Corporate Structure – a part of the Valuation Process

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Delimitations

To make this thesis manageable in the specific time frame and to stay within the relevant subject the authors decided a few delimitations. The first one is that no research will be made in the subject of the difference of business climate between Sweden and Denmark; hence it is taken for granted that the interest of football and sporting is rather equal. There will not be any research made on the different financial situations in the two countries. Further on; the valuation is limited to the methods and models mentioned in the Choice of method. The dividend discount model cannot be used due to that the two clubs do not pay any dividends. Another important delimitation is that the authors of this thesis take for granted that the reader of this report will have small but yet some knowledge in the subject of finance. There will be no effort put into analyzing the different risk moments due to the two different countries.

Firm valuation

Regular firm valuation has as mentioned been studied a lot; one early method when it comes to the specific value of the individual firms is the Modigliani & Miller method. According to Brennan & Schwartz (1986) the model does not involve that many risk measures as one could appreciate. The most interesting research made in this subject, who also suits the contents of this thesis is actually the choices of valuation methods. The Swede Per Flöstrand (2006) wrote about the importance of choosing the correct valuation model. There is a jungle of different models and methods to choose from. According to Barker (1999) one can differ the methods between sophisticated and unsophisticated valuation models. A sophisticated model is a model that focuses on the net present value of the financial performance of several future periods and an unsophisticated method is when calculations are made on one period (Flöstrand, 2006).

Financial valuation approaches and general theory

There are many different approaches to valuation theory, one can value many parts of a company such as; just the equity or one can value the entire firm. (Damodaran, 2008) In this thesis the two clubs will be valued entirely as two firms. The reason to this is that it will lead to the most accurate comparison due to the simple reason that the two clubs are built up in different ways and the purpose is to be able to draw a conclusion about the affects of the entire firm value, not single parts of the companies. In the following part of the thesis one will be able to read more thoroughly about the 14 different profitability and valuation approaches that will be used in the valuation of the clubs. The profitability measures will be used to compare the two firms at more specific levels and so that one will get a wider view of the entire firms. The valuation methods will be used to get a specific value for the firms that later will be evaluated.

Discounted cash Flow Valuation

We invest in most assets because that we expect them to generate profits in the future. In this discounted cash flow valuation the value of an asset is not what one think is the value of that asset but it is the expected cash flow of an that asset. One could say that assets with high and future cash flows should be more valuable than assets with low cash flows. A man called Irving Fisher developed the principles of modern valuation theories in his book the rate of interest. In this book he brought up four approaches when analyzing an investment. Fischer stated that when multiple investments occurs you should choose the investment that has the highest present value at the market interest rate, where the present value of the benefits exceeded the present value of the costs the most; with the rate of return on sacrifice that most exceeds the market interest rate or that, when compared to the next most costly investment, yields a rate of return over cost that exceeds the market interest rate. (Damodaran, 2006).

Liquidation and Accounting Valuation

The second of these approaches is known as liquidation and accounting valuation. This approach focus to value the existing assets of a firm, that starts with accounting estimates of book value. (Damodaran, 2006) DOXHRI the expected cash flow of that asset. When extending this plan to valuing a firm, it can be stated that the value of a business is equal to the sum of the values of the assets that are owned by the business. There are some difference comparing a valuation between a collection of assets and a business. The largest difference is that an industry or a firm is a running unit with assets that already are owned by the firm and assets it expects to invest in the future. (Damodaran, 2006) A balance sheet for a firm gives a good framework where one can draw out the differences between valuing a business as a running concern and therefore valuing the business as a collection of assets. In running concern valuation judgments has to be made, not only on existing investments but also in future investments and the earnings that these investments will generate. In this type of asset-based valuation, the focus is on the assets in place of the firm and an estimation of the value for each of the assets has to be made separately. For companies with growth opportunities, asset- based valuations will yield lower values compared to a going concern valuation.

