scholarly journals Terminal Value Calculation in DCF Valuation Models: An Empirical Verification

e-Finanse ◽  
2018 ◽  
Vol 14 (1) ◽  
pp. 27-38
Author(s):  
Adam Behr ◽  
Paweł Mielcarz ◽  
Dmytro Osiichuk
Keyword(s):  
Methodological Issue ◽  
Cash Flows ◽  
Public Companies ◽  
Market Sentiment ◽  
Empirical Verification ◽  
Organic Growth ◽  
Cash Flow Forecast ◽  
Free Cash Flows ◽  
Short Termism ◽  
Probabilistic Nature

AbstractThe paper presents an empirical verification of the main assumptions underlying the calculation of terminal value in DCF valuation models. The test results suggest that the volatility of free cash flows and the dynamism of the operating environment do not allow us to make a reliable long-term forecast of value creation potential of the public companies in Poland. Regardless of their organic growth phase, the overwhelming majority of the sampled firms are evidenced to exhibit extreme year-on-year fluctuations of sales, investments and cash flows over the short- and medium-term observation windows. The variability of operating results and the probabilistic nature of company-level fundamentals may preclude the possibility of constructing a reliable cash flow forecast for the purposes of a DCF valuation. This methodological issue appears to pose a particular challenge during the calculation of terminal value, which is heavily dependent on highly subjective and uncertain steady-state fundamentals. Therefore, the predictive power of the deterministic DCF models may be reduced to a snapshot of the current market sentiment regarding a particular stock. The paper postulates that a further discussion on the tenets of terminal value calculation may be necessary in order to overcome the existing flaws and increase the accuracy of valuation models. We contribute to this discussion by outlining the principal methodological and theoretical issues which challenge the practicing valuators at the stage of terminal value calculation. Our conclusions may help to shed light on the problems of market short-termism, and high inconstancy of investment recommendations.

Comparing Growth Rates Used in Discounted Cash Flow Valuations

2021 ◽  
Vol 40 (1) ◽  
pp. 2-12
Author(s):  
Roger J. Grabowski
Keyword(s):  
Cash Flow ◽  
Growth Rates ◽  
Cash Flows ◽  
Business Unit ◽  
Security Analysts ◽  
Discounted Cash Flow ◽  
Earning Growth ◽  
Organic Growth ◽  
The Subject ◽  
Free Cash Flows

Estimating growth in net cash flows is one of the key components in applying the discounted cash flow (DCF) method in valuing any company, reporting unit, or other business unit. This paper explains the underlying assumptions of the DCF method and demonstrates how to compare the most commonly used basis for estimating net cash flows (sometimes referred to as free cash flows), expected organic growth, to historic estimates of growth of the subject company and estimates of earning growth commonly prepared by security analysts.

Factors Associated with U.S. Public Companies' Investment in Internal Auditing

2005 ◽  
Vol 19 (2) ◽  
pp. 69-84 ◽  
Author(s):  
Joseph V. Carcello ◽  
Dana R. Hermanson ◽  
K. Raghunandan
Keyword(s):  
Audit Committee ◽  
Internal Audit ◽  
Cash Flows ◽  
Financial Service ◽  
Company Size ◽  
Internal Auditing ◽  
Public Companies ◽  
Ability To Pay ◽  
Factors Associated ◽  
Operating Cash Flows

Internal auditing has been the focus of much attention in recent years. This study examines factors associated with U.S. public companies' investment in internal auditing. Data from a survey administered to Chief Audit Executives of midsized U.S. public companies were supplemented with publicly available data. Based on data from 217 companies, the results indicate that total internal audit budgets (inhouse plus outsourced portions) are related to several factors associated with company risk, ability to pay for monitoring, and auditing characteristics. Specifically, we find evidence that internal audit budgets are positively related to company size, leverage, financial, service, and utility industries, relative amount of inventory, operating cash flows, and audit committee review of the internal audit budget. Total internal audit budgets are negatively related to the percentage of internal auditing that is outsourced. This study contributes to our understanding of internal audit services, and it allows companies to benchmark their investment in internal auditing.

Board diversity and firm risk-taking in the tourism sector: Moderating effects of board independence, CEO duality, and free cash flows

2021 ◽  
pp. 135481662110143
Author(s):  
Ozgur Ozdemir ◽  
Ezgi Erkmen ◽  
Fatemeh Binesh
Keyword(s):  
Risk Taking ◽  
Composite Index ◽  
Cash Flows ◽  
Board Independence ◽  
Firm Risk ◽  
Board Diversity ◽  
Ceo Duality ◽  
Reduction Effect ◽  
Task Oriented ◽  
Free Cash Flows

