Search

We use a decision-tree-based machine learning approach to perform relative valuation. Stocks are valued using market-to-book, enterprise-value-to-assets and enterprise-value-to-sales multiples. Our machine learning models reduce median absolute valuation errors by between 17% and 50% relative to traditional models. The identified valuation drivers are consistent with theoretical predictions derived from a discounted cash flow approach. Accounting variables related to profitability, growth, efficiency and financial soundness are important valuation drivers. The valuations produced by machine learning models behave like fundamental values. A value-weighted strategy that buys (sells) undervalued (overvalued) stocks generates highly significant abnormal returns. When we use models trained on listed firms to value IPOs, machine learning models outperform traditional models in valuation accuracy and can identify mispriced IPOs.

The degree of uncertainty associated with the value of a company plays a relevant role in valuation analysis. We propose an original and robust methodology for company market valuation, which replaces the traditional point estimate of the conventional Discounted Cash Flow model with a probability distribution of fair values that convey information about both the expected value of the company and its intrinsic uncertainty. Our methodology depends on two main ingredients: an econometric model for company revenues and a set of firm-specific balance sheet relations that are estimated using historical data. We explore the effectiveness and scope of our methodology through a series of statistical exercises on publicly traded U.S. companies. At the firm level, we show that the fair value distribution derived with our methodology constitutes a reliable predictor of the company’s future abnormal returns. At the market level, we show that a long-short valuation (LSV) factor, built using buy-sell recommendations based on the fair value distribution, contains information not accessible through the traditional market factors. The LSV factor significantly increases the explanatory and the predictive power of factor models estimated on portfolios and individual stock returns.

In order to maintain the company's ability to fulfill its liabilities, PT. Jasa Marga (Persero) Tbk will takes a corporate action strategy to strengthen capital structure for the Toll Road Subsidiaries (/APJT). APJT selected are PT. Trans Marga Central Java (/PT. TMJ, is the operator of Semarang-Solo toll road) and PT. Jasamarga Surabaya Mojokerto (/PT. JSM, is the operator of Surabaya-Mojokerto toll road) because of its capability to fulfill their solvents. Corporate action strategy done by analyze related with company performance baluation, optimal capital structure analysis. For Company performance valuation, analyze is done with company's financial ratios. From the calculation and analysis of profitability ratios; liquidity ratios and solvency ratios, PT. TMJ and PT. JSM during year 2015-2019 showed fair good performance. The composition of the capital structure to obtain optimal value for PT. TMJ and PT. JSM are range from 60:40 to 30:70 for the composition of debt and equity. The results of the company valuation using Discounted Cash Flow (DCF) method show that the company value of PT. TMJ, with a capital structure composition of 60:40 worth IDR. 25,862,- /share and with a capital composition of 70:30 share value of PT. TMJ in the amount of IDR.10,418,- /share. As for PT. JSM with a capital structure composition of 60:40 is IDR. 2,709,- /share and with a capital composition of 70:30 the share value of PT. JSM is IDR. 911,- /share. From analyze result, Management should pay more attention in capital expense due it’s effect in Optimizing Capital Structure, then from that Optimal Capital structure, APJT can reduce debt portion dan increasing uts equity portion through several strategy

In any context where a discounted cash flow valuation is required, there is the issue of estimating the continuing value. The most common way to do that is to assume that by the terminal horizon the company is in a steady state and is growing at a constant rate. The issue is how to handle inflation. The problem is that it is often done wrong and the impact is typically material. Because there remains significant confusion, in this paper we simplify the analysis by isolating the two key issues and providing example calculations. We show that even at the current 2% level proper treatment of inflation has a sizeable impact on valuation. If inflation were to accelerate as a result of current monetary and fiscal policies, the significance of this issue will increase.

Objetivo: A empresa Magazine Luiza, fundada em novembro/1957, ícone do varejo nacional, abriu seu capital em 2011 na B3, com crescimento exponencial na valorização de suas ações. Este caso proporciona os seguintes objetivos pedagógicos: a) promover a análise de problemas, propor e indagar decisões em relação à valuation; b) estimular a reflexão entre a teoria que sustenta os propósitos de avaliação e a forma como ela deve ser desenvolvida e aplicada; c) ampliar a capacidade de relacionar os pressupostos teóricos de valuation e a sua adequação à realidade. Metodologia: As Demonstrações Contábeis foram extraídas do site da empresa MGL, na Economática® e no site da B3. Também foi utilizada a base de dados do professor Damodaran. Destaca-se que os dados são reais, porém, em contrapartida, considera-se como situação hipotética a existência da empresa Alpha Varejo e sua proposta de aquisição da empresa Magazine Luiza. Resultados: Sob o ponto de vista comportamental, permite que estudantes e docente tenham diálogos e discussões saudáveis de modo que haja respeito mútuo às opiniões e ideias divergentes, permitindo a exposição de seus pontos de vista. Estimar o valor da empresa pelos métodos do Fluxo de Caixa Descontado e Avaliação Relativa é uma tarefa complexa, e pode ser considerada como um processo importante para tomada de decisão, principalmente para o acionista da empresa. No uso dos métodos, reside a necessidade de escolhas de premissas adequadas que melhor refletem a realidade da empresa. Contribuições do Estudo: A realização da atividade proposta, com estudantes de graduação ou pós-graduação na área de negócios em disciplinas voltadas para análise de viabilidade financeira de empresas e valuation, contribui para a formação destes estudantes com desenvolvimento de análise crítica e estímulo à discussão na área de finanças.

Traditional valuation models such as the Gordon growth model, the discounted cash flow (DCF) model, and the real option approach assume that cash flows are perpetual. There is no firm that lasts forever. In the expected time to ruin model, the underlying firm has an expected termination date. In an efficient market, stock prices should reflect all available information. Adapted from a revised valuation model, the authors solve for the implied mortality (IM) of an underlying firm given its equity market price. The authors investigate IM for securities during the last few crises. The existence of IM may be the missing piece of the unexplained volatility puzzle. TOPICS:Financial crises and financial market history, exchange-traded funds and applications, security analysis and valuation, tail risks Key Findings ▪ Most valuation models of the firm assume that cash flows are perpetual. Of course, this is incorrect. By applying the Expected Time to Ruin Model, we solve for the Implied Mortality (IM) of an underlying firm given its equity market price. ▪ IM would be a useful and easy tool for the credit market trading. High leverage firms such as those in the financial industry suffered more during the crisis. We investigate the last three crises and different degrees of impact on them. ▪ The change in IM may be the missing piece of the unexplained volatility puzzle or so-called “Irrational Exuberance.”

