Course Introduction

Lucas S. Macoris (FGV-EAESP)

Disclaimer

Disclaimer

The information presented in this lecture is for educational and informational purposes only and should not be construed as investment advice. Nothing discussed constitutes a recommendation to buy, sell, or hold any financial instrument or security. Investment decisions should be made based on individual research and consultation with a qualified financial professional. The presenter assumes no responsibility for any financial decisions made based on this content.

All publicly available content used in this lecture is available and also shared on my GitHub page. Participants are encouraged to review, modify, and use it for their own learning and research purposes. However, no guarantees are made regarding the accuracy, completeness, or suitability of the code for any specific application.

For any questions or concerns, please feel free to reach out via email at lucas.macoris@fgv.br

Welcome to the Course

  1. Overview and Course Organization
  2. Grading and Evaluations
  3. Navigating through the syllabus
  4. How you can get the best of this course
  5. Overall Q&A
  6. Introduction to Corporate Finance

Overview and course organization

  • This is a hands-on, applied course on Valuation designed for professional master’s students in management. Throughout the course, students will:

    1. Explore the core concepts and methodologies used in valuation
    2. Develop the ability to critically analyze corporate performance, investment opportunities, and strategic decisions

  • Basic text-book

    1. We will follow Corporate Finance (Berk and DeMarzo 2023), as our text-book
    2. Harvard Business Review (selected cases) - access granted on e-Class®

  • Supplementary Reading

    1. Selected academic papers

Course Organization, selected topics

  • Although some topics may vary as we move along the course, we aim to cover the following areas:

    1. Valuation - rationale and basic concepts
    2. Relative Valuation
    3. The Free Cash Flow in practice
    4. Valuation with different leverage policies
    5. Incorporating Uncertainty in Valuation Models
    6. Equity Valuation
    7. Mergers and Acquisitions

Complementary Content

Students are encouraged to bring in new topics and/or in-depth discussions of the covered topics that are of the interest of a broader audience. Whenever applicable, the professor will provide supplementary content in the form of whitepapers, policy papers, and academic papers to foster the discussion.

Grading and Evaluations

Grading will be composed of the following activities:

  1. Capstone Project (Excel format) (50%)
  2. Capstone Project Presentation (PowerPoint format) (30%)
  3. Take-home Deliverables (10%)
  4. Active In-class Participation (10%)
  • You can find the details of any of these activities in the official syllabus (available on eClass)
  • In case of any questions, feel free to reach out to lucas.macoris@fgv.br

Office-hours

I also host office-hours (by appointment) on Thursdays, 5PM-6PM. In these sessions, I’ll be more than happy to help you with anything you need from this course. Use the Office-hour Appointments link at the bottom of this slide to schedule some time (or click here).

Getting the best of this course

Getting the best of this course

How you can get the best of this course

  1. Follow FGV-EAESP code of conduct
  2. Be organized: pay attention to pre-readings and deliverables!
  3. Be proactive: ask questions and participate in discussions, proactively study the mandatory reading
  4. Take the lead on your learning: you are the ultimate responsible for your success!

How the professor can facilitate you getting the best of this course

  1. All mandatory content will be provided ahead of time
  2. Provide a safe and open space for questions, both in-person and remote
  3. Motivate students, both from the academic and practitioner standpoints
  4. Provide opportunities to extend knowledge beyond the mandatory readings

What is a Valuation About?

Definition

Valuation is the process of estimating what something is worth today, based on its expected future benefits. In corporate finance, this typically involves discounting future cash flows using an appropriate discount rate that reflects the risk of those cash flows (Berk and DeMarzo 2023)

  • Valuation ≠ Price Forecasting: it estimates fundamental value, not short-term market movements.

  • Purposes of Valuation: Investment decisions, fundraising, M&A, taxation, strategic planning.

  • A Blend of Science and Judgment: Relies on models and assumptions—cash flows, risk, growth, reinvestment.