This study examines the effect of board diversity on risk-taking for tourism firms and analyzes the moderating effect of board independence, CEO duality, and free cash flows in this proposed relationship. Using a composite index of board diversity and a sample of tourism firms from the US hotel, restaurant, and airline industries, we find that greater board diversity leads to lower risk-taking, measured in standard deviation of return on assets. Moreover, we report that the risk-reduction effect of board diversity is more profound when tourism firms have less board independence and less free cash flows for investments. When board diversity is decomposed into relation-oriented and task-oriented diversity attributes, we find that only the task-oriented diversity is influential in reducing firm risk-taking for tourism firms. Akin to main analysis, the board independence and free cash flows are significant moderators of the relationship between task-oriented diversity and firm risk-taking.

scholarly journals Relationship Between Free Cash Flows and Corporate Governance Levels in the Light of Agency Theory

2021 ◽  
Vol 20 ◽  
pp. e3206
Author(s):  
Glaysson Aguilar de Araújo ◽  
Lara Alves Corrêa ◽  
Valéria Gama Fully Bressan ◽  
João Estevão Barbosa Neto ◽  
Bruna Camargos Avelino
Keyword(s):  
Corporate Governance ◽  
Stock Market ◽  
Cash Flows ◽  
Least Square ◽  
Publicly Traded ◽  
Potential Conflict ◽  
Return On Equity ◽  
Publicly Traded Companies ◽  
Corporate Governance Mechanisms ◽  
Free Cash Flows

This research analyzes the relationship between free cash flows (FCFs) and the different levels of Corporate Governance present in the Brazilian stock market. To this end, the sample was composed of 212 Brazilian publicly traded companies listed on Brasil, Bolsa, Balcão [B]³, in the period from 2010 to 2018. The methodology consisted of estimating a regression for panel data, using the random effects model, estimating by generalized least square (GLS) and assuming adjustments for autocorrelation and robust standard errors for heteroscedasticity. The results found, for the sample studied, suggest that Corporate Governance levels are positively related to the FCFs. In synergy, when compared to the Traditional level of [B]³, companies listed on the Novo Mercado and Level 2 levels tend to present higher FCF values. In addition, the larger the size of the companies and the higher their return on equity, the higher their FCFs tend to be, just as companies in stages of maturity tend to present lower FCF values. The relevance of this research is based on analyzing, in a stock market subject to imperfections, factors that may affect decisions about the level of cash maintenance of companies, more specifically by evaluating how Corporate Governance mechanisms relate to the theory of FCFs, in a context of potential conflict of interest.

scholarly journals Targeting fixed reinvestment rate with nonlinear mechanism: a “strange” path to financial distress

2009 ◽  
Vol 7 (2) ◽  
pp. 311-318
Author(s):  
Safieddine Bouali
Keyword(s):  
Cash Flow ◽  
Financial Distress ◽  
Cash Flows ◽  
Share Repurchases ◽  
Governance Arrangement ◽  
Dynamical Mechanism ◽  
Nonlinear Adjustment ◽  
Adjustment Speed ◽  
Nonlinear Mechanism ◽  
Free Cash Flows

Governance arrangement between shareholders, debtholders and managers fix the reinvestment ratio of profits. Residual earnings will appear as excess cash flow to disgorge in dividend disbursements or share repurchases. However, financial crisis stimulates corporation to express highest aversion both to overinvestment or underinvestment, probably in an identical degree. Besides, dissuasion to commit fraud pushes ownership to select a strong dynamical mechanism adjusting held earnings to the preferred reinvestment rate. Focus? Immediate disbursement of free cash flows. This paper shows that self-imposed discipline targeting fixed reinvestment rate under nonlinear adjustment speed can inject itself a “strange” dynamics to the firm, leading to critical losses and a bankruptcy threat. However, one way to reduce this instability is determining carefully the “normal” cash flow which does not trigger the payout.

scholarly journals The applicability of FCFF method evaluating an enterprise of Real Estate segment

2021 ◽  
Vol 91 ◽  
pp. 01042
Author(s):  
Jaromír Vrbka ◽  
Pavla Vitková
Keyword(s):  
Real Estate ◽  
Deep Understanding ◽  
Cash Flows ◽  
Free Cash Flow ◽  
Capital Asset Pricing ◽  
The Real Estate ◽  
Asset Pricing Model ◽  
Enterprise Valuation ◽  
Suggested Technique ◽  
Free Cash Flows

The article aims at evaluating a specific enterprise of the Real Estate segment using FCFF (Free Cash Flow to Firm) method. This technique determines the company’s value through free cash flows. Enterprise valuation presents a distinct discipline requiring appraiser’s deep understanding not only of the evaluated enterprise but also other external decisive influences. The theoretical part focuses on calculation procedures using The CAPM (Capital Asset Pricing Model) model quantifying separate variables that determine discount rates. The suggested technique deals with specific financial data of the company and is applicable in evaluating small and medium-sized enterprises.

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