The evaluation of investment projects has been carried out mainly through the analysis of Discounted Cash Flow (DCF), whose financial feasibility measures have been based fundamentally on approaches such as the Net Present Value (NPV) and the Internal Rate of Return (IRR), which are widely discussed in the field of energy project valuation. Despite this, the classical methods have a limitation when perceiving relevant characteristics for decision-making in high-risk investments, such as the uncertainty of the cash flows and the quantification of risk. An alternative to the use of these methods is the technique known as Decoupled Net Present Value (DNPV), which decouples the risk associated with the project from the value of money over time. This valuation methodology was applied to a photovoltaic solar energy self-generation project in Colombia. In this study, the results obtained through the DNPV was equivalent to 2.3-fold the value obtained by means of NPV. Thus, many renewable energy projects can become undervalued since traditional methods mistakenly associated a discount rate that includes a very high risk premium and that in many occasions it is more related to the sources of financing of the project instead of representing the risk component that it has.Keywords: Decoupled net present value (DNPV), Renewable energy projects, Solar energy investmentsJEL Classifications: Q2, Q4DOI: https://doi.org/10.32479/ijeep.10577

The paper seeks to develop a comprehensive framework to cross-border discounted cash flow valuation. Although the literature on company valuation and on international financial management is vast, such a framework has not yet been proposed. We build upon well-known fundamentals and relevant contributions, e.g. on the derivation of the risk-adjusted rate of return. Relevant risks are exchange rate risk, business risk, financial risk, the risk of the tax effects induced by debt financing, and the risk of default. Additional tax effects beyond the well-known tax shield on interest expenses must be considered. Risk discounts from cash flows and risk premia to be added to risk-free interest rates are derived according to the global capital asset pricing model. A conceptual choice occurs not only between the foreign currency and the home currency approach, but also regarding the estimation of future exchange rates. The paper shows how a valuation can be implemented with or without consideration of covariances between cash flows and rate of returns with exchange rates. It also derives the discount rates if forward exchange rates are applied. We discuss the consequences of assuming the uncovered interest parity to hold. We assume deterministic debt and apply the adjusted present value approach. In addition, we derive the RADR to be used in the flow to equity and weighted average cost of capital approach. The paper addresses not only the valuation of a foreign company, but also the valuation of a domestic company that generates cash flows in foreign currency and/or uses debt in foreign currency.

This chapter addresses relative valuation (i.e., market-based) methods, asset-oriented methods, real options analysis (i.e., contingent claims), and replacement cost, often used as alternatives to discounted cash flow valuation. Relative valuation methods include comparable company, comparable transactions, comparable industry techniques, and value driver-based valuation. Asset-oriented methods include tangible book value and liquidation- or breakup valuation techniques. This chapter also discusses in detail how to look at merger and acquisition (M&A) valuation in the context of real options and concludes with a summary of the strengths and weaknesses of the alternative valuation methods (including discounted cash flow) and when it is appropriate to apply each methodology.

In the literature, the integration of the cash and risk effects of executive compensation into company valuation is discussed only marginally. This paper addresses the question of how these effects can be integrated into corporate valuation. Several methods for solving the problem are discussed and a method free of circular references, similar to the adjusted present value approach to company valuation, is identified. Contrary to a common assumption in the literature, there is no uniform and constant cost of capital for a company that uses employee stock options. Cost of capital needs to be adjusted to the cash and risk impact of equity-based executive compensation. Making recourse to the treasury stock method, which is used to calculate diluted earnings per share, is not recommended here even though a corrected version of this method is used. I discuss different forms of equity-based executive compensation, including the resulting allocation of risk and net present value between owners and managers.

Start-up companies are businesses that are now very popular in Indonesia. To support the business moving fast, these businesses need investors by offering the company's fair value. With similar but not the same calculation, in which start-up companies have different financial indicators and financial assumptions with conventional companies, in this case, the valuation is included innovation value and disruption probability. This research is a descriptive study which is based on case studies in the research object. The object of research is PT ABC, a company engaged in the field of Financial Technology. Data collection is done by collecting secondary data from the company and observation during the internship. The analysis is done by conducting a sensitivity analysis with the DCF method using Microsoft Excel. Valuation is also very closely related to Financial Projection to predict the state of the industry pear to pear landing in the future. The data shows that the enterprise value is Rp. 46,084,735,403,742. Then, EV/Revenue is 1,748 times, and the percentage of raise is 100%. According to DCF Valuation, the author suggests investors invest in the company. Because the valuation is very good.

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.

Valuation techniques, such as discounted cash flow and multiples, are applied in transactions and are also relevant for accounting, tax, and litigation issues. Within these and other valuation purposes, the techniques are crucial for “social interactions” like market processes and legal affairs. We examine this “social dimension” of business valuation and look especially at the advancement of valuation knowledge and techniques. For this purpose, we employ an approach based on “actor-network-theory” (ANT). In order to study specific margins of business valuation, the focus lies on the dissemination of the capital asset pricing model (CAPM) in German judicial valuation. We conclude, inter alia, that “the” CAPM has developed into a growing actor-network over the time, a well-established infra-structure which allows other actors to link to it. The CAPM-network deploys specific actors which enable to conduct or implement advantageous actions. In this context we discuss concepts like co-authorities, (vague) labelling, vague referencing and responsibility at a distance. Moreover, we identify specific arguments which are used by courts regarding the application of the CAPM. We suggest that these arguments are particular important to solidify and perpetuate the application of the model in judicial practice. The present study intends to shed light on the process of the construction of valuation techniques, the actors which are involved in this process, and the interactions of these actors. In doing so, we intend to facilitate and objectify the dialogue between actors in business valuation and thus to improve further ambitions to construct valuation techniques.

