David Hillier's Finance Classroom

Making Finance Easy

Video: Tell Me About Ordinary Shares

In this video I discuss all the different characteristics of ordinary shares.  There’s quite a lot to cover, including:

  • Par vs No-Par Shares
  • Authorised vs Outstanding Shares
  • Retained Earnings
  • Market vs Book Values
  • Treasury Stock
  • Shareholder Rights
  • Dividend Characteristics
  • Share Classes


New Video Series: Long-Term Financing

The new term is almost upon us and so it is time for a new Finance Classroom video series! I’m concentrating on Long-Term Financing and will review the characteristics of ordinary shares and debt instruments.  We’ll also look at hybrid securities, such as preference shares and then spend some time considering recent trends in financing.  The series will finish off with a discussion of Islamic Financing, which is a major fast-growing new area for firms to tap into to raise new money.

If you wish to subscribe to the Finance Classroom Newsletter, please supply your e-mail address at the side of the page (or the bottom if you’re using a mobile phone or tablet) and click the ‘subscribe’ button.  You will receive an e-mail notification each time a new article has been posted and exclusive posts based on subscriber requests.

Finance Reference Lists: 2012 Update

It’s been some time, but I’ve now completed the reference lists for 2012 and they are fully updated in their respective pages.  I personally read each paper to ensure they are an appropriate level for Masters and Undergraduate degree students who wish to learn more about each topic.  Doctoral students will likely use this list as a base before going into more advanced research papers.

I realise the update is only 2012. Because I read each paper, it takes me a while to go through a full year. A shorter list of references but updated to much more recently can be found in my textbooks.

On to 2013!

New Video: An Introduction to Firm Valuation – Price Multiples and Free Cash Flow to the Firm (FCFF) Methods

This video finishes my series (for now) on equity and firm valuation.  I focus on three different methods to close the course:

  • Discounted Cash Flows
  • Price/Earnings Multiples
  • Free Cash Flow to the Firm (FCFF)

In a 17 minute video, I obviously can’t cover everything in detail but I hope the video gives you a good introduction into each of the methods listed above.

I’ll be back in a few weeks with a completely new course. Stay tuned!


If you wish to subscribe to the Finance Classroom Newsletter, please supply your e-mail address at the side of the page (or the bottom if you’re using a mobile phone or tablet) and click the ‘subscribe’ button.  You will receive an e-mail notification each time a new article has been posted and exclusive posts based on subscriber requests.


Video: How to Read Financial Information on Websites

This is a quick video to address some requests I’ve had on how to read financial information on websites.  It can be really daunting to people who are new to Finance when they have to collect financial information on companies for research. I’m hoping that this video will be of some help to you.

My favourite websites (not including the financial databases the university subscribes to) are:

Video: Reconciling the Dividend Growth and NPVGO Models of Equity Valuation

This isn’t my most riveting video (are any?), but very important nevertheless.

In my recent videos I’ve shown how to value equities using both Dividend Growth and Net Present Value of Growth Opportunities (NPVGO) models.  This video shows that both methods are equivalent and should lead to the same equity valuation.

I sometime include this as an exam question and ask students to show that both approaches lead to the same equity value.  Don’t say you haven’t been warned!

If you wish to subscribe to the Finance Classroom Newsletter, please supply your e-mail address at the side of the page (or the bottom if you’re using a mobile phone or tablet) and click the ‘subscribe’ button.  You will receive an e-mail notification each time a new article has been posted and exclusive posts based on subscriber requests.


Finance Reference Lists 2011 Update

A substantial part of writing Finance textbooks is the background reading that goes into each topic. My reference lists are given at the end of each chapter but because of space issues, I can only include only a subset of all the papers I read.

In the Reference Lists page, I have created curated reference lists for all the main topics in the book and they are very useful when undertaking new research into an area.

The process of reading each paper is slow, so in recreating my full lists, I have reread the papers to ensure they are relevant for the topic and make a substantial contribution to the literature.  I’ve completed the year 2011 and will now start on 2012 papers.

The topics I cover are:

  1. Asset Pricing
  2. Behavioural Finance
  3. Bonds
  4. Capital Structure
  5. Corporate Governance
  6. Corporate Restructuring
  7. Derivatives
  8. Dividends
  9. Executive Compensation
  10. Financial Analysis
  11. Financial Distress
  12. Insider Trading
  13. International Corporate Finance
  14. Investments
  15. Private Financing
  16. Security Issues

I hope these are helpful to researchers and as more years are included their usefulness should be even greater.

Video: How to Calculate the Net Present Value of Growth Opportunities

Now we’re really in 2017, I’ll be starting back on a regular delivery of videos in Corporate Finance.  This video concerns growth opportunities and how to calculate the proportion of a company’s share price that comes from growth.

It’s important to remember that share prices are forward-looking and reflect today’s expectations of everything that is going to affect a company in the future.

When President Trump tweets about automakers or companies who are producing goods in Mexico, share prices react immediately because investors incorporate changes in expectations of future cash flow into today’s price.  President Trump may or may not carry through with actions, but prices have changed nevertheless.

