scholarly journals On the Differential Analysis of Enterprise Valuation Methods as a Guideline for Unlisted Companies Assessment (I): Empowering Discounted Cash Flow Valuation

2020 ◽  
Vol 10 (17) ◽  
pp. 5875
Author(s):  
Germania Vayas-Ortega ◽  
Cristina Soguero-Ruiz ◽  
José-Luis Rojo-Álvarez ◽  
Francisco-Javier Gimeno-Blanes
Keyword(s):  
Cash Flow ◽  
Private Equity ◽  
Weighted Average ◽  
Companion Paper ◽  
Free Cash Flow ◽  
Fine Tuning ◽  
Machine Learning Techniques ◽  
Differential Analysis ◽  
Discounted Cash Flow ◽  
Endogenous Variables

The Discounted Cash Flow (DCF) method is probably the most extended approach used in company valuation, its main drawbacks being probably the known extreme sensitivity to key variables such as Weighted Average Cost of Capital (WACC) and Free Cash Flow (FCF) estimations not unquestionably obtained. In this paper we propose an unbiased and systematic DCF method which allows us to value private equity by leveraging on stock markets evidences, based on a twofold approach: First, the use of the inverse method assesses the existence of a coherent WACC that positively compares with market observations; second, different FCF forecasting methods are benchmarked and shown to correspond with actual valuations. We use financial historical data including 42 companies in five sectors, extracted from Eikon-Reuters. Our results show that WACC and FCF forecasting are not coherent with market expectations along time, with sectors, or with market regions, when only historical and endogenous variables are taken into account. The best estimates are found when exogenous variables, operational normalization of input space, and data-driven linear techniques are considered (Root Mean Square Error of 6.51). Our method suggests that FCFs and their positive alignment with Market Capitalization and the subordinate enterprise value are the most influencing variables. The fine-tuning of the methods presented here, along with an exhaustive analysis using nonlinear machine-learning techniques, are developed and discussed in the companion paper.

scholarly journals Over-Valuation: Avoid Double Counting when Retaining Dividends in the FCFE Valuation

2017 ◽  
Vol 8 (4) ◽  
pp. 107
Author(s):  
Joao Marques Silva ◽  
Jose Azevedo Pereira
Keyword(s):  
Cash Flow ◽  
Flow Model ◽  
Weighted Average ◽  
Free Cash Flow ◽  
Double Counting ◽  
Cost Of Equity ◽  
Discounted Cash Flow ◽  
Enterprise Valuation ◽  
A Value ◽  
The Cost

Valuation based on DCF (Discounted Cash Flow) has been the dominant valuation procedure during the last decades. In spite of this dominance, enterprise valuation using the discounted FCF (Free Cash Flow) model has some practical drawbacks, since there is often some confusion on how to effectively use it. Commonly, the valuation procedures start by estimating future FCF figures from historical data, such as mean FCF, growth and retention ratio, alongside many other variables. These FCF forecasts are discounted at the cost of equity (FCFE – FCF to Equity) or the Weighted Average Cost of Capital WACC (FCFF – FCF to Firm). Implicit in the above mentioned valuation procedures is the expectation that the company puts the retained free cash that is generating to good use, yielding a value capable of rewarding appropriately the level of risk inherent in the way it used. Some poorly performed valuation studies however tend to double count (Damodaran, 2006a) the retained cash’s interest in subsequent values of FCF, or include the accumulated cash build-up in the Terminal Value. This paper discusses how these two common double-counting mistakes are made and evaluates their weight in the final valuation figure for the particular case of retained FCFE (the case for the FCFF is analogous, but we focus on FCFE for simplicity) using projected figures.

scholarly journals On the Differential Analysis of Enterprise Valuation Methods as a Guideline for Unlisted Companies Assessment (II): Applying Machine-Learning Techniques for Unbiased Enterprise Value Assessment

2020 ◽  
Vol 10 (15) ◽  
pp. 5334 ◽  
Author(s):  
Germania Vayas-Ortega ◽  
Cristina Soguero-Ruiz ◽  
Margarita Rodríguez-Ibáñez ◽  
José-Luis Rojo-Álvarez ◽  
Francisco-Javier Gimeno-Blanes
Keyword(s):  
Machine Learning ◽  
Intrinsic Value ◽  
Gaussian Process Regression ◽  
Companion Paper ◽  
Machine Learning Techniques ◽  
Value Assessment ◽  
Differential Analysis ◽  
Discounted Cash Flow ◽  
Enterprise Value ◽  
Company Valuation

The search for an unbiased company valuation method to reduce uncertainty, whether or not it is automatic, has been a relevant topic in social sciences and business development for decades. Many methods have been described in the literature, but consensus has not been reached. In the companion paper we aimed to review the assessment capabilities of traditional company valuation model, based on company’s intrinsic value using the Discounted Cash Flow (DCF). In this paper, we capitalized on the potential of exogenous information combined with Machine Learning (ML) techniques. To do so, we performed an extensive analysis to evaluate the predictive capabilities with up to 18 different ML techniques. Endogenous variables (features) related to value creation (DCF) were proved to be crucial elements for the models, while the incorporation of exogenous, industry/country specific ones, incrementally improves the ML performance. Bagging Trees, Supported Vector Machine Regression, Gaussian Process Regression methods consistently provided the best results. We concluded that an unbiased model can be created based on endogenous and exogenous information to build a reference framework, to price and benchmark Enterprise Value for valuation and credit risk assessment.