Nesta pesquisa, buscou-se analisar os métodos de valoração de patentes discutidos pela literatura e valorar a patente de defumador de pescados (MU 8802959-0) do Núcleo de Inovação Tecnológica do Instituto Federal de Educação, Ciência e Tecnologia da Bahia – NIT/IFBA. Para tanto, os procedimentos metodológicos adotados consistiram em pesquisa exploratória, de natureza bibliográfica, documental, baseada em artigos, dissertações, teses, relatórios técnicos e sites institucionais. A abordagem empregada na pesquisa foi a de pesquisa qualitativa, com análise de dados qualitativo e quantitativo. Quanto aos dados, foram coletados dados secundários utilizados que foram obtidos a partir do documento de patente e por meio de observação direta realizada no NIT/IFBA. Como resultados observou-se que o método alternativo de valoração, que leva em consideração a característica do ativo, bem como o Nível de Prontidão Tecnológica (NPT) e variáveis econômicas, mostrou-se mais favorável para a valoração da patente de defumador de pescados do NIT/IFBA, quando comparado com as abordagens tradicionais, a exemplo do método de Fluxo de Caixa Descontado (FCD), opções reais e abordagem de custos. Ademais, o método alternativo considera, também, as particularidades e a dinâmica dos NITs, além de requerer dados que são acessíveis aos Núcleos e apresentar flexibilidade, podendo ser adaptada de acordo com as características da patente.

Real estate development has received less scrutiny than real estate investment in terms of appraisal practices and performance measurement. This is despite the inherent uncertainty and financial risks associated with development as an activity. We investigate market practices regarding performance metrics and return expectations both for residential and commercial real estate development in the UK, exploring what is considered as an appropriate return and how this varies according to type and duration of scheme, and method of appraisal used. After examining the literature and the information available on ex-post returns from development activity, results from a survey of real estate developers are reported, supplemented by findings from interviews. The results suggest that the use of traditional residual valuation techniques dominates discounted cash flow models when appraising development projects, particularly among residential developers, while profit-on-cost and profit-on-value are the most popular metrics for quantifying required returns. Unlike NPV or IRR, these metrics do not account for the timing of cash flows, raising questions about the robustness of appraisals in this sector. Such metrics might suffice if required profits are adjusted in ways that are consistent with scheme duration and risks, but it is unclear that this is currently the case.\ud \ud \ud Keywords\ud Development; Housebuilding; Profit Measures; Real Estate Appraisal; Required Returns

The business appraisal process is described in many works. It states that the main purpose of the assessment process is to identify critical business areas that create value. In which publications are investigated the methodological foundations for assessing the value of property. The problems of different approaches to the assessment of property objects in seaports are described. But there is a lack of comprehensive business valuation studies in other sectors of the maritime industry, such as onshore services. The aim of the work is to study the goals and methods of assessing the value of a business in various areas of the maritime industry, taking into account their specifics. Business valuation is a multilevel complex process. When evaluating a business, it is necessary to audit and sometimes revalue all the assets of the company. It is necessary to build forecasts for a certain time interval. Before starting the business appraisal process, it is necessary to take into account certain key factors: economic factors (profitability and risks), political factors (lack of a stable and predictable situation in the industry), social factors (personal reasons of customers and consumers of appraisal), information factors (for correct estimates need reliable information). The need to assess the value of a business arises in almost all transformations: when buying and selling an enterprise, its corporatization, mergers and acquisitions, as well as in many other situations. There are situations when the need to assess those specified in the law. Basically, these cases concern the appraisal of state property. There are many other situations where an assessment needs to be made. These include: buying - selling a company, making management decisions, determining the amount of tax on the company's property, insuring the company's property, obtaining a loan, investing. A properly performed appraisal is also a monitoring of the company's performance and revaluation of the property's value. Therefore, it is important to ensure that the financial data to be evaluated is complete, current and accurate. Only with reliable data and a well-planned strategic approach can a reliable forecast be made. The more complete and detailed the data for analysis are, the more accurate and qualitative the results of the assessment will be. The most common valuation method is the discounted cash flow method. Its advantage is the ability to measure future results today. This is a complex expert method, but it provides information about the business prospects. When assessing a business in the maritime industry, it is necessary to take into account the existing methods and approaches, but business as an object of assessment requires a different message from the traditional methods of profitable, comparative and cost-based approaches, and the use of specific methods for assessing the business and taking into account the specifics of the management of individual sectors of the maritime industry.

It is important to make a reasonable valuation of a company. A good valuation can make a difference in lots of aspects. In this research, the purpose of predicting valuation of Uber is to gain the future free cash flow and stock value of it, so that we can provide information for its future development strategy and put forward feasible business decisions, and then improve the future value of it. What’s more, we hope to use the information of Uber’s valuation to make investment analysis, understand its advantages and disadvantages, and help investors make better decisions. The reason why we choose Uber as a research object because it is a growing company that needs the right strategy and a lot of investments. Making valuation of Uber can help it attract investment and make stratagem. We use the discounted cash flow model to value Uber. We estimate the company’s income, expenditure, free cash flow and equity beta in the future by investigating and studying its data in recent three years and the data of a peer group. Finally, we get Uber’s optimistic price, pessimistic price and target price. All of the prices are higher than the present price which means it has a good development prospect and be good for investing.

Infrastructure providing fundamental services for societies may become obsolete under changing environments such as climate or demographics changes, creating the need for adaptability. Designing infrastructure for adaptability may affect life cycle costs as well as environmental and social issues such as resources consumption, waste production or disruption to services provided. Sustainability valuation of adaptable infrastructure is thus required. The Real Options Analysis (ROA) is widely used to evaluate financial viability of investing in adaptable infrastructure. But, the environmental and social aspects have been barely noticed and incorporated. Hence, a valuation method is required to properly address all aspects of sustainability. This paper bridges the gap and advances the literature by presenting a methodology for designed-in adaptability valuation, considering all the sustainability aspects. To this end, a hybrid approach is suggested through integration of Social and Environmental Costing (SEC) with ROA, providing a single measure for sustainability of adaptable infrastructure. In this approach, the outputs of Life Cycle Assessment (LCA) tools are monetized using SEC methods; and then incorporated in the ROA that is built on the probabilistic Discounted Cash Flow (DCF) analysis, suitable for engineering applications. The application of the proposed approach is illustrated on a case example involving seawalls under changing climate effects. For the case example, including sustainability issues in the analysis improved the viability of designing in adaptability. This conclusion cannot be generalized and each situation requires an individual analysis. However, the proposed approach and methodology will be the same in all the situations.

