A Non-Circular Reformulation of the Capital Cash Flow Valuation Method

2016 ◽  
Author(s):  
Felipe Mejia-Pelaez
Keyword(s):  
Cash Flow ◽  
Valuation Method

After-Tax Discounting: A Research Edge

2020 ◽  
Vol 27 (2) ◽  
pp. 86
Author(s):  
Hongtao Guo
Keyword(s):  
Cash Flow ◽  
Discount Rate ◽  
Capital Markets ◽  
Research Note ◽  
Dynamic State ◽  
Discount Rates ◽  
Valuation Method ◽  
Flow Processes ◽  
Risk Neutral ◽  
Tax Status

This research note addresses after-tax discounting for pricing assets. Specifically, it analyzes the appropriate way to discount after-tax payoffs from assets that trade in capital markets in which both taxable and tax-free investors can buy and sell both taxable and tax-free instruments. The effect of the tax status of the investor and the tax status of the financing tool that an investor uses on price of an asset are discussed. Secondly, it derives the proper after-tax discount rate to use in the risk neutral valuation method for pricing assets that have state-contingent payments, typically structured in a lease based transaction. Dynamic state-contingent payoffs and cash flow processes are developed. Pre-tax discounted price, after-tax discounted payoffs are considered, then after-tax discount rate is derived. Included in this analysis of state-contingent discounting is the effect of depreciation expense, the only expense associated with the use of the asset, on after-tax discount rates

Did Adoption of Forward-Looking Valuation Methods Improve Valuation Accuracy in Shareholder Litigation?

2007 ◽  
Vol 22 (4) ◽  
pp. 573-598 ◽  
Author(s):  
Feng Chen ◽  
Kenton K. Yee ◽  
Yong Keun Yoo
Keyword(s):  
Supreme Court ◽  
Cash Flow ◽  
Earnings Forecasts ◽  
Block Method ◽  
Valuation Methods ◽  
Valuation Method ◽  
Shareholder Litigation ◽  
The Law ◽  
Case Basis ◽  
Forward Looking

Before 1984, Delaware judges relied exclusively on the Delaware Block method—an appraisal formula based on trailing earnings and liquidation value—to price shares in shareholder litigation. In 1984, the Delaware Supreme Court changed the law to permit its judges to use any valuation method they deem appropriate. As a result, judges and litigants began switching from the Block method and adopting forward-looking valuation techniques based on cash flow and earnings forecasts. While the use of forward-looking methods potentially improves valuation accuracy by incorporating forecast information, the use of forecasts allows more room for subjective manipulation. Did the adoption of forward-looking methods improve or reduce valuation accuracy in shareholder litigation? We address this question using a comprehensive hand-collected sample of all Delaware corporate “appraisal-remedy” cases published between 1966 and 2002 in Lexis-Nexis. The sample identifies, on a case-by-case basis, the plaintiff's, the defendant's, and the judge's valuation methods and resulting valuation estimates. We show that the adoption of forward-looking valuation methods improves litigants' valuation accuracy on average.

scholarly journals To Iterate Or Not To Iterate? Using The WACC In Equity Valuation

2011 ◽  
Vol 9 (11) ◽  
pp. 29 ◽  
Author(s):  
Patrick J. Larkin
Keyword(s):  
Cash Flow ◽  
Firm Value ◽  
Iterative Procedure ◽  
Capital Budgeting ◽  
Cash Flows ◽  
Debt Ratio ◽  
Discounted Cash Flow ◽  
Valuation Method ◽  
Equity Value ◽  
Current Value

The textbook discounted cash flow (DCF) valuation method involves estimating a target debt ratio for the firm, discounting firm cash flows at the WACC to estimate firm value, then subtracting the current value of debt to get equity value. This method gives the correct equity value in situations in which the firm will move toward the target debt ratio after the transaction is complete, such as takeovers and capital budgeting projects. The textbook method does not work well for estimating equity value in passive investments in which leverage is unlikely to change as a result of the potential transaction. Estimating equity value in passive investments when leverage is unlikely to change requires a simple iterative procedure to correct for circularity, which is demonstrated here. This situation sows confusion among students and practitioners. Finance scholars and textbook authors are aware of the situation but the author has never seen it clearly explained in prior textbooks or articles.

scholarly journals Stock Valuation in Pharmaceutical Sub-Sector Companies using the Discounted Cash Flow and Relative Valuation Methods in the 2013-2020 Period

