By Professor Paolo Fulghieri, Macon G. Patton Distinguished Professor of Finance at the Kenan-Flagler Business School of the University of North Carolina (UNC).

The program Unlocking Value in Volatile Markets: An advanced valuation program was conceived in a rather serendipitous way.

Professor Paolo Fulghieri
Finance Professor Paolo Fulghieri, University of North Carolina

A few years ago, I was contacted through UNC by a major US producer of chemical compounds. The company was rather dissatisfied with the internal protocols and procedures used for capital budgeting and valuation. In particular, the top management felt that the standard DCF analysis was not able to capture the value implications of managerial ability to pursue new profit opportunities in a volatile environment. It was felt that the DCF, while appropriate to value well established businesses, misses critical components of the value creation process that comes from opportunities created in new and volatile markets, and by the ability of managers to respond to changes in the environment. In addition, the DCF values only one firm at a time, and does not consider the strategic interactions that emerge from market competition. The company came to me to design and deliver a program that integrated DCF, decision analysis, and competitive strategy.

“One of my best experiences as a teacher came when one of the participants had a Eureka moment…”

So, that’s how this program started. I have since taught this program at UNC, including executives working in the nearby Research Triangle Park. The aim of the program is to integrate decision tree analysis, DCF and competitive strategy in a rigorous and systematic way. The program uses option analysis, Monte Carlo simulations, and game theory to capture the value implications of exploiting new profit opportunities in competitive and uncertain markets. The techniques developed are useful in the context of capital budgeting, PE investments, and valuations leading to acquisitions.

Unlocking Value in Volatile Markets AIF

One of my best experiences as a teacher came when one of the participants had a “eureka” moment. The student was working at the time for a biotech company, and was trying to develop valuation techniques to make the go-no go decision in the development of a drug. It was clear to him, and the company, that the DCF was not the right approach. They also felt that incorporating market dynamics and competitors’ behavior was important, but they were not sure how to do that. They tried decision trees, but they felt something was missing. In fact something important was missing. And the program taught him, and the company, the right approach.

Prof. Paolo Fulghieri teaches the programs Unlocking Value in Volatile Markets: An Advanced Valuation Program, Foundations of Finance and Initial Public Offerings at Amsterdam Institute of Finance. Learn more & reserve your place here.

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