The two main methodologies used for the valuation of a company are:DCF (Discounted Cash Flows)EBITDA multiplesDCF methodology:Compared with the EBITDA multiple methodology explained later in this post, the DCF will be more precise, and specific to one specific business. The DCF will look to bring forward all the future cash flows to the date of the investment by discounting these future cash flows. The formula is:151Where:EV = Enterprise ValueCF(n)= Cash flow at period nTV = Terminal Valuer = Discount rate (WACC)T = number of years chosen to discount the cash flowsTo be able to use this approach, one would need to be able to access detailed P&L and cash flows, both historical and forecast. It is also important to distinguish two different values: the Enterprise Value (EV) and the Equity Value. The Enterprise Value represents the value of the company itself, without taking into consideration its capital structure. To get the EV, cash flows used are cash flows prior to any debt servicing which are not linked to operations. These are called Free Cash Flow to the Firm (FCFF).The Equity Value is the value of the company to shareholders (i.e., after any debt considerations). To get the Equity Value, the cash flow used are Free Cash Flow to Equity (FCFFE). FCFFE are FCFF, to which any interest-bearing debt cash flows have been deducted. These additional main deductions include debt drawdown, debt repayment or interest payments. This should more or less represent the final “cash available” line.It is also important to select a representative number of years for the discounted cash flow - in the formula, this is “T”. For example, a start-up will only rely on its projections to be able to extract a value for its company. These cash flow should be lower in early years and ramp up to a more stable level in later year. A longer period of time will then be necessary to use the DCF approach with that type of company. More mature company will however have more stable cash flows - a shorter period of time can be sufficient to use the DCF methodology. Similarly, if a mature company decides to implement a specific growth project, cash flows will also vary, and longer period of times may be required. Generally, investor will look at the first five to ten years to get a representative sample for the valuation. Indeed, discounted cash flows in year fifteen, for example, will not change the final value of the company significantly given the discount factor applied will be quite high, reducing the impact of later years cash flows.Some exceptions could be made, for example for fixed term projects. A mine may have a limited life of 20 years, after which time no more cash flows will be extracted from the project. In this instance, a DCF over the life of the mine should be considered.The Terminal Value (TV) represents the period after the last cash flow used for the DCF. For example, if 5 years of cash flows are used for the valuation, the Terminal Value will represent the value of the company from year 5 onwards. This could be:Perpetual growth value: Constant growth of cash flows at a specific rateExit multiple (EBITDA multiple) – more common for equity investors looking to exit their investment in a few years’ timeThe TV is useful given it is difficult to assess precisely what a company will look like beyond 5-10 years. The Terminal Value formula is:152Where:CF(T) = Cash flow of the last period considered for the DCFg = perpetual growth rate of the company beyond Tr = Discount rate (WACC) used for the DCFEBITDA multiple methodology:There are two main EBITDA multiple approaches:Peers comparisonPrecedent transactionsPeers comparison looks at public companies’ market value and deduce the Enterprise Value by adding the net debt to it. The EBITDA available will allow a comparison of the EV / EBITDA multiple of the public company and apply that same multiple to the companies being studied to deduce the Enterprise Value.Precedent transactions are similar in principle, but somewhat more complicated. This method will look at recent M&A transaction that happened and look at the multiple applied for the transaction. Generally, less information will be available, making it more difficult to have the relevant data for comparison.Application in debt financingOnce the value of the company has been calculated, either using the DCF or the EBITDA multiple - or often an average of both, a debt investor will be able to understand the LTV it will apply on the company. To give a concrete example, this is very similar to a mortgage: If you want to purchase a house that has been valued at 100 with 80 of mortgage, the LTV is 80%. Mortgage lenders also look at your salary and will for example lend up to 5x your salary. This is similar for debt financing: if the company has been valued at 100, a debt investor might be reluctant to have more than 80 of debt on the company and will not want to lend more than 5x the EBITDA of the company. However, this means that a lender will want to understand how much debt is “in front” of him – i.e., how much debt is senior to what the investor will lend to the company. This is important for them as, should a company default on its debt and start a liquidation process, debt investors will be repaid according to their seniority. The more debt is in front of them, the more risk of loss they will have.Finally, another important cash flow element for bond investors is :153This shows how many times a company can cover its interest expenses with its earnings. Lenders generally look to have at least 1.5-2x interest coverage ratio in case the business plan is lower than budgeted.