Business Valuation and Corporate Restructuring
What the domain tests
Business valuation tests DCF, multiples and asset-based methods, and their use in mergers, acquisitions, MBOs and restructuring. You must value equity versus enterprise value correctly and assess synergy.
Core rules and concepts
- DCF: forecast free cash flow to the firm, discount at WACC, add terminal value, subtract net debt to get equity value. Terminal value = FCF_(n+1)/(WACC − g), with g below long-run nominal growth.
- FCF to equity is discounted at Ke and gives equity value directly. Do not mix FCFF with Ke.
- Market multiples: P/E, EV/EBITDA and P/B. Apply to sustainable earnings or EBITDA; adjust for non-recurring items, accounting differences and control premium.
- Asset-based valuation is a floor, useful for property or liquidation, but weak for going concerns with intangible value.
- Synergy value = combined value − (stand-alone values). M&A is accretive to EPS only if the acquired earnings yield exceeds the financing cost, but EPS accretion is not the same as value creation.
- Nigerian schemes of merger require CAMA 2020 and SEC or court approvals; due diligence covers tax, liabilities, contracts and regulatory capital.
Worked example
FCFF at the end of year 1 is N120m and grows at 3%. WACC is 11%. Terminal value at the end of year 1 = 120 × 1.03 ÷ (0.11 − 0.03) = N1,545m. Discount year-1 FCFF plus terminal value at 11%: (120 + 1,545) ÷ 1.11 = N1,500m enterprise value. If net debt is N400m, equity value = N1,100m.
Traps that cost marks
Do not discount FCFF at Ke, use g ≥ WACC, apply a P/E to pre-tax profit, ignore net debt or synergy costs, or treat asset value as market value. Control premiums and synergies must be justified.