Corporate Finance 101: Equity Valuation

A zoom-in, zoom-out, connect-the-dots take on Free cash flow models, Dividend discount models, and equity valuation
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Instructed by Loony Corn Business / Finance
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  • Lectures 50
  • Length 6 hours
  • Skill Level All Levels
  • Languages English
  • Includes Lifetime access
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    Available on iOS and Android
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About This Course

Published 3/2016 English

Course Description

A zoom-in, zoom-out, connect-the-dots tour of Equity valuation

Let's parse that

  • 'connect the dots': Equity valuation is conceptually complex - that's why plenty of folks mechanically follow the procedures, but don't understand the valuation they end up with. This course makes sure that won't happen to you.
  • 'zoom in': Getting the details is very important in equity valuation - a small change in an assumption, and the value output by your model changes dramatically. This course gets the details right where they are important.
  • 'zoom out': Details are important, but not always.  This course knows when to switch to the big picture.

What's Covered:

  • Equity Valuation Introduced: intrinsic value, price, valuation and market capitalisation.
  • Absolute Valuation Techniques focus on getting a point estimate of a company's intrinsic value. This is invariably done by discounting a series of cash flows projected into the future. 
  • Net Present Value and Discounting Cash Flows: NPV is a crucial concept in finance - and in life. Understand what the present value of an asset is, how it relates to the rate of return on the asset, and how risky cash flow streams are handled.
  • CAPM, Weighted Average Cost of Capital and Required Equity Return: These are key concepts required in valuing the risky stream of cash flows that represent a company's value.
  • Dividend Discount Models: A family of absolute value models that discount the dividends from a stock. Despite their seeming simplicity, there is some real wisdom embedded into these models. Understand them.
  • Free Cash Flow ValuationFCF valuation is a serious valuation tool. Understand how to use it right - and when not to use it.
  • FCFF and FCFE: The fine print on calculating Free Cash Flows to the Firm, and to Equity holders.

Talk to us!

Mail us about anything - anything! - and we will always reply :-)

What are the requirements?

  • This course assumes no prior knowledge of accounting or finance

What am I going to get from this course?

  • Understand company valuation, the role of cash flows, risk and return
  • Apply important types of models: Dividend-Discount models, Free Cash Flow Models and Relative-Value models
  • Calculate the cost of capital to a company

Who is the target audience?

  • Yep! Business majors and aspiring MBAs
  • Yep! Finance professionals who are rusty on equity valuation
  • Yep! CFA Candidates
  • Yep! Accountants looking to strengthen their applied corporate finance skills
  • Yep! Non-finance professionals, aspiring entrepreneurs looking to understand how companies are valued

What you get with this course?

Not for you? No problem.
30 day money back guarantee.

Forever yours.
Lifetime access.

Learn on the go.
Desktop, iOS and Android.

Get rewarded.
Certificate of completion.


Section 1: You, Us & This Course

This is a zoom-in, zoom-out, connect-the-dots take on equity valuation, ideal for finance professionals, MBAs, and aspiring entrepreneurs with an eye on the money.

Section 2: Price, Value and Valuation

In finance, as in life, price and value are all too easy to mix up.


Intrinsic value is intangible, so it can only be estimated (by models), not measured.


For a publicly traded firm, market capitalisation is synonymous with valuation. The difference between value and valuation is what keeps the investing industry alive and awake, however.


Going concern, liquidation, or sum-of-the-parts? Take your pick of valuation models.

Section 3: NPV and Discounting Cash Flows

Absolute valuation models focus on a point estimate of intrinsic value. They are invariably based on the concept of Net Present Value.


The idea of Net Present Value (NPV) is one of the most fundamental in all of finance - and it all starts with compound interest.


NPV and price are related: if NPV > price, the asset is undervalued, and should be bought ASAP! If NPV < price, the asset is overvalued - don't buy it.


Calculate the NPV of a cash flow in the future. The cash flow is deterministic, btw.

Future Value of a Present Cash Flow

The higher the compounding frequency on the risk-free instrument, the higher the discount rate.


Taken to its limit, compounding could be continuous. This yields the highest possible discount factor, given a certain discount rate.


Calculating the NPV of a stream of cash flows in the future is one of the most common use-cases in all of finance. Its used across bond math as well as corporate finance.

Section 4: Valuing Uncertain Cash Flows

Discounting risky cash flows presents a challenge: you can either increase the discount rate (by risk-adjusting it) or decrease the cash flow (replace it with its certainty equivalent). Almost everyone does the former. 


Assets with the same risk should offer the same return. This is the principle underlying risk-return models. We see a simple example of a risk-return model, calculating the cost of debt for a firm from its credit rating and the duration of the borrowing.


The CAPM is the most widely known and widely used risk-return model for equities. Understand how the CAPM works, what market beta is, and how the ERP can (or rather can not) be cleanly measured.


The overall cost of capital for a firm with both debt and equity is given by the wacc. This is a weighted average of the costs of debt and equity. The weights used in the average? The market prices of debt and equity respectively.


Interest expenses are pre-tax, while dividend payments are not. So, from the point-of-view of a firm, we need to reduce the cost of debt using an adjustment for the tax shield.