THE AIMS OF THE PAPER This study attempts to explore the links between venture capital (VC) investments and the real option approach (ROA) with analyzing the characteristic features of the venture capital investments and their process. The real options can be examined as a way of thinking and evaluation method and the study’s aim is to show that real option approach can provide an answer to the valuation challenges of venture capital investments. METHODOLOGY The choice of the appropriate valuation method requires consideration of its conditions of application, which, in the case of real option theory, result from the examination of uncertainty, flexibility and irreversibility. The venture capital investments are characterized by a high degree of uncertainty and risk, which can also be traced back to the provision of financing to innovative, early-stage companies. Real option theory also provides venture capital investors with professional experience through their active role in decision-making. The study evaluates a Hungarian start-up company venture capital investment with the help of a traditional discounted cash flow method and two real option valuation models: Black – Scholes model and binomial pricing model. Then a sensitivity analysis is prepared to analyze the value driver effect on option value and a volatility analysis to verify the importance of high-degree of uncertainty in real option valuation. MOST IMPORTANT RESULTS The paper concludes that the option-based valuation methods are more suitable for evaluating venture capital investments than other approaches such as the discounted cash flow methods, and the embedded flexibility can be determined by the real option approach. The binomial pricing model points out the advantages of staging investments with the higher real (call) option value. Besides the real option valuation, the sensitivity analysis shows a positive effect of the present value of the underlying assets, the time to maturity, the risk-free interest rate and volatility on the call option value. The analysis of the volatility emphasizes the importance of the degree of uncertainty in real option valuation. RECOMMENDATIONS The real option approach ensures proper evaluation of venture capital investment, avoiding the undervaluation and taking advantage of staging and timing investments in practice. Acknowledgment: Supported by the UNKP-19-3 New National Excellence Program of the Ministry for Innovation and Technology.

Residual income valuation was already known and used in valuation theory and practice previously, however, the method has been subject to increasing attention in the past decades. By comparing the discounted cash flow method and the residual income model, this paper seeks to answer the question of what practical implications the difference in theory results in. the discounted cash flow method continues to be widely popular in literature and international practice, however, it may give rise to flawed results in certain cases. with the help of specific business examples, the study highlights that in such cases, the risks of under or overestimation can be mitigated with the help of the rim model. the largest benefit of the residual income model compared to the dcf method is that instead of deriving the value solely from the future, it gives a central role to the already known book value, and the speculative value – determined based on the accounting income – plays a less significant role in the course of valuation.

The article is devoted to one of the constantly discussed topics of development of the military-industrial complex – the directions of development of the pricing system for defense products [1, 2]. The main methods of pricing used in the military economy are highlighted. The ways of the pricing system development based on statistical and engineering methods of analysis of the influence of various technological factors are considered, the tendency of transition to the methods of «full» valuation of products with no connection to labor intensity is shown. The discounted cash flow method is considered as one of the methods of contract profitability estimation. The necessity of the creation of a modern effective pricing system based on an innovative-institutional approach is shown. It is indicated that the new pricing system will require the restructuring of organizational structures of enterprises with the inclusion of fundamentally new elements.

The traditional discounted cash flow (DCF) model is generally used to estimate the present value of an enterprise or its equity based on expected future parameters such as cash flows, growth rate a...

Purpose The purpose of this paper is to assess model risk with regard to wind energy output in monthly cash flow models for the purpose of valuation and risk assessment of wind farm investments, where only a few approaches exist in the literature. Design/methodology/approach This paper focuses on the risk-return characteristics of this investment from the perspective of private and institutional investors and takes into account several risks, in particular the resource risk related to the uncertainty of the monthly wind energy produced. To this end, this paper presents different approaches for modeling monthly wind power output and assesses the impact of three selected models with different properties on the investment’s risk-return characteristics by means of a stochastic discounted cash flow model. In addition, the model considers the possibility of a joint operation of the wind farm with a pumped hydro storage system to reduce risk and improve profits. Findings The results show that the (non-)consideration of seasonality of the monthly wind energy produced considerably influences the risk-return characteristics, but that principal developments dependent on input parameters and model variables remain similar. Originality/value This paper contributes to the literature by presenting different approaches for modeling the monthly wind energy produced based on direct models of the wind energy output, which are rare in the existing literature. Further, their impact on risk-return characteristics of a wind farm investment is analyzed, and thus, related model risk is assessed.

The study described in this article seeks to solve the problem of investment decisions in the current environment, where investor irrationality comes to the front and blinds traditional classical analytical tools. During the post-crisis period it becomes a problem not only for Russian valuation analysts but globally as well. The present study uses behavioral finance methodology to solve this problem. To illustrate the solution, we used the discounted cash flow valuation techniques on a huge amount of on-sale Russian businesses and then applied quantitative financial solution methods to process the multiple results. TOPICS:Private equity, factor-based models, developed markets Key Findings • The article provides its reader with a strict, consistent and interconnected analytical instruments to measure how sentiments have an influence on prices and lead to different interpretations of risks and returns in behavioral finance theories. • The reader can take away from the methodology described in the article how sentiment is reflected in the stochastic discount factor. • After reading the article the reader has the illustrated on a particular M&A market methods of implementation of the stochastic discount factor-based behavioral pricing theory.