Table of Contents :

• 1 Introduction
  • 1.1 Background
  • 1.2 Problem Discussion
  • 1.3 Purpose
  • 1.4 Research Questions
  • 1.5 Problems with the thesis
  • 1.6 Delimitations
  • 1.7 Choice of firms
  • 1.8 Structure of the thesis
  • 1.9 Earlier Research
    • 1.9.1 Firm valuation
    • 1.9.2 The football industry
  • 1.10 Summary of expected Result
  • 1.11 Summary of the actual results
• 2 Background of the valuation process
  • 2.1 Financial valuation approaches and general theory
    • 2.1.1 Discounted cash Flow Valuation
    • 2.1.2 Liquidation and Accounting Valuation
    • 2.1.3 Relative Valuation
    • 2.1.4 Claim Valuation
  • 2.2 Financial valuation models and key ratios
    • 2.2.1 Free Cash Flow to Firm
    • 2.2.2 Free Cash Flow to Equity
    • 2.2.3 Modigliani & Miller theory
    • 2.2.4 Growth model
    • 2.2.5 Return on Equity (ROE)
    • 2.2.6 Return on Assets (ROA)
    • 2.2.7 Return on Capital (ROC)
    • 2.2.8 Beta value
    • 2.2.9 Variance & Covariance
    • 2.2.10 Price to Earnings ratio
    • 2.2.11 Price to Sales Ratio
    • 2.2.12 Weighted Average Cost of Capital
    • 2.2.13 Cost of Equity
    • 2.2.14 Interest Coverage Ratio
    • 2.2.15 Capital Asset Pricing Model
  • 2.3 Corporate Structure – a part of the Valuation Process
    • 2.3.1 Corporate Structure for firms in the Sporting Sector
    • 2.3.2 Unincorporated association
    • 2.3.3 Limited Companies
    • 2.3.4 Centralized (Vertical)
    • 2.3.5 Flat Corporate Structure (Horizontal)
    • 2.3.6 Mintzberg Structural Configurations Theory

• 3 Method
  • 3.1 Approach
  • 3.2 Choice of Method
  • 3.3 Collection of Data
    • 3.3.1 Research Strategy
    • 3.3.2 Reliability and Validity
• 4 Empirical results ± Valuation
  • 4.1 Parken Sport & Entertainment
    • 4.1.1 Parken Sport & Entertainment in short
    • 4.1.2 Return on Assets
    • 4.1.3 Return on Equity
    • 4.1.4 Return on Capital (ROC)
    • 4.1.5 Price to Earnings ratio
    • 4.1.6 Interest coverage ratio
    • 4.1.7 Beta Value
    • 4.1.8 Cost of Equity (Re)
    • 4.1.9 Weighted Average Cost of Capital
    • 4.1.10 Risks
    • 4.1.11 Growth Rate
    • 4.1.12 Free Cash Flow to Equity
    • 4.1.13 Free Cash Flow to Firm
    • 4.1.14 Final Value
    • 4.1.15 Corporate Structure
  • 4.2 Allmänna Idrottsklubb Solna
    • 4.2.1 Allmänna Idrottsklubb in Short
    • 4.2.2 Return on Assets
    • 4.2.3 Return on Equity
    • 4.2.4 Return on Capital
    • 4.2.5 Price to Earnings ratio / Price to Sales ratio
    • 4.2.6 Interest Coverage Ratio
    • 4.2.7 Beta Value
    • 4.2.8 Cost of Equity
    • 4.2.9 Weighted Average Cost of Capital
    • 4.2.10 Growth Rate
    • 4.2.11 Free Cash Flow to Equity
    • 4.2.12 Free Cash Flow to Firm
    • 4.2.13 Final Value
    • 4.2.14 Corporate Structure
• 5.1 Beta Value
  • 5.2 Price to Earnings Ratio
  • 5.3 Interest Coverage Ratio
  • 5.4 Free Cash Flow to Equity
  • 5.5 Free Cash Flow to Firm
  • 5.6 Return on Equity
  • 5.7 Return on Assets
  • 5.8 Return on Capital
  • 5.9 Weighted Average Cost of Capital
  • 5.10 Cost of Equity
  • 5.11 Growth Rate
  • 5.12 Corporate Structure
• 6 Conclusion
• 7 Future Studies
• 8 Reference List:
• 9 Appendix
  • 9.1 Calculations Parken Sport & Entertainment
  • 9.2 Calculations AIK

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Valuation of firms in the Sport Sector – A case study on key ratios and Corporate structure for Allmänna Idrottsklubb Solna & Parken Sport & Entertainment