Be careful to use the WACC for all cash flows related to a firm. This leads to a few strange situations (eg negative cash flows) but at least it is consistent and transparent.


Top-down betas are obtained from regression, but are very noisy (standard errors in regressions are quite large!) Instead, we should use bottoms-up betas, especially for conglomerates. Understand the intuition, as well as the outline of the procedure.


If you are valuing a private company, the beta you really ought to use in your WACC calculation is not the market beta, its the total beta.


The beta that we get via regression, or (on Yahoo FInance:-)) is a levered beta, which reflects the market co-movement of a company at its current level of leverage. There is a simple way to unlever and relever betas. 


Debt is an important part of WACC. Don't forget to take operating leases as well.


Don't forget leases, including operating leases!

Section 5: Dividend Discount Models

Dividend Discount Models are a specific family of absolute value models that discount dividends. These can seem simplistic, but have a lot of simple wisdom embedded within.


DDM have a neat relationship between the price of a stock today, its price in the future, and the dividends in the period in between.


Depending on the company's growth and stage in its life-cycle, different DDM profiles can be applied to model its growth.


A cash cow is a company with zero growth. Cash cows are not as uncommon as you might think - look no further than many state-owned resource firms.

Sustainable Growth Rate of Equity

The Gordon Growth Model works best for stable-growth, dividend paying companies.


Micro Econ 101 dictates that firms experience a period of extra-ordinary growth early in their lives, before perfect competition sets in. At that point, growth subsides. We explore a few Dividend Discount Models that allow us to model this.

Section 6: Free Cash Flow Models

Free Cash Flow valuation is conceptually similar to Dividend Discount Valuation, but the FCF method can be used for a far wider range of firms, and in a far wider range of situations. This is the real deal in equity valuation.

Section 7: FCFF and FCFE Details

FCFF is free cash flow available to all providers of capital to the firm (both debt and equity). FCFE is the free cash flow available only to equity holders.


The easiest way to calculate FCFF is from the Cash Flow Statement. FCFF is basically Cash Flow from Operations (CFO), minus Investments in Fixed Assets, plus tax-adjusted interest expense.


FCFE is simply FCFF minus payments from the equity holders to the debt holders, plus payments from debt holders to equity holders:-)


FCFF and FCFE each have their strengths and weaknesses. We also discuss an alternative discounting method of valuation, called the Adjusted Present Value (APV) method, which discounts FCFF using the cost of equity. This allows valuation with having to calculate the WACC, but it is tricky for another reason: determining the costs of financial distress.


There are 2 reasons why Net Income can't be used: for one, it does not take into account investments that are required to maintain the operations of the firm in the future, and for another, it includes various non-cash items, notably depreciation. EBITDA has both of these flaws, and in addition, it also has a third: it is a pre-tax measure. And of course taxes have to be deducted from any measure of cash flows to the capital providers of a firm (the government is not, usually, a capital provider!)

FCFF from Net Income or EBITDA

We discuss non-cash charges, preferred stock (include in FCFF, remove from FCFE), non-operating assets, and forecasting FCFF and FCFE

Section 8: Relative Valuation
Introducing Relative Valuation Models
The P/E Ratio: Pros and Cons
Mechanics of calculating the P/E ratio
Market P/E and Macro-economics
Other Valuation Ratios: P/B and EV/EBITDA
Section 9: Capital Structure and the M-M Propositions

The proportion of debt and equity that a firm chooses is known as its capital structure. We also look at 3 important decisions that firms have to make: the investment decision, the financing decision, and the dividend decision.


The second of the famous Modigliani-Miller propositions is easier to arrive at intuitively than the first, so let's start there - we see how leverage makes good times better, and bad times worse. 


We now circle back to the first, and more famous, Modigliani-Miller proposition:  leverage, by itself can not change the value of a company.

Behind the Numbers: The Intuition Behind M-M

The M-M propositions, as we studied them so far, made some important assumptions about the world a firm operated in - the most important and unrealistic of these was the absence of taxes. Let's now factor in the effect of taxes.

Wrapping up MM in a world with taxes

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Instructor Biography

Loony Corn, A 4-person team;ex-Google; Stanford, IIM Ahmedabad, IIT

Loonycorn is us, Janani Ravi, Vitthal Srinivasan, Swetha Kolalapudi and Navdeep Singh. Between the four of us, we have studied at Stanford, IIM Ahmedabad, the IITs and have spent years (decades, actually) working in tech, in the Bay Area, New York, Singapore and Bangalore.

Janani: 7 years at Google (New York, Singapore); Studied at Stanford; also worked at Flipkart and Microsoft

Vitthal: Also Google (Singapore) and studied at Stanford; Flipkart, Credit Suisse and INSEAD too

Swetha: Early Flipkart employee, IIM Ahmedabad and IIT Madras alum

Navdeep: longtime Flipkart employee too, and IIT Guwahati alum

We think we might have hit upon a neat way of teaching complicated tech courses in a funny, practical, engaging way, which is why we are so excited to be here on Udemy!

We hope you will try our offerings, and think you'll like them :-)

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