Technology finance, which has attracted worldwide attention for the successful business development of small-and-medium enterprises (SMEs) or start-ups, has advanced an innovation or stagnation way-out resolution strategy for companies in line with the low-growth economic trends. Although the development of new technologies and the establishment of active R&amp, D and commercialization strategies are essential factors in a company’s management sustainability, the activation of the technology market in practice is still in progress for its golden age. In this study, to promote a technology transfer-based company’s growth and to run technology-based various financial support activities, we develop and propose a new intelligent, deep learning-based technology valuation system that enables technology holders to estimate the economic values of their innovative technologies and further to establish a firm’s commercialization strategy. For the last years, the KIBO Patent Appraisal System (KPAS-II) herein proposed has been advanced by KIBO as a web-based, artificial intelligence (AI) and evaluation data applications valuation system that automatically calculates and estimates a technology’s feasible economic value by utilizing both the intrinsic and extrinsic index information of a patent and the commercialization entity’s business capabilities, and by applying to the discounted cash flow (DCF) method in valuation theory, and finally integrating with deep learning results based on the in-advance previously established patent DB and the financial DB. The KPAS-II proposed in this study can be said to have dramatically overcome the long-term preparation period and high levels of R&amp, D and commercialization costs in terms of the limitations that the existing technology valuation method possesses by enhancing the reliability of approximate economic values from the deep learning results based on financial data and completed valuation data. In addition, it is expected that technology marketing coordinators, researchers, and non-specialty business agents, not limited to valuation experts, can easily estimate the economic values of their patents or technologies, and they can be actively utilized in a technology-based company’s decision-making and technologically dependent financial activities.

We model investor heterogeneity using different required returns on an investment and evaluate the impact on the valuation of an investment. By assuming no disagreement on the cash flows, we emphasize how risk preferences in particular, but also the costs of capital, influence a subjective evaluation of the decision to invest now or retain the option to invest in future. We propose a risk-adjusted valuation model to facilitate investors’ subjective decision making, in response to the market valuation of an investment opportunity. The investor’s subjective assessment arises from their perceived misvaluation of the investment by the market, so projected cash flows are discounted using two different rates representing the investor’s and the market’s view. This liberates our model from perfect or imperfect hedging assumptions and instead, we are able to illustrate the hedging effect on the real option value when perceptions of risk premia diverge. During crises periods, delaying an investment becomes more valuable as the idiosyncratic risk of future cash flows increases, but the decision-maker may rush to invest too quickly when the risk level is exceptionally high. Our model verifies features established by classical real-option valuation models and provides many new insights about the importance of modelling divergences in decision-makers risk premia, especially during crisis periods. It also has many practical advantages because it requires no more parameter inputs than basic discounted cash flow approaches, such as the marketed asset disclaimer method, but the outputs are much richer. They allow for complex interactions between cost and revenue uncertainties as well as an easy exploration of the effects of hedgeable and un-hedgeable risks on the real option value. Furthermore, we provide fully-adjustable Python code in which all parameter values can be chosen by the user.

The purpose of the study described in this article is to solve the problem of investment decisions in the current environment where investor irrationality comes to the front and blinds traditional classical analytical tools. During the post-crisis period it becomes a problem not only for Russian valuation analysts but for global as well. The current study uses behavioral finance methodology to solve this problem. To illustrate the solution, we used the discounted cash flow valuation techniques on a huge amount of on-sale Russian businesses and then applied quantitative financial solution methods to process the multiple results. As it is shown in the article stochastic discount factor-based behavioral pricing theory is a construction set for skilled researchers. An instrument turned into the future. With the developed techniques with improved tools, new models and empirical testing at various markets it will be included in the product range of analytical databases and value assessment methods for businesses and other assets. As it is approved with the article’s data sentiments have an influence on prices and lead to different interpretations of risks and returns in neoclassical and behavioral finance theories. So behavioral finances and neoclassical finances give a different meaning to asset pricing and especially to correlation of risks and profits.

This study aims to determine intrinsic value of stock in companies listed on the Indonesia Stock Exchange in animal feed subsector in 2018 with the approach of free cash flow to firm (FCFF) and relative valuation based on price earnings ratio (PER) and price book value (PBV). The discounted cash flow (DCF)-FCFF valuation results show that the Charoen Phokpand Indonesia (CPIN) in pessimistic and moderate scenarios is overvalued, while in optimistic scenarios it is undervalued. Japfa Comfeed Indonesia (JPFA) shares are undervalued in all scenarios, and Malindo Feedmill (MAIN) shares are in overvalued condition in all scenarios. The PER valuation results show that CPIN shares in pessimistic and moderate scenarios are undervalued, while in optimistic scenarios, they are overvalued. JPFA and MAIN stocks in all scenarios are overvalued. The PBV valuation results show that CPIN’s stock in the pessimistic scenario is undervalued, while in the moderate and optimistic scenarios are overvalued condition. JPFA and MAIN stocks in all scenarios are overvalued.

This paper presents a study of the valuation methods used by analysts to price small and medium-sized enterprises (SMEs) and startups, characterized generally by a lack of accounting history, an absence of comparable firms, and a high growth potential, or even going through a stage of hypergrowth, despite operating in a particularly uncertain environment. According to a sample of 203 analysts’ IPO reports on Euronext Paris, it is noted that analysts are restricted to using a limited number of valuation models for startups and SMEs, despite the multitude of available assessment methods. The data strongly proved that the discounted cash flow method (DCF) is the most widely used model for startups and SMEs. The real options model, recognized by the literature as the most suitable model for these firms, has never been used. All the valuation methods tend to overestimate firms. Furthermore, the given estimates in the reports were closer to the stock price values one month after the IPO. Regressions prove that the analysts’ choice to use the comparables method depends significantly on the activity sector of the assessed firm.JEL classification: G32, G24

Many studies have focused on the relationship between companies with strong environmental, social, and governance (ESG) characteristics and corporate financial performance. However, these have often struggled to show that positive correlations—when produced—can in fact explain the behavior. The authors of this article provide a link between ESG information and the valuation and performance of companies, by examining three transmission channels within a standard discounted cash flow model—which they call the cash-flow channel, the idiosyncratic risk channel, and the valuation channel. They tested each of these transmission channels using Morgan Stanley Capital International ESG Ratings data and financial variables. This showed that companies’ ESG information was transmitted to their valuation and performance, both through their systematic risk profile (lower costs of capital and higher valuations) and their idiosyncratic risk profile (higher profitability and lower exposures to tail risk). The research suggests that changes in a company’s ESG characteristics may be a useful financial indicator. ESG ratings may also be suitable for integration into policy benchmarks and financial analyses. TOPICS: ESG investing, security analysis and valuation, risk management

