COMPANY VALUATION METHODS. THE MOST COMMON ERRORS IN VALUATIONS (original) (raw)
Related papers
Introduction to Business Valuation
Advances in Business Information Systems and Analytics, 2020
This chapter is an introduction to the book and provides basic information to help readers in the following chapters. This book analyzes all kinds of problems and develops solutions in firm valuation process. The needs and purposes of firm valuation are briefly explained. Basic Concepts, such as Cost, Price, Value, Valuation, Evaluation, Free Cash Flow, and different types of value, are explained. Face value, issue price, fair value, intrinsic value, market value, book value, going-concern value, liquidation value, replacement value, enterprise value, and equity value are explained within the different types of value. Then, “financial statements” and “elements of financial statements”, which will form the basis of all valuation approaches, are explained and emphasized. The value drivers for businesses are discussed. Business valuation approaches' general features are given.
CORPORATE VALUATION: A LITERATURE REVIEW
This article discusses the ways and methods of corporate valuations that include the discounted cash flow models, the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Models (APM), Tobin's q, sales accelerator and cash flow models of investment, and economic base performance measures such as Economic Rent and Excess Market Value. It seems that more innovated methods to detect changes in companies' financial positions are needed. Also, managers' financial experiences are essential for companies to compete in a world with a constant change.
EQUITY VALUATION USING ACCOUNTING NUMBERS
This research primarily focuses on the valuation methodologies used to value firms with high and low intangibles as scaled by the total assets of the firm. In doing so a structured positive approach is applied in all chapters to explain the outcomes. Various statistical tools and databases have also been used to support the results and give them a strong base. Chapter two gives a brief overview of valuation literature explaining the different valuation models in practice. Chapter three deals with an exhaustive study of a small sample of twenty-one firms and their analyst reports. Strict investigation of the analysts‟ reports reveal that Discounted Cash Flow (DCF) model is the most commonly used valuation model across the firms of the sample. However, multiples-based approach has also been used frequently, but DCF supersedes as the dominant model in most of the cases. The analysis is extended to a large sample of 1140 observations in chapter four and involves empirical study to find out the valuation technique that gives the most approximate estimate of price. The mean valuation errors are minimal for the harmonic mean multiple after the REVM model. This analysis
Mergers and Acquisitions : A Review of Valuation Methods
2017
Globally, mergers and acquisitions (M&A) have grown dramatically in recent years. M&A offer companies the opportunity to grow rapidly and successfully. One of the most critical elements in M&A is the valuation of companies as the success of an M&A is closely related to determining the fair value of the companies. Determining the value of a company is one of the most complex and difficult subjects in financial management. Corporate executives face many choices and complications as they try to assess a company’s value. There are a variety of ways to value a company. In this study I discussed the main methods of business valuation and I analyzed how to use the Discounted Cash Flow Method in M&A. This Method determines a company’s current value according to its estimated future cash flows and is often used in the valuation of companies. Finally I tried to determine which method would be appropriate in an M&A.
Errors in 110 common errors in company valuations
In the review paper Fernández and Bilan suggest corrections for a spectrum of errors identified in actual valuations performed by the financial analysts, investment banks and financial consultants, thus providing a valuable insights for both academia and practitioners. However, their instructive example of a proper valuation in the section 1.D "Wrong Calculation of WACC" contains errors itself. This note discusses the origin of these errors and the way to eliminate them.
The Value Examiner, 2020
Much literature exists on methods that can be used to estimate the fair market value (FMV)—as conventionally defined by the standards of professional organizations1—of going concerns (defined below). Limited literature, however, covers methods or mechanisms that can be used to reconcile indications of going concern FMV derived from multiple valuation methods. This article summarizes the gaps in the literature on this subject and introduces an alternative practice mechanism (APM) (Salter 2020) that is configured to provide a more substantive defense of going concern FMV conclusions. We believe the APM proposed in this article clarifies the issues associated with reconciling separate business value indications from multiple methods, enhances the practice of business valuation, and ties academic research more closely with these enhanced practices.
A Practical Guide for Consistency in Valuation: Cash Flows, Terminal Value and Cost of Capital
SSRN Electronic Journal, 2000
Practitioners and teachers very easily break some consistency rules when doing or teaching valuation of assets. In this short and simple note we present a practical guide to call the attention upon the most frequent broken consistency rules. They have to do firstly with the consistency in the matching of the cash flows, this is, the free cash flow (FCF), the cash flow to debt (CFD), the cash flow to equity (CFE) and the tax savings or tax shield (TS). Secondly, they have to do with the proper expression for the cost of unlevered equity with finite cash flows and perpetuities. Thirdly, they have to do with the consistency between the terminal value and growth for the FCF and the terminal value and growth for the CFE, when there is a jump in the CFE due to the adjustment of debt to comply with the leverage at perpetuity. And finally, the proper determination of the cost of capital either departing from the cost of unlevered equity (Ku) or the cost of levered equity (Ke). In the Appendixes we show some algebraic derivations and an example.
Understanding Business Valuations, Shares, and Other Proprietary Interests
2004
This customized coaching module addresses business valuation theories and practices from the standpoint of corporate managers, external financiers and investors, and valuation specialists. Users of valuation technologies seek to utilize all available knowledge to the extent that their resources, efforts, and exposures can be minimized. With unlimited access to the sources of internal information, corporate managers have employed an "economic-based valuation approach" to capture direct contributions of certain operating, investment, and financing activities on firm value. Creditors and shareholders who lack a direct control over the firm’s operations often rely on an "accounting-based valuation approach" to evaluate financial statements and establish the linkage between the firm’s performance and its market value. Valuation specialists such as corporate lenders, investment bankers, professional fund managers, and portfolio investment advisors have utilized a wide range of sophisticated valuation techniques subject to their unique analytical styles and resource limitations. With an advance in computer technology, however, many valuation specialists have turned their attention to a "quantitative-based valuation approach" that allow them to not only accurately measure the independent and joint impacts of internal business activities and external market events on firm value based on sophisticated mathematical models but also identify the mispriced assets or “valuation gaps” that may occur from persistent market imperfections and the sub-rational behavior of some groups of market participants.