2021 ◽  
pp. 167-176
Author(s):  
Afna Dalilah ◽  
Riko Hendrawan
Keyword(s):  
Cash Flow ◽  
Stock Exchange ◽  
Fair Value ◽  
Free Cash Flow ◽  
Discounted Cash Flow ◽  
Stock Valuation ◽  
Industry Growth ◽  
Valuation Method ◽  
Pessimistic Scenario ◽  
Relative Valuation

This research aims at calculating the fair value of shares of pharmaceutical companies listed on the Indonesia Stock Exchange (IDX). The data used in this research is historical data from the 2013-2020 financial statements, which are used as the basis for projections in 2021-2025. The method used in this research is Discounted Cash Flow (DCF) method with Free Cash Flow to the Firm (FCFF) approach and Relative Valuation method with Price to Earning Ratio (PER) and Price to Book Value (PBV) approaches in three scenarios. The three scenarios used are the optimistic scenario (condition above industry growth), the moderate scenario (the most likely condition for the company), and the pessimistic scenario (the average condition of the industry). The results of the research showed that by using the DCF-FCFF method, KAEF and PYFA stocks experienced overvalued conditions in all scenarios. Meanwhile, KLBF and DVLA stocks were undervalued in all scenarios. Then, from the calculation of the Relative Valuation method, each company was still within the industry range in all scenarios. Overall, KAEF stocks were overvalued by 57.817%, KLBF stocks were undervalued by 7.879%, DVLA stocks were undervalued by 370.865%, and PYFA stocks were overvalued by 16.662% both in DCF method and in Relative Valuation method.

scholarly journals After-Tax Discounting: A Research Edge

2020 ◽  
Vol 27 (1) ◽  
pp. 86
Author(s):  
Hongtao Guo
Keyword(s):  
Cash Flow ◽  
Discount Rate ◽  
Capital Markets ◽  
Research Note ◽  
Dynamic State ◽  
Discount Rates ◽  
Valuation Method ◽  
Flow Processes ◽  
Risk Neutral ◽  
Tax Status

This research note addresses after-tax discounting for pricing assets. Specifically, it analyzes the appropriate way to discount after-tax payoffs from assets that trade in capital markets in which both taxable and tax-free investors can buy and sell both taxable and tax-free instruments.  The effect of the tax status of the investor and the tax status of the financing tool that an investor uses on price of an asset are discussed. Secondly, it derives the proper after-tax discount rate to use in the risk neutral valuation method for pricing assets that have state-contingent payments, typically structured in a lease based transaction. Dynamic state-contingent payoffs and cash flow processes are developed. Pre-tax discounted price, after-tax discounted payoffs are considered, then after-tax discount rate is derived. Included in this analysis of state-contingent discounting is the effect of depreciation expense, the only expense associated with the use of the asset, on after-tax discount rates. 

scholarly journals Stock Valuation using Discounted Cash Flow Method with Free Cash Flow to Equity and Relative Valuation Approaches on State-Owned Banks Listed on IDX for 2021 to 2025 Period Projection

2021 ◽  
pp. 191-201
Author(s):  
Almirah Jumran ◽  
Riko Hendrawan
Keyword(s):  
Cash Flow ◽  
Stock Prices ◽  
Intrinsic Value ◽  
Free Cash Flow ◽  
Regulatory Capital ◽  
Discounted Cash Flow ◽  
Industry Growth ◽  
Valuation Method ◽  
Price Earnings Ratio ◽  
Relative Valuation

This study aims to project the intrinsic value of state-owned banks listed on IDX for the 2021 to 2025 projection. This study uses the Discounted Cash Flow (DCF) method with the Free Cash Flow to Equity (FCFE) approach specifically for banks by looking at the regulatory capital. Meanwhile, it is also used the Relative Valuation method with the Price to Book Value (PBV) and Price Earnings Ratio (PER) approaches. This study uses three scenarios will be used, which consist of a pessimistic scenario (the average condition of the industry), a moderate scenario (the same condition as the company's growth), and an optimistic scenario (a condition above industry growth), which aims to project the stock value over the next five years. The data used in this study comes from historical data during the 2016 to 2020 period. Based on the results, the stock prices of state-owned banks using the FCFE method shows undervalued results for all scenarios. Meanwhile, using the relative valuation method, PBV in the optimistic scenario only shows BBNI undervalued conditions. In addition, in moderate and pessimistic scenarios, only BBRI shows overvalued conditions. Furthermore, PER shows undervalued results for all scenarios.

scholarly journals Study on the Valuation Method for Overseas Oil and Gas Extraction Based on the Modified Trinomial Tree Option Pricing Model