PurposeThe purpose of this paper is to present a model to value leveraged firms in the presence of default risk and bankruptcy costs under a flexible firm’s debt structure.Design/methodology/approachThe authors assume that the total debt of the firm is a combination of two debt components. The first component is an active debt component which is assumed to be proportional to the firm’s value. The second one is a passive predetermined risk-free debt component. The combination of the two debt categories makes the firm’s capital structure more realistic and allows us to include flexibility into the firm’s debt structure management. The firm’s valuation is performed using the discounted cash flow technique based on the weighted average cost of capital (WACC) method.FindingsThe model can be used to define active debt management strategies that can induce the firm to deviate from its capital structure target in order to preserve debt capacity for future funding needs. The firm’s valuation is performed by using the WACC method and a closed form valuation formula is provided. Such a formula can be used to value costs and benefits of financial flexibility.Research limitations/implicationsThe proposed approach provides a good compromise between mathematical complexity and model capability of interpreting the various economic and financial aspects involved in the firm’s debt structure puzzle.Practical implicationsThis model offers a realistic approach to practical applications where real financing decisions are characterized by a simultaneous use of these two debt categories. By comparing costs and benefits deriving from using unused debt capacity for future funding needs, the model provides a quantitative support to investigate if financial flexibility can add value to firms.Originality/valueTo the authors knowledge, the approach the authors propose is the first attempt to build a valuation scheme that accounts for firm’s financial flexibility under default risky debt and bankruptcy costs. Including financial flexibility, this model fills an important gap in the literature on this topic.

PurposeThe purpose of this study is to describe and analyse the methods and standards of valuation used by Swedish professional property valuers when appraising commercial properties and factors affecting those standards. The study builds on a 2002 comparative study of valuers in four European countries by McParland et al. (2002), but focuses specifically on property valuers in Sweden.Design/methodology/approachIn 2010-2011, a questionnaire was used in face-to-face interviews with about half of the authorised property valuers in Sweden. Another questionnaire was emailed to all authorised property valuers in Sweden 2015 and again about half participated.FindingsAnalysis of the results shows some new trends in used and preferred standards and methods. Although Swedish valuers still rely mainly on local guidelines, they now increasingly use international standards and company guidelines, which may indicate a growing, if indirect, form of internationalisation. Swedish valuers still use discounted cash flow as their primary method, but their use of comparative methods has increased.Originality/valueThe data in this comparative study of valuation standards and methods over time used were collected from a specific group of property valuers authorised through the professional Swedish organisation Samhällsbyggarna (Swedish Professionals for the Built Environment), which contributes to an insight in the presiding of the harmonisation of valuation methods and standards.

Renewable energies are a natural replacement for conventional or fossil fuel energy generation. One of these sources, wind energy, has exhibited significant cost reductions during the last decades. Even though this historical cost reduction trend is well known in the industry and in the academia, information on this cost trend and volatility has been scarcely incorporated in previous works, thus a natural concern arises when assessing their influence on the economic valuation of wind farms. Moreover, wind projects are modular in size and have a short time-to-market, providing a valuable managerial flexibility to defer investment under non-attractive market conditions, such as high development cost scenarios. Traditional evaluation tools often consider those scenarios, wrongly assuming that wind-developers would move forward with the project under such conditions. Accordingly, this paper analyzes the effect of incorporating both generation cost history and investment flexibility in the valuation of wind farms in the United States using Real Options methodology. Taking two decades of cost data and a reference wind farm, this “uncertainty-flexibility” effect is incorporated and valued, finding that the value of the wind project is 14.2% larger than the one neglecting such effect – where cost stochasticity and managerial flexibility are ignored. Therefore, traditional tools for project valuation, such as discounted cash flow and scenario analysis can no longer solely be used, as they do not properly account for the cost reduction trend, uncertainty, and managerial flexibility that a wind farm could face.

O objetivo deste estudo consistiu em analisar comparativamente os resultados da valoração de ativos intangíveis pela abordagem das opções reais, baseado no modelo de Black e Scholes, com o método do fluxo de caixa descontado, no contexto de um software desenvolvido na Universidade Federal de Minas Gerais. As flexibilidades consideradas no desenvolvimento do trabalho foram a opção de abandono e a opção de prorrogação do contrato de licenciamento. Os resultados mostraram que o modelo das opções reais se adapta melhor a esse cenário, pois incorpora ao valor final do ativo as opções presentes desde o momento da Pesquisa e Desenvolvimento até o fim do licenciamento e proteção da tecnologia. O valor esperado sob a ótica das opções reais foi estatisticamente superior ao do fluxo de caixa tradicional. Esse resultado mostrou que as contingências relativas ao caso de estudo são relevantes e com isso devem ser consideradas no processo de valoração. A maior proximidade desse valor com a realidade representa benefícios tanto para a universidade quanto para a empresa. Ademais, é importante ressaltar que uma tecnologia protegida é capaz de criar uma grande vantagem competitiva e que os ganhos com sua exploração podem ir muito além dos financeiros.

Purpose The majority of institutional investors in Germany use the German income approach (GIA) while investors abroad prefer the discounted cash flow (DCF). The debate around the two methods has been largely theoretical, lacking large-scale empirical evidence. The paper aims to discuss this issue. Design/methodology/approach The analysis consisted of a performance comparison and hedonic regressions based on ordinary least squares. Fitted GIA and DCF values were obtained for all observations in the data set in order to eliminate distortions caused by different property characteristics in the two valuation sub-samples. Findings The research hypothesis, stating that the two methods result in statistically identical estimations of value, was rejected. The performance analysis showed that GIA valuations displayed smoother total return performance due to less volatile capital growth in comparison to DCF valuations. Comparing the fitted values obtained from the regressions showed that GIA valuations were on average lower than their DCF counterparts. The difference was small and both methods resulted in very similar fitted values. The difference between fitted values was not constant over time and decreased toward the end of the analysis period. Practical implications The research adds empirical arguments to the ongoing debate between GIA and DCF valuations. So far empirical proof has been scarce or one-sided. Originality/value This analysis is the first large-scale empirical comparison of the DCF and the GIA within the same market.