Amazon and Whole Foods: adventures in grocery shopping

2020 ◽  
Vol 16 (2) ◽  
pp. 115-153
Author(s):  
Susan White
Keyword(s):  
Undergraduate Students ◽  
Stock Price ◽  
Private Equity ◽  
Weighted Average ◽  
Grocery Shopping ◽  
Discounted Cash Flow ◽  
Content Type ◽  
Business Press ◽  
Academic Level ◽  
Whole Foods

Theoretical basis This case focuses on valuation using various methods to price a firm. Students attempting this case should know the basics of how to value a company using discounted cash flow, comparable multiples and comparable transactions. Students will need to calculate the weighted average cost of capital using comparable companies and the capital asset pricing model and determine differences in value created by an acquisition vs a leveraged buyout (LBO). The case also discusses qualitative issues in mergers, such as fit between target and acquirer, integration issues, potential high debt from LBO. Research methodology This case was library-researched, using Amazon and Whole Foods public filings and business press papers. Case overview/synopsis Whole Foods Markets received a buyout offer from Amazon. Whole Foods could solicit offers from other firms, including firms more directly in the grocery business. Whole Foods also considered a management buyout or purchase by a private equity firm. Whole Foods had underperformed, with a falling stock price and reduced profitability. Amazon’s bid was attractive, a premium of about 40 per cent over Whole Foods’ pre-merger stock price. Whole Foods also wanted to consider issues such as culture. Whole Foods’ strategy was to sell organic foods at premium prices, while Amazon was a retail discounter with a largely online business. Complexity academic level This case is appropriate for graduate students at the end of their introductory course or for graduate or undergraduate students in a corporate finance elective, particularly a merger/restructuring elective. The case has been used in an advanced undergraduate finance elective, with a team presenting the case to the class, with remaining students in the class required to write case summaries and questions for the presenting group.

Application of discounted cash flow model valuation: The case of Excide industries

2021 ◽  
Vol 8 (4) ◽  
pp. 170-179
Author(s):  
Ashok Panigrahi ◽  
Kushal Vachhani ◽  
Mohit Sisodia
Keyword(s):  
Sensitivity Analysis ◽  
Cash Flow ◽  
Flow Model ◽  
Cost Of Capital ◽  
Weighted Average ◽  
The Other ◽  
Discounted Cash Flow ◽  
Worst Case ◽  
Share Prices ◽  
Valuation Technique

Theoretical and practical features of the widely used discounted cash flow (DCF) valuation approach are examined in depth in this paper. This research evaluates Exide Industries by using the DCF Valuation technique. It is widely accepted that the discounted cash flow approach is an effective tool for analyzing the situation of an organization even in the most complicated circumstances. The DCF approach, on the other hand, is prone to huge assumption bias, and even little modifications in an analysis' underlying assumptions may substantially affect the valuation findings. As a result, of the sensitivity analysis, we discovered bullish, base, and worst-case scenarios with target share prices of Rs. 253.25, Rs. 171.37, and Rs.133.25, respectively, by adjusting growth and WACC (Weighted-Average Cost of Capital) values.

A Comparison of the Weighted-Average Cost of Capital and Equity-Residual Approaches to Valuation

2017 ◽  
pp. 1-5
Author(s):  
Robert S. Harris
Keyword(s):  
Cash Flow ◽  
Average Cost ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Technical Note ◽  
Discounted Cash Flow ◽  
Investment Projects ◽  
Discounted Cash Flow Valuation

This technical note compares two methods of treating debt usage in discounted-cash-flow valuation of investment projects or companies. The note demonstrates that the approach using weighted average cost of capital (WACC) and the approach using equity residual (ER) yield equivalent results if consistent assumptions are used. General features are illustrated with specific examples, including a spreadsheet.

scholarly journals Terminal Value in SMEs: Testing the Multiple EV/EBITDA Approach

2019 ◽  
Vol 14 (1) ◽  
Author(s):  
Raül Vidal-Garcia ◽  
Javier Ribal
Keyword(s):  
Cash Flow ◽  
Food Industry ◽  
Empirical Distribution ◽  
Cash Flows ◽  
Free Cash Flow ◽  
Discounted Cash Flow ◽  
Public Companies ◽  
Bootstrap Techniques ◽  
Valuation Process