In this regard, share prices reflect what the market today believes will happen in the future.  In this video, I’ll show you how one can calculate the value of future events.  I’ll also spend a little time looking at non-dividend paying firms as well as showing why companies can continue to grow dividends even though they are investing in poor projects.  Enjoy!

If you like this, please subscribe to the Finance Classroom Newsletter. You will receive an e-mail notification each time a new article has been posted and exclusive posts based on subscriber requests.   

Valuation Multiples: Carnival plc

How to Value Companies: Valuation Multiples

The Valuation Multiples method is one of the most common approaches to valuation because it is quick and does not require detailed analysis of a company’s annual accounts

It is also an excellent approach when a company is private and the share price is not available.

Which Valuation Multiple to Use?

The best multiple for a particular company will depend on its industry and growth opportunities.  Common multiples include:

Enterprise Value/Sales Price/Earnings Sales/Assets
Enterprise Value/EBITDA Price/Book Value of Equity Sales/EBIT
Enterprise Value/EBIT Price/Sales Price/Sales

Note: Enterprise Value = Market value of equity + Debt – Cash and Cash Equivalents

Four Key Steps

  1. Identify peers/benchmarks for the company.
  2. Find valuation multiples for the comparator firms.
  3. Calculate the median or mean multiples of the peer group.
  4. Calculate the expected multiple for your chosen firm and use to value equity.

Given we are in December and the weather is dreadful outside, let’s use the Cruise firm, Carnival plc as a case study for the Valuation Multiple approach.

Step 1: Identify peers/benchmarks

Carnival plc is an international leisure and cruise firm with operations throughout the world.  You can find out more about the company on their corporate website.

Our first step is to find Carnival’s peers.  For a listed firm it’s as easy as searching for “company name peers” in Google. I did this and got the following set of results:

Carnival plc Benchmark Companies

I went with the first entry in the list above and found that Carnival had two main competitors:

Carnival peers screenshot from csimarket.com

We have two peers: Norwegian Cruise Line Holdings Ltd, and Royal Carribean Cruises Ltd – both private firms.

Step 2: Find valuation multiples for the comparator firms.

Given we have private firms, there will be no share price available so we will use Enterprise Value ratios

*** For clarity, I don’t know anything about the Hotels and Leisure industry sector.  To check, I did another search on google with the following request, “what are the best valuation multiples for hotels and leisure?”.  The first result that came up was Enterprise Value/EBITDA, which is one of our ratios so we are on the right track ****

Step 3: Calculate the median or mean multiples of the peers

Simply calculate the average of the peer ratios and compare it to your target firm.

For our case study, let’s focus only on Enterprise Value/EBITDA.  If you are doing a full analysis, you should use other ratios as well to triangulate your values.

The internet is a wonderful resource. I did another search on google for “Carnival plc Enterprise Value/EBITDA“.  Our old friend, gurufocus.com, came to the rescue:

Doing the same thing for Norwegian Cruise Line Holdings, we get:

For Royal Caribbean Cruises Ltd we get:

Let’s bring the data together.


Enterprise Value/EBITDA
Carnival plc 10.94
Norwegian Cruise Line Holdings Ltd 12.25
Royal Caribbean Cruises Ltd 11.63
Average of Norwegian and Royal 11.94


Step 4: Calculate the expected multiple for your chosen firm and use to value firm

From Gurufocus.com, Carnival has an Enterprise Value of $48.451 billion and an EBITDA of $4.430 billion.

On the basis of the comparator EV/EBITDA figure, you would expect the Enterprise Value for Carnival to be 11.94 x $4.430 billion = $52.894 billion, which is higher than the actual Enterprise Value of $48.451 billion.

It would look as if Carnival is underpriced compared to its two peers.

Strengths and Weaknesses of the Valuation Multiple Approach


  1. There is a massive number of different multiples you could look at and so you have different ways to carry out firm valuations.
  2. Ratios are simple to calculate and easy to interpret.
  3. You are valuing a firm based on other companies in the same sector. Differences between the actual share price and estimated values can provide much insight into where the company could improve its operations.
  4. This method is used for private firms and each industry will have standard valuation multiples to arrive at an expected value for a company. This is important when you are looking to sell your firm.


  1. It can be difficult to identify appropriate peers for the company. Choose the wrong ones and your value estimates will be wrong.
  2. It is easy to focus on the wrong multiples given that there are so many to choose from.
  3. The method does not actually look at the company’s figures but uses other company data to arrive at a value.


In this series of articles, I have shown a number of different ways to value companies. The exposition was necessarily simple to ensure the central concepts are presented in a clear and concise way.

There are many factors I didn’t consider as my objective was to show you the general approach to value firms, rather than to look at the specific valuation of any one firm.

If you want to know more about valuation multiples, you should check out Chapters 12 and 13 of my book, Financial Markets and Corporate Strategy, where I explore the method in much more depth.

I’m now going to take a break for a couple of weeks and when I return in January, I will continue with my valuation videos on YouTube.

See you in a few weeks!



