Business Valuation and Corporate Restructuring
Domain scope
Business valuation and corporate restructuring tests valuation of shares, debt and targets, and the financial logic of M&A and restructuring. You must select methods, adjust earnings, value synergies and assess whether a deal creates value.
Core rules
- Asset-based valuation (NAV, liquidation, replacement cost) gives a floor, not a going-concern value; it misses intangible assets and future cash flows.
- Income methods: dividend growth model P0 = D1 / (ke - g); free cash flow to firm discounted at WACC, then subtract net debt to get equity value. FCFF = EBIT(1 - t) + depreciation - capex - increase in working capital.
- Market multiples: P/E values equity as maintainable earnings x P/E; EV/EBITDA values the enterprise, so subtract net debt to get equity. Adjust for non-recurring items, accounting policies, growth and risk.
- M&A: synergy value = PV of incremental cash flows; net gain to acquirer = synergy - premium paid. EPS bootstrapping from a high-P/E acquirer is not economic value creation.
- Restructuring: divestment, demerger, MBO, share buyback, rights issue, debt-for-equity swap; assess effect on control, gearing and value.
Worked example
Target reports earnings of £8m, including a £1m non-recurring gain, so maintainable earnings = £7m. Sector P/E = 12. Standalone equity value = 12 x £7m = £84m. The acquirer offers £95m, a premium of £11m (13.1%). PV of synergies = £15m. Net gain to acquirer = £15m - £11m = £4m, so the deal is value-creating if synergy estimates are reliable and integration costs are included. If the P/E were applied to unadjusted £8m earnings, value would be £96m and the premium would be overstated.
Traps
- Applying a P/E to unsustainable earnings.
- Confusing enterprise value and equity value; forgetting to subtract net debt.
- Ignoring synergies, integration costs and control premiums.
- Using the acquirer's P/E to value the target.
- Treating asset value as the sole measure for a going concern.