2.2 Valuation

Practice lab · Valuation

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Put your learning to work

Build a value range you can defend

Rebuild Harbour’s valuation using three methods. Explain which evidence deserves most weight and what would change your conclusion at the £8 price.

1 Take a first view2 Work and test3 Record your judgement

Try a decision · choose one

The three valuation methods give different answers. What should your committee note do?

Correct. Methods use different assumptions and may share the same forecasting weaknesses. Explain why an estimate deserves weight; a simple average does not resolve those weaknesses.

Reconsider this choice. Methods use different assumptions and may share the same forecasting weaknesses. Explain why an estimate deserves weight; a simple average does not resolve those weaknesses. Try another answer.

Case briefing video coming soon

Apply Valuation

Read the full narration

You have now built the tools in Valuation. The next task is to apply them to the supplied fictional case. Start with the objective and constraints. Record your first decision and the evidence supporting it. Work the numbers using consistent definitions and units. Invite the strongest reasonable challenge. When new information arrives, keep your first record and explain what changes. Finish with a conditional conclusion: what you would do, why, what remains uncertain and what evidence would trigger a review. This is a teaching exercise with fictional information. The quality of your reasoning matters more than whether a simulated outcome later looks favourable.

Rebuild Harbour’s valuation.

All company amounts £m. These are original hypothetical valuation inputs, not market observations or forecasts for a real issuer.

InputValue / assumption
Observed price / shares£8 / 20m
Debt / excess cash50 / 30
Historical EBITDA42
Comparable multiple range4.5–5.5x matching EBITDA
FCFF years1,2,312, 14, 16; end-year
Base WACC / terminal growth10% / 2%
Sensitivity rows / columnsWACC9,10,11%; g1,2,3%
Equipment / service divisional EBITDA28 / 16 before central costs
Annual central expense2; consolidated EBITDA42
Central-cost present value20, deducted once
Base division multiples5x equipment / 6x service
Division ranges4.5–5.5x / 5.5–6.5x
Other claims, assets, tax/separation costsExcluded; investigate for a real application

Try a decision · choose one

Harbour has 20 million shares priced at £8. Its equity market value is…

Correct. 20 million × £8 = £160 million. This is equity market value, before the enterprise-value bridge.

Reconsider this choice. 20 million × £8 = £160 million. This is equity market value, before the enterprise-value bridge. Try another answer.

Your model

  • Calculate market cap, EV and current EV/EBITDA.
  • Build comparable EV, equity and per-share endpoints.
  • Calculate each explicit PV, terminal endpoint, terminal PV and claim bridge.
  • Rebuild the 3×3 sensitivity grid with unrounded workings.
  • Calculate SOTP with central costs and net debt kept separate.
  • Draw a common-scale football field, then defend your evidence weighting.
Control totals after your attempt

Market cap160; EV180; current multiple4.2857x. Relative8.45–10.55/share. Explicit PV34.5004; terminal value at year3=204; terminal PV153.2682; EV187.7686; equity167.7686; base8.38843/share. Base SOTP9.80; range8.70–10.90. DCF grid6.60–11.36 does not imply a probability interval.

Common £-per-share scale, £6–£12. Labels give exact rounded endpoints; bars illustrate conditional estimates.

Relative
£8.45–£10.55
DCF sensitivity
£6.60–£11.36
SOTP
£8.70–£10.90

Observed price: £8.00. Base DCF: £8.39. Base SOTP: £9.80.

Peer review

Swap workings. Reproduce one result without asking the author, inspect signs/units and identify one assumption whose change could alter the conclusion. Record a correction openly rather than hide it with a plug.

The valuation committee

Try a decision · choose one

Using equity market value £160m, debt £50m and excess cash £30m, enterprise value is…

Correct. Enterprise value = equity market value + debt − excess cash = 160 + 50 − 30 = £180m under the stated simplified bridge.

Reconsider this choice. Enterprise value = equity market value + debt − excess cash = 160 + 50 − 30 = £180m under the stated simplified bridge. Try another answer.

Write 300–450 words recommending a next step for a hypothetical analysis of Harbour at £8. Use the relative, DCF and SOTP work. No real trade is required and there is no prescribed buy/sell answer.

  • Reconcile equity market value and EV.
  • Compare at least two methods with a common per-share basis.
  • Explain the strongest contrary case and the limits of the sensitivity range.
  • Prioritise two evidence gaps and state what would change your mind.

Original practice rubric · 15 marks

  • Evidence and arithmetic (4 marks): Correct calculations, units, source trail and clearly stated assumptions.
  • Analysis (4 marks): Explains business mechanisms and connects the statements or valuation drivers.
  • Balanced judgement (4 marks): Addresses a credible alternative, weighs limitations and reaches a conditional conclusion.
  • Communication and review (3 marks): A clear note with prioritised missing evidence and observable review triggers.
Indicative response after your own attempt

The current market cap is160 and EV180 under the simple bridge. Base DCF8.39 offers a small conditional gap, while its6.60–11.36 grid spans below and above price. Relative8.45–10.55 depends on peer quality; SOTP8.70–10.90 depends on division/corporate assumptions and is not breakup proceeds. A defensible analyst may defer pending customer and reinvestment evidence or state a conditional view. Explain weighting, shared forecast risks, terminal dependence and observable review triggers.

This is an On Judgement classroom rubric, not an official AQA mark scheme.