Abstract This study focuses on answering whether EV/EBITDA multiple of public companies in the food industry can be useful to obtain the Terminal Value (TV) in the valuation of unlisted small and medium-sized food companies. A case study into Spanish unlisted agribusinesses is designed for several samples and accounting years from 2010 to 2013. By means of a discounted cash flow (DCF) model combined with bootstrap techniques, the TV/EBITDA empirical distribution of the unlisted multiples is obtained for two different scenarios of free cash flow (FCF) growth, and then compared with the EV/EBITDA of the listed companies in the same industry. The results show that the stock market EV/EBITDA multiple may be used to determine the TV in the valuation process of unlisted small and medium-sized food companies that consistently obtain positive cash flows.

scholarly journals The Intrinsic Value of an Enterprise Determined by Means of the FCFE Tool

2020 ◽  
Vol 12 (21) ◽  
pp. 8868
Author(s):  
Veronika Jezkova ◽  
Zuzana Rowland ◽  
Veronika Machova ◽  
Jan Hejda
Keyword(s):  
Cash Flow ◽  
Intrinsic Value ◽  
Free Cash Flow ◽  
Annual Reports ◽  
Discounted Cash Flow ◽  
Enterprise Value ◽  
Future Value ◽  
Mutual Relations ◽  
Key Indicators

This paper deals with the determination of the intrinsic value of the company Seznam.cz, a.s. using discounted cash flow. Specifically, it is concerned with determining the value of the business from the perspective of the company’s shareholders. The Free Cash Flow to Equity (FCFE) method is chosen for analysis and determination of the value. According to this method, the specific FCFE values are discovered. However, the enterprise value must also be analyzed on the basis of other key indicators, such as financial leverage, the Capital Asset Pricing Model (CAPM) method, or the net present and future value of the FCFE. This is especially important so that the results can be put into mutual relations and a sufficient representative value of the FCFE results can be achieved. Input values stem from the company’s annual reports. From the results of the mentioned methods and indicators, it was found that the value of the FCFE is quite high, which means that the capital used is used appropriately. Based on the result of the continuing value of the FCFE, it can be said that the company’s intrinsic value is at a very good level.

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 Company life cycle models and business valuation

2019 ◽  
Vol 93 (9/10) ◽  
pp. 285-296
Author(s):  
Michael Corbey ◽  
Frans de Roon ◽  
Stef Hinfelaar
Keyword(s):  
Life Cycle ◽  
Cash Flow ◽  
Growth Models ◽  
Forecast Accuracy ◽  
Cash Flows ◽  
Free Cash Flow ◽  
Life Cycle Thinking ◽  
Discounted Cash Flow ◽  
Business Valuation ◽  
Quality Life

Future free cash flow is a crucial element of most business valuation tools, such as the Discounted Cash Flow model, with the quality of the valuation depending heavily on its forecast accuracy. This paper explores the theory on business life cycle (and growth) models in an aim to improve that quality. Life cycle and growth models have been studied in the management and organization literature for decades, but the relevant aspects from a business valuation perspective remain unclear. Reviewing the existing literature, we argue that the five-stage Hanks model (Start-up, Growth, Maturity, Diversification, and Decline) is applicable for valuation purposes. We further argue that life cycle thinking provides useful insights for making grounded assumptions in predicting the future free cash flows and residual value of a company. This paper presents practical valuation approaches and insights for each of the five stages of the Hanks model.

scholarly journals ANALISIS PENILAIAN PERUSAHAAN PT. PERUSAHAAN GAS NEGARA TBK

2021 ◽  
Vol 4 (1) ◽  
pp. 184-188
Author(s):  
Clarisa Felicia
Keyword(s):  
Cash Flow ◽  
Free Cash Flow ◽  
Discounted Cash Flow

Salah satu sektor penting bagi perkembangan ekonomi Indonesia adalah sektor minyak dan gas bumi . Sayangnya diketahui adanya penurunan dari sektor minyak dan gas bumi dimana pendapatan negara dari sektor ini turun hingga 80% dari Rp. 216.000.000.000.000 (Rp. 216 Triliun) di tahun 2014 menjadi Rp. 44.000.000.000.000 (Rp. 44 Triliun) pada tahun 2016. PT. Perusahaan Gas Negara TBK adalah BUMN yang terbesar di bidang transportasi dan distribusi gas bumi. Penelitian ini bertujuan untuk mengetahui nilai intrinsik per saham PT. Perusahaan Gas Negara TBK dengan metode discounted cash flow menggunakan free cash flow ke perusahaan. Data diperoleh dari laporan keuangan PT. Perusahaan Gas Negara TBK pada tahun 2013 hingga tahun 2018. Hasil penelitian menunjukkan bahwa nilai intrinsik per saham dari PT. Perusahaan Gas Negara TBK adalah Rp. 6.757,72.

Sign in / Sign up

Export Citation Format

Share Document