Since joining Megabank Asset Management three months ago you have been busy learning the ropes. You are about to grab dinner at 7 pm when your line manager, Charles de Vitry, sends you an email, reproduced below:
I’ve just been told by Peter from the Investment Committee that we have
been approached to bid on a stake in the Cloudy Bay Vineyards Limited.
To start the process we are expected to submit an “Expression of
Interest” form, in which we have to indicate the price we would be
happy to pay per share. Although this is purely indicative and not a
legally binding commitment, it is considered bad form to back out of
an expression of interest. The Investment Committee will be meeting
tomorrow at 10 am to discuss our Cloudy Bay; they will be expecting me
to have an opinion about the value of Cloudy Bay. So I need your help:
Can you run some numbers and come up with an equity valuation for Cloudy
Bay as a whole (and a price per share)?
I’ll need a 3-5 page report (in pdf format please). I’d like a brief
overview of Cloudy Bay, its industry, the overall economy, a description
and motivation of your valuation approach, key assumptions, and valuation
drivers, the actual “base case” valuation (of the equity of the whole
firm and price per share) and some scenario analysis showing what the
valuation might look like if we change the key valuation drivers. I’ll
be presenting this to the committee so make sure it looks professional.
You should be able to locate financials for Cloudy Bay on the New
Zealand Companies Office website1 under the “Documents” section.
You can use any information that is publicly available. Be sure to send
me your Excel calculations just in case I get challenged on any of the
I’ll be boarding my plane in 15 mins and should be back in town tomorrow
morning by 9:15 am. It would be great if you could email me the overview
before then so I can have a look at it while taking the taxi to the
EXAMPLE REPORT OUTLINE
The lines in bold are report section headings. The alphabetic lists underneath the bold section headers describe the type of content that each section should contain. You should free feel to adapt the outline below to suit your valuation approach; however, do ensure that you cover all the elements listed below in your report.
1. Executive Summary
a. Price: Mid-point estimate, Low and High estimates
b. Date of valuation
c. One line valuation approach summary
d. Most important valuation drivers
e. Key risks (industry, regulatory, market, technology)
a. Who and what is the report for?
b. Limitations, caveats, and disclaimers
a. Economic Backdrop
b. Industry Developments
c. The Firm
a. Summarise alternative methodologies
b. Select a methodology and motivate why you prefer this methodology to the alternatives
c. Set out the chosen methodology in sufficient detail
a. Valuation output (valuation in $/share)
b. Key inputs and intermediate variables
i. Risk-free rate, Market Risk Premium
ii. Equity beta, equity discount rate [, debt discount rate, D/E ratio, WACC]
iii. Growth rate(s), profit margins, a terminal value
6. Scenario Analysis
a. Define scenarios for Pessimistic, Base case, Optimistic
b. Report Valuation + 2-4 key variables from each scenario
c. Scenarios could be based on possible economic outcomes or possible industry or technological developments.
7. Appendix and References