand how to adjust them for emerging markets. Understand key topics and tools employed to evaluate the economic and financial performance of emerging market companies from a pragmatic perspective. Establish a good understanding of successful tools used to realistically elaborate and analyze business projections. Establish a deep understanding of when one valuation technique works better than another. Implement a practical approach by using valuation techniques over real cases, based on Emerging Markets companies. Methodology Minimum Class Attendance: 75% Grade Weights: - Class Participation: 40% - Assignments: 30% - Final exam: 30% Página 2 de 5

3 Outline and session schedule Session Topics 1 Review of Valuation Techniques in Developed Markets Introduction to main Valuation Techniques. Value of the Firm vs. Value of the Equity. Review of the Discounted Cash Flow Model. What are the advantages and disadvantages of the model? What is the discounted rate? The Risk Free rate and the Risk Premium. What is Beta? Understanding Beta limitations. How to calculate the Cost of Equity and Cost of Capital? Company Risk and the Business Cycle. Edition, Chapters: 2, 7 and 8 McKinsey and Company (Autumn, 2002) The Real Cost of Equity Damodaran, Aswath: Investment Valuation Wiley Finance 2nd Edition. Chapters: 1 and 4 2 Review of Valuation Techniques in Developed Markets (Part II) Calculating Free Cash Flow of the Firm and Free cash Flow of Equity. How to estimate Growth? Working Capital. Capital Expenditures: Maintenance vs. Growth. Estimating the Terminal Value of a Company. Practical Application of Each Model. Edition. Chapters: 14 and 15 Edition. Chapters: 9, 10, 11, 12 and 13 3 Relative Valuation: Multiples of Equity Relative Valuation. What are the advantages and disadvantages of valuation multiples? Multiples of Equity: PE, Earnings Yield, P/B, P/CF, P/S. Fundamental Variables that determine each Multiple. Edition. Chapters: 17 to 20 4 Relative Valuation: Multiples of the Firm Multiples of the Firm: EV/S, EV/EBIT, EV/EBITDA. Fundamental Variables that determine each Multiple. What is the concept and limitations of EBITDA? EBITDA in Leverage Buyouts How Private Equity Firms determine the right EBITDA Multiple? Página 3 de 5

4 Edition. Chapters: 17 to 20 5 Competitive Analysis in Valuation Competition and its impact on Valuation. Types of Competitive Advantages. When are competitive advantages sustainable? Barriers of Entry. Economies of scale. Global Markets and Competition. How to incorporate sustainable competitive advantages in cash flows, discount rates and valuation multiples? Greenwald, Bruce: Competition Demystified Columbia Business School. Chapters: 1 to 5 6 Financial Statement Analyses of Emerging Companies How to use and interpret annual reports and financial statements when valuing emerging market companies? Is all the necessary information available in financial statements? Issues to consider when evaluating Latin American company business. Key financial indicators. Accounting values against market values. Financial Risks. William BRUNS. Introduction to Financial Ratios and Financial Statement Analysis Harvard Business School September Cases Latest annual reports of two Latin American companies to be selected by students. 7 Valuing Companies in Energing Markets (Part I) Emerging Markets and their Relevant Features. Macroeconomic characteristics of Emerging Markets. Foreign Direct Investment. Mergers and Acquisitions. Stock Markets in Emerging Markets. Fundamental Discounted Cash Flows. How should Cash Flows be adjusted in Volatile Economies? Pereiro, Luis Valuation of Companies in Emerging Markets John Wiley & Sons Chapters: 1,3,4 and 6 Bruner, R.; Conroy, R.; Estrada, J.; Kritzman, M. & Li, W. (May, 2002). Valuation in Emerging Markets. James, M. & Koller, T. (2000). Valuation in Emerging Markets. 8 Valuing Companies in Energing Markets (Part II) Modeling Cash Flow in Emerging Markets. Exchange Risk. Inflation Risk. Relative Valuation in Emerging Markets. What are the right comparables? Cross Border Valuation. Can Developed Market Multiples Página 4 de 5

5 be adjusted for Emerging Markets companies? Pereiro, Luis Valuation of Companies in Emerging Markets John Wiley & Sons Chapters: 1,3,4 and 6 Vélez-Pareja, I. & Tham, J. (January, 2002) Valuation in an Inflationary Environment. Taylor Mark., Taylor Alan (2004). The Purchasing Power Parity Debate. NBER working paper Cost of Capital Estimation in Emerging Markets Modeling the Cost of Capital in Emerging Economies. Determining and measuring risk of Emerging Markets companies. Is β an appropriate risk estimator? How to estimate β of private (unlisted) Emerging Market companies? Levered and unlevered β. Do CAPM s assumptions hold in developed markets? Do they hold in Emerging Markets? Problems related to measuring and estimating cost of capital in developing economies. Alternatives to CAPM for estimating cost of capital. Country Risk Premium. Fuenzalida, D. & Mongrut, S. (May 2010) Estimation of Discount Rates in Latin America: Empirical Evidence and Challenges Pereiro, L. (April 2001) The Valuation of Closely-Held Companies in Latin America 10 Exam Bibliography Reading material consists of notes, papers, exercises and chapters from suggested books. Suggested books are: Damodaran, Aswath. Investment Valuation, John Wiley & Sons, Inc. (2nd Edition) Pereiro, Luis. Valuation of Companies in Emerging Markets. A Practical Approach. John Wiley and Sons, Greenwald, Bruce: Competition Demystified Columbia Business School Copeland, Tom; Koller, Tim & Murrin, Jack. Valuation. Measuring and Managing the Value of Companies. John Wiley and Sons (3rd Edition), Página 5 de 5