Valuation and Small Firm Financing (MSB311)

Content

The first part of the class introduced the tools of corporate valuation, such as cash flow forecasts, cost of capital estimation and relative valuation. These tools are then applied to actual valuations through a set of cases. In the second part of the course we look at valuation methods for start-ups and contrast them with those used for mature firms. The goal here is to help the students gain critical insight into what makes start-up valuation much more demanding relative to what they have learned so far.

The course then looks at the contracts the founders have with their financiers and investigates how these contracts structure the relationship between the contracting parties. The students will learn how these contracts:

set incentives for founders and investors

reduce asymmetric information

affect the valuation of the firm

change the relative value of the stakes of the contracting parties

In a second step the students will understand the incentives for investors (mostly venture capitalfunds) to finance start-ups and the consequences of these incentives:

the need to exit investments, and the difficulties of doing so through an IPO

how investors in start-ups (called VCs) structure

the contracts with their investors (called LPs)

how the performance of VC funds can be evaluated.

Learning outcome

Knowledge

Upon completion of the course, students will have knowledge of

• Master the components of valuations, including the estimation of cash flow, growth, cost of capital, horizon value, present value calculations, and ratio analysis.
• Identify the value drivers (from a finance perspective) in a given corporate situation.
• Start-up financing and the venture capital (VC) industry in general.
• How financial contracts should be designed in the VC industry.
• How firms are listed on a stock exchange.

Skills

Upon completion of the course, the candidate will be able to

• Master corporate valuations, performing all necessary analyses, such as the evaluation of a corporation's real investments, financial choices, and strategy.
• Build spreadsheets evaluating the cash flow consequences of a firm's plans, bringing in data from the corporations' environment as well as the corporate plans.
• Assess annual accounts and analyze them to recognize the cash flows that are relevant for valuation.
• Question the sensitivity of any decision-relevant estimate.
• Recognize how valuation is an integrated perspective in the field of finance, and the basis for all corporate decisions.
• Ask critical questions about finance-related business situations; use of method, assumptions and calculated value.
• Communicate central finance concepts, both written and oral, in business settings.
• Use the discounted cash flow (DCF) method for start-ups.
• Use the VC method and other valuation methods
• Evaluate the performance of VC funds.

Required prerequisite knowledge

Exam

Coursework requirements

Course teacher(s)

Study Program Director:

Course assessment

Literature