How to Value Companies: Focussing on the Operations

You can value companies in a number of ways. For example, use balance sheet/stock market data for the market valuation method, or you can use Cash Flow/Income Statement for FCFF valuation. In this article, we focus on the actual operations of a firm to get a valuation estimate.

Consider the basic accounting equation:

Assets = Liabilities + Equity

The method used in Part 1 of this series separately estimated the liabilities and equity of a company to arrive at an overall firm value.

Our focus shifts to the left-hand side of the accounting equation – the assets of the firm.  Theoretically, asset value should be equal to the sum of the liabilities and equity values.

Valuation Steps

The best approach to valuing a firm’s assets is to work with the company’s management to identify all future cash flows likely to come from the assets (including human capital, brands and other intangibles). If you don’t have access to the management, you will need to use websites and the financial pages.

To value your firm, follow steps 1 and 2 below.

  1. Split the company into different divisions/activities and analyse each of these separately.
  2. Carry out a discounted cash flow analysis on each of the firm’s operational lines and then sum the individual present values to arrive at a total value of the assets (and the firm).

Valuation in Practice

Consider the construction firm, Carillion plc.  From its website, the company is involved in 4 distinct operations: Support Services, Public Private Partnerships, Middle East Construction Services and Construction Services (Excluding Middle East).

Cash Flows

The Carillion Annual Report provides the following information on the firm’s operations:

How to Value Companies

It is clear  that whereas Support Services is the largest market by far for Carillion, it is fairly stagnant compared to their Construction business.

Pipeline orders for Construction (The Middle East and elsewhere) are massive compared to existing revenue streams.  In addition, the efficiency of these business lines is much better than for Support Services.

The Discount Rate

Page 93 of the Annual Report states:

Discount rates have been estimated based on pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the Cash-Generating Units (CGUs). Whilst the Group has four CGUs, the risks and rewards associated with Construction services (excluding the Middle East) are consistent, and therefore one discount rate has been applied to each CGU. Similarly the risks and rewards encountered in the Support services CGUs are consistent and therefore one discount rate has been applied to each CGU. Management has derived a Weighted Average Cost of Capital (WACC) using the capital asset pricing model to determine the cost of equity and then weighting the overall cost of capital for the Group by equity and debt. The WACC was then used to determine the pre-tax discount rates for each CGU. The rate used to discount the forecast cash flows for the CGUs in the Construction services (excluding the Middle East) was 10.0 per cent (2012: 11.7 per cent) and for the CGUs in the Support services segment was 8.8 per cent (2012: 9.9 per cent).

So, from this text, we have a discount rate of 10.0% for Middle East Construction and Construction (Exc. the Middle East) and 8.8% for Support Services and Public Private Partnerships.


From this point on, it is up to the analyst to decide on the assumptions with respect to cash flow growth and future cash flows.  This is covered in much more detail in my textbooks, so, for now, I am just going to state a number of very broad (and probably unrealistic!) assumptions.


  1. For the next five years, cash flows will grow at a rate in proportion to the Pipeline/Order Book ratios for each business line.
  2. From the 5th year onwards, cash flows will remain constant.
  3. The maximum year on year growth in cash flows in any unit will be 20%.

I admit these can be criticized as being “finger in the air” assumptions.  However, without further in-depth analysis, we cannot forecast any further than five years from now. Also, from year five onwards assuming no growth is as good an estimate as any.

With the exception of Support Services, the pipeline of orders in all units are significantly higher than the existing order book.  Consequently, I am assuming 20% growth year on year for all units, excluding Support Services .

Support Services looks as if future performance will be flat.  Given that the pipeline of orders in this division is 23.5% less than the existing order book, I have chosen a negative growth rate of 23.5/10 = -2.35% for the next five years. This reflects a potential thttp://www.david-hillier.com/wp-admin/post-new.phpightening of this market over the coming period.

With these assumptions, we have the following cash flow streams for each business unit: 

We now need to estimate the terminal value for each of the Business Lines.  To do this, I simply treat the cash flows from Year 6 onwards as perpetuities and discount them at the respective discount rate for each unit (=Cash Flow@Yr 6/Discount Rate).

Company Valuation: Assets

We now have cash flows and a Terminal Value for each business unit.  These will be discounted to present values using the respective business unit discount rates.  The present values for each cash flow are given below:

Company Valuation

Summing these present values gives us an estimate of the value of Carillion plc.  The value from the Asset Valuation method is £4.089 billion.

 Strengths and Weaknesses:

The strengths of the Asset Valuation approach are:

  1. If full sight is given of the firm’s operations, it is possible to come to a completely independent estimate of firm value that does not rely on financial reports.
  2. The method (when valuing the future cash flows of operations) avoids accounting assumptions like intangibles valuation, which can be difficult to understand.

The weaknesses of the Asset Valuation approach are:

  1. It is often exceptionally difficult to get information on the firm’s operations and sales pipeline, making this method almost impossible to use.
  2. The method suffers from the need to make assumptions about future cash flows just like all other methods.

In the next installment of this Primer on Corporate Valuation, I will look at the final valuation technique, Valuation Multiples and Peer Comparisons.

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