\(\rightarrow\) Example: WeWork’s $47B pre-IPO valuation collapsed after governance and business model scrutiny, revealing an inflated narrative disconnected from fundamentals

What is the Value of a Firm?

  1. Market Value: reflects what investors are currently willing to pay
  • Changes in real time—driven by expectations, sentiment, and news
  • Example: Tesla’s market cap surged past $1 trillion despite profits trailing legacy automakers
  1. Accounting (Book) Value: based on historical costs and accounting rules
  • Often underestimates firms with intangible assets
  • Example: Amazon’s book value was far below its market cap during its growth years
  1. Intrinsic Value: theoretical value based on expected future cash flows, risk, and growth
  • May differ from market value—basis for investment decisions.
  • Example: Warren Buffett invests when market price is below its (estimated) intrinsic value

Valuation Methodologies

  • The fastest way to assess the value of a firm is to compare and contrast it to similar firms in which we assume to know the value upfront

  • This is what we call Relative Valuation:

  1. Compares a firm’s value to that of similar companies using market-based ratios
  2. Common multiples include P/E, EV/EBITDA, P/B, and EV/Sales
  3. Assumes that comparable firms are correctly priced by the market
  4. Simpler and faster than DCF, but less grounded in fundamentals and sensitive to choice of peers and potential market mispricing

\(\rightarrow\) Example: SaaS startups valued at 10x–20x revenue during bull markets

Valuation Methodologies, continued

  • The Discounted Cash Flow (DCF) is based on expected free cash flows discounted at the firm’s cost of capital:

\[ V=\sum_{t=0}^{\infty}\dfrac{FCF}{(1+r)^t} \]

  • Requires detailed assumptions about growth, margins, reinvestment, and risk
  • Grounded in fundamentals, making it robust for long-term valuation
  • Sensitive to small changes in assumptions, especially terminal value and discount rate

\(\rightarrow\) Example: valuing the introduction of a new project within a given company requires estimates around (expected) future cash flows and its associated risk, as well as the investment needed

Valuation Methodologies, continued

  • The Liquidation (or Salvage) Value: an Asset-Based view of the firm by the sum of tangible assets minus liabilities
  1. Estimates the value of a firm’s assets if sold separately in a distressed or orderly sale (“fire sale”)
  2. Because it ignores the firm’s ability to generate future cash flows, it is typically lower than going-concern value due to forced-sale discounts
  3. Useful for valuing distressed firms or setting a valuation floor
  4. Often used in bankruptcy, restructuring, or lender recovery scenarios

\(\rightarrow\) Example: the liquidation value of Lehman Brothers post-crisis

Impact of New Information on Valuation

  • Valuation is not static - new information constantly reshapes assumptions about expected returns and risk:
  1. Rising interest rates lower the present value of future earnings
  2. New patents or tech boosts future cash flow expectations
  3. Regulatory risks raise discount rates or reduce expected margins, plummeting stock prices
  • As such, as new information arrives publicly, investors reassess expectations regarding expected cash-flows, risk, and future growth, and the expected value of a firm changes

\(\rightarrow\) Example: Meta lost $200B in market cap in 2022 after weak earnings and guidance—market revised growth expectations sharply

The Dark Side of Valuation

“Every valuation tells a story. The danger lies when the story is fiction.” – Aswath Damodaran

  • What happens when standard valuation models don’t work to frame a specific valuation target?

  • There are common real-world examples that pose difficulties for the standard valuation methods:

    1. Startups: no earnings, high uncertainty. In this case, the use of scenario-based or option pricing approaches are more suitable for the task

    \(\rightarrow\) Example: Uber pre-IPO required projecting market share in unproven markets

    1. SPACs and Shells: High valuation based on expectations alone

    \(\rightarrow\) Example: Nikola surged on hydrogen truck hype—collapsed after short-seller revelations

References

@ Website | @ Slides | @ Office-hour appointments

Berk, J., and P. DeMarzo. 2023. Corporate Finance, Global Edition. Pearson. https://books.google.com.br/books?id=m78oEAAAQBAJ.