2020 ◽  
Vol 2020 ◽  
pp. 1-15
Author(s):  
Jianye Liu ◽  
Zuxin Li ◽  
Dongkun Luo ◽  
Ruolei Liu
Keyword(s):  
Probability Distribution ◽  
Option Pricing ◽  
Cash Flow ◽  
Oil And Gas ◽  
Gas Extraction ◽  
Pricing Model ◽  
Valuation Method ◽  
Decision Points ◽  
Option Pricing Model ◽  
Trinomial Tree

Wandering of oil prices at lower values and the bitter reality have forced people to look for a more accurate valuation method for overseas oil and gas extraction of China. However, the currently available resource classification method, discount cash flow (DCF) method, and real option method all suffer from their own disadvantages. This paper identifies multiple uncertainty factors such as oil prices and reserves. It then investigates the transmission mechanism of how each uncertainty factor impacts the oil and gas extraction value and quantifies the transmission efficiency. The probability distribution patterns of each uncertainty factor have been determined; the trinomial tree option pricing model is modified, with consideration upon the nonstandardness of the probability distribution. Decision points and strategies space are designed in accordance with the practical oil and gas production; and the Bermuda option is adopted to replace the conventional decision-based tree model with the probability-based tree. Finally, a backward algorithm is developed to calculate the probability at each decision point, which avoids difficulties in determining the asset volatility ratio; and a case study is presented to demonstrate application of the proposed method. Results show that decision rights for overseas investment are valuable. The value of extraction does not yet necessarily grow with higher uncertainty, and instead, it is under joint effects of the cash flow and strategy space. So, valuation should incorporate the composite value of future cash flow and decision rights. Volatility of the value of extraction is not solely dependent on the oil price, but affected by multiple factors. Similar to the Bermuda option, the decision-making behavior for oil and gas extraction occurs only at finite decision points, to which the trinomial tree option pricing model is applicable. The adoption of probability distribution can to a great extent exploit the uncertain information. Replacement of the decision-based tree with the probability-based tree provides more accurate probability distribution of the calculated value of extraction, and moreover the disperse degree of the probability can reflect how high risks are, which is conducive to decision-making for investment.

Earnings Versus Cash Flows: The Valuation Perspective

2016 ◽  
Vol 3 (1) ◽  
Author(s):  
Megha Agarwal
Keyword(s):  
Cash Flow ◽  
Growth Model ◽  
Cash Flows ◽  
Free Cash Flow ◽  
Return On Equity ◽  
Operating Income ◽  
Valuation Method ◽  
Ex Post ◽  
Price Earnings Ratio ◽  
Free Cash Flows

This paper is an effort to compare the earnings based and cash flow based methods of valuation of an enterprise. The theoretically equivalent methods based on either earnings such as Residual Earnings Model (REM), Abnormal Earnings Growth Model (AEGM), Residual Operating Income Method (ReOIM), Abnormal Operating Income Growth Model (AOIGM) and its extensions multipliers such as Price/Earnings Ratio, Price/Book Value Ratio; or cash flow based models such as Dividend Valuation Method (DVM) and Free Cash Flow method (FCFM) all provide different estimates of valuation of the Indian giant corporate Reliance India Limited (RIL). An ex-post analysis of published accounting and financial data for four financial years from 2008-09 to 2011-12 has been conducted. A comparison of these valuation estimates with the actual market capitalization of the company shows that the complex accounting based model AOIGM provides closest forecasts. These different estimates may be derived due to inconsistencies in discount rate, growth rates and the other forecasted variables. Although inputs for earnings based models may be available to the investor and analysts through published statements, precise estimation of free cash flows may be better undertaken by the internal management. The estimation of value from more stable parameters as Residual operating income and RNOA could be considered superior to the valuations from more volatile return on equity.

scholarly journals How to Perform Discounted Cash Flow Valuation?

2011 ◽  
Vol 3 (1) ◽  
pp. 81-96 ◽  
Author(s):  
Sławomir Janiszewski
Keyword(s):  
Mergers And Acquisitions ◽  
Cash Flow ◽  
Practical Knowledge ◽  
Discounted Cash Flow ◽  
Global Capital ◽  
Professional Experiences ◽  
Knowledge Based ◽  
Valuation Method ◽  
Company Valuation ◽  
Discounted Cash Flow Valuation

How to Perform Discounted Cash Flow Valuation?Within the last few decades the quickly accelerating globalization processes contributed to rapid increase in the value of the global capital markets, and mergers and acquisitions transactions. This implicated the rising importance of methodologies that enable investors to efficiently value the companies. The aim of this elaboration is to present practical approach towards the discounted cash flow company valuation method, considered one of the most effective but simultaneously one of the most sophisticated among all. The article comprises purely theoretical as well as practical knowledge, based on the author's broad professional experiences.

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