Stock valuations are the result of a combination of Discounted Free Cash Flows (FCF), comparables multipliers, and transactions.

Stock valuations are the result of a combination of Discounted Free Cash Flows (FCF), comparables multipliers, and transactions.

Discounted Cash Flows

Discounted cash flows use the present value of FCF forecast ~5 years into the future. FCFs are calculated as follows.

FCF = Earnings before Interest and Taxes (EBIT) – Taxes Paid – Working Capital Increases – Changes in Other Assets

Comparables

This method uses data from companies in the same industry as the firm being valued. In doing this, the methodology uses multipliers. The best multiplier is:

EV/EBITDA = Enterprise Value / Earnings Before Interest, Taxes, Depreciation, and Amortization

where EV = [[# of shares outstanding x market price/share] + [interest-bearing debt outstanding]]

You take the EBITDA of the target firm being evaluated and multiply it by the EV/EBITDA for its comparable to get the target firm’s EV. To get the value of the target firm’s equity, subtract interest-bearing debt outstanding from the calculated EV. Finally, divide the equity by the number of shares outstanding to get the comparable price per share.

You can repeat this process using other comparable firms and then average the calculated prices to get a comparable-based stock price. Also, you can use other ratios, such as EV to cash flow, and so on.

Transactions

Acquisitions of firms in the same industry as the target firm also give us an indication of the stock price for the target firm. To use this method, compare the stock price of the acquired firm prior to the announcement of the acquisition to the final price paid. This comparison is the premium paid. This premium can then be applied to the current stock price of the target firm to get a transaction-based stock price.

All three methods may be combined by giving the stock prices calculated under each weight. The sum of these weights is 100%. You choose how you weigh each. That said, discounted cash flows should carry a higher weight because the method is more rigorous. As always, it all depends!

Wilson Aviation

You have read the Wilson Aviation case. Now, please answer questions in the case using the Excel template below. The template already contains all the data you need to complete your work. the Wilson Aviation case is the PDF and the questions is the template file.