Uma das formas mais utilizadas para se apurar o valor de uma companhia (valuation) é o fluxo de caixa descontado, método que utiliza dados financeiros e contábeis da empresa para calcular o seu valor justo, com base na projeção de benefícios futuros de caixa. No entanto, apesar de ser o modelo mais utilizado, este método, pode não incorporar de maneira adequada os riscos do valuation, como o risco do custo de capital, que é impreciso em países emergentes, devido as constantes flutuações de taxas de juros, inflação e do próprio mercado. Uma forma de incorporar aos cálculos estes riscos, é usando distribuições de probabilidade com simulações Monte Carlo para se determinar previsões de diversos valores que a empresa pode assumir. Diante do exposto, o presente trabalho tem como principal objetivo verificar a acurácia da utilização da simulação de Monte Carlo no processo de avaliação de uma empresa através do método de fluxo de caixa descontado, incluindo a incerteza do cálculo de custo de capital. Após a análise dos resultados, chegou-se à conclusão de que a simulação de Monte Carlo é uma poderosa ferramenta para auxiliar na tomada de decisão, pois apesar de não prever o valor exato da empresa, ajuda a compreender os riscos e ameniza a subjetividade da avaliação, além de que permite conhecer os diversos valores que uma empresa pode assumir em diferentes cenários econômicos. O valor encontrado para a empresa no modelo determinístico está próximo da média das simulações, o mesmo ocorre com o custo de capital.

International audience; The discount cash flow model must incorporate, in emerging economic systems, a conceptual framework for the inflation and valuation in two currencies treatment. The start point are the parity theories and Fisher effect, adding fuzzy logic for project uncertainty variables: interest rates, inflation, exchange rates and quantities, becoming one of its main contributions. The structure of the paper as follows: they are developed the parity theories and model´s equation at the fuzzy logic framework. Its functioning is illustrated with case of a firm located in an emerging and inflationary economy like Argentina, using spreadsheets. Finally, the results obtained showed the consistency with the parity theories, adding fuzzy logic for the uncertainty treatment, at the comprehensive framework of discounted cash flow model in two currencies.

The purpose of the study is to investigate the characteristics of the discounted cash flow (DCF) as a measure of startup financial success. In general, DCF is found the most popular method in startup valuation followed by the internal rate of return (IRR) and the payback period methods. However, the consequences of using this method in startup valuation are rarely analyzed in financial research. In this study, a simplified mathematical model is developed to describe the time-series development of the cash flow. This model is based on the growth of expenditures and their ability to generate revenues from the founding of the startup. The model employs IRR as the measure of true profitability and the average lagin revenue generation as a proxy of the payback period. Numerical experiments are used to show the sensitivity of DCF to the parameters of the model. The results indicate that the use of DCF favors startups that grow slowly and have a short payback period but that also exhibit a high IRR. The longer the time series of the startup used in the analysis, the more significant role IRR tends to play in DCF. Empirical evidence extracted from a sample of Finnish startups supports the numerical findings.

In Japan, higher reimbursement drug prices give pharmaceutical firms stronger RD (2) by how much reimbursement drug prices can be reduced, keeping pharmaceutical firms’ RD and (3) how the magnitude of the impact changes with the degree of price risk that firms face and with the level of their risk aversion. To this end, a hypothetical new branded drug is constructed from actual data on the Japanese drug market. Assuming that a pharmaceutical firm is an expected-utility maximizer, that the firm’s instantaneous utility function is in the form of the constant-relative-risk-aversion utility function and that its R&D incentives are quantified by the standard discounted cash flow valuation, we use simulations to compute the certainty equivalent and risk premium associated with various degrees of price risk and risk aversion. Referring to the empirical literature on risk preference, we set the parameter value for the level of relative risk aversion of a pharmaceutical firm to 3.0 and that for the discount rate to 0.08. The following results emerged. (1) In the presence of a 20% price risk regarding a reimbursement price of 100 (i.e., ranging from 80 to 120), a pharmaceutical firm’s certainty equivalent is 96.0. Hence, in the presence of a 20% price risk, a risky reimbursement drug price of 100 is equivalent to a sure reimbursement drug price of 96.0. (2) In the presence of a 20% price risk regarding a reimbursement price of 100, the price premium is 4.0. Therefore, by increasing the predictability of future prices, the reimbursement price may decrease by 4.0, while the firm’s R&D incentives remain unchanged. (3) The magnitude of the impact increases at an increasing rate with the degree of price risk and increases at a decreasing rate with the level of risk aversion.

Recently, recycling of municipal solid waste incineration (MSWI) fly ash has gained increasing interest, although it is still unclear if recycling is preferable over disposal from an economic and environmental point of view. The objective of the present study is to assess the resource potential of MSWI fly ash for the production of three different commodities (cement, metals, de-icing salts) from a private investor’s micro and a public entity’s macro perspective. Therefore, the environmental impacts and economics were determined by life cycle assessment (LCA) and discounted cash flow (DCF) analysis, respectively. Monetary valuation was applied to the LCA results in order to determine the external costs, which were subsequently added to the DCF analysis results from the macro perspective (i.e. internal costs) to determine the socio-economic viability (i.e. total costs) of MSWI fly ash recycling. The resource classification scheme UNFC was used to classify MSWI fly ash for utilisation in cement production, metal and salt recovery based on the combined result from LCA and DCF analysis. The consideration of project feasibility and geological knowledge leads to the classification as commercial project (111) for cement production (micro and macro view) and for metal recovery (macro view). Metal recovery is classified as other combination (211) from a micro view due to a negative median net present value and salt recovery is classified as non-commercial project (321) from a micro and macro view. It was demonstrated that monetary valuation of LCA results is a useful tool for including external costs into resource classification.

Climate change is undeniably the major challenge of our times and poses a global threat to civilization. The present study attempts to analyze the shift in the environmental changes in the Indian chemical industry and to evaluate such an impact on the financial valuation and performance of the companies by investigating the case of one of the major players in the fluorochemical industry in India, Gujarat Fluorochemicals Ltd. (GFL). Employing Discounted Cash Flow Analysis, the study discovers that climate change in the form of increased carbon credits has positively impacted the financial valuation of GFL. The findings suggest that an increase of approximately 44% in the valuation of the GFL is owing to the revenue from the sale of the carbon credits as per the Kyoto Protocol.

The discounted cash flow valuation methodology calculating the net present value, and derivatives of this methodology, rely on the use of discount rates to arrive at a value. Generally, a single discount rate is used over the life of the resources project. Where discounting factors using more than one discount rate are used, these factors seldom incorporate the impacts of changing debt to equity ratios, increasing capitalization of projects, equity returns trending towards the risk free rate and finally a defendable premium incorporated to reflect technical risk. This paper provides a discussion and solutions to these issues and gives the reader simple yet defendable tools to reconsider what, why and how discount rates should be used.

In determining terminal value in a discounted cash flow (DCF) valuation, it is usually assumed that a mature company will grow at a constant rate in perpetuity. The impact of creative destruction a...

This study study started with the question "How much is my company worth?" and "How do I go about valuing my company?" The most popular approaches for valuing companies are Asset, Income, and Market based. This study seeks to identify whether Income-based Discounted Cash Flow method based on projected future income would be suitable to value international chemical distributors. 2 and 3-stage Discounted Cash Flow model will be used. The projected companies' enterprise and equity values will be compared with the existing companies's valuations. A base, bear and bull case scenario will be set up to establish the range of company's value for comparison with the existing valuation. This study adopts a single multiple-case study approach where actual financial data from three of the world's largest chemical distributors were used to establish the existing companies' valuation to demonstrate the validity and applicability of the Discoujnted Cash Flow method. Sensitivity analysis will be performed too.

Purpose: Magazine Luiza, founded in November 1957, is a national retail icon, went public in 2011 at B3, with exponential growth in the valuation of its shares. This case provides the following pedagogical objectives: a) promote problem analysis, propose and inquire about valuation decisions; b) stimulate reflection between the theory that supports the purposes of evaluation and the way it should be developed and applied; c) expand the ability to relate the theoretical assumptions of valuation and their adequacy to reality. Methodology: The Financial Statements were extracted from the website of the company, on Economática® and on the website of B3. Professor Damodaran's database was also used. It should be noted that the data are real, however, on the other hand, the existence of the company Alpha Varejo and its proposed acquisition of the company Magazine Luiza are considered as a hypothetical situation. Results: From a behavioral perspective, it allows students and teachers to have healthy dialogues and discussions so that there is mutual respect for divergent opinions and ideas, allowing the exposure of their points of view. Estimating the value of the company using the Discounted Cash Flow and Relative Valuation methods is a complex task, and can be considered as an important decision-making process, especially for the company's shareholder. In the use of methods, there is the need to choose appropriate premises that best reflect the reality of the company. Contributions of the Study: The performance of the proposed activity, with undergraduate or graduate students in the business area in disciplines aimed at analyzing the financial viability of companies and valuation, contributes to the training of these students with the development of critical analysis and stimulating discussion in the financial studies. Objetivo: La empresa Magazine Luiza, fundada en noviembre de 1957, es un ícono minorista nacional, se hizo pública en 2011 en B3, con un crecimiento exponencial en la valoración de sus acciones. Este caso proporciona los siguientes objetivos pedagógicos: a) promover el análisis de problemas, proponer e investigar decisiones en relación con la valoración; b) estimular la reflexión entre la teoría que respalda los propósitos de la evaluación y la forma en que debe desarrollarse y aplicarse; c) ampliar la capacidad de relacionar los supuestos teóricos de la valoración y su adecuación a la realidad. Metodología: Las demonstraciones financieras se extrajeron del sitio web de la empresa, de Economática® y del sitio web de B3. También se utilizó la base de datos del profesor Damodaran. Cabe señalar que los datos son reales, sin embargo, por otro lado, la existencia de la empresa Alpha Varejo y su propuesta de adquisición de la empresa Magazine Luiza se consideran una situación hipotética. Resultados: Desde un punto de vista conductual, permite a los estudiantes y profesores mantener diálogos y debates saludables para que exista un respeto mutuo por las opiniones e ideas divergentes, lo que permite exponer sus puntos de vista. Estimar el valor de la empresa utilizando los métodos de Flujo de Caja Descontado y Valoración Relativa es una tarea compleja y puede considerarse como un importante proceso de toma de decisiones, especialmente para el accionista de la empresa. En el uso de métodos, existe la necesidad de elegir las premisas apropiadas que mejor reflejen la realidad de la empresa. Contribuciones del Estudio: El desempeño de la actividad propuesta, con estudiantes de pregrado o posgrado en el área de negocios en disciplinas destinadas a analizar la viabilidad financiera de las empresas y la valoración, contribuye a la capacitación de estos estudiantes con el desarrollo de análisis críticos y una discusión estimulante en el área de finanzas. Objetivo: A empresa Magazine Luiza, fundada em novembro/1957, ícone do varejo nacional, abriu seu capital em 2011 na B3, com crescimento exponencial na valorização de suas ações. Este caso proporciona os seguintes objetivos pedagógicos: a) promover a análise de problemas, propor e indagar decisões em relação à valuation; b) estimular a reflexão entre a teoria que sustenta os propósitos de avaliação e a forma como ela deve ser desenvolvida e aplicada; c) ampliar a capacidade de relacionar os pressupostos teóricos de valuation e a sua adequação à realidade. Metodologia: As Demonstrações Contábeis foram extraídas do site da empresa MGL, na Economática® e no site da B3. Também foi utilizada a base de dados do professor Damodaran. Destaca-se que os dados são reais, porém, em contrapartida, considera-se como situação hipotética a existência da empresa Alpha Varejo e sua proposta de aquisição da empresa Magazine Luiza. Resultados: Sob o ponto de vista comportamental, permite que estudantes e docente tenham diálogos e discussões saudáveis de modo que haja respeito mútuo às opiniões e ideias divergentes, permitindo a exposição de seus pontos de vista. Estimar o valor da empresa pelos métodos do Fluxo de Caixa Descontado e Avaliação Relativa é uma tarefa complexa, e pode ser considerada como um processo importante para tomada de decisão, principalmente para o acionista da empresa. No uso dos métodos, reside a necessidade de escolhas de premissas adequadas que melhor refletem a realidade da empresa. Contribuições do Estudo: A realização da atividade proposta, com estudantes de graduação ou pós-graduação na área de negócios em disciplinas voltadas para análise de viabilidade financeira de empresas e valuation, contribui para a formação destes estudantes com desenvolvimento de análise crítica e estímulo à discussão na área de finanças.

This paper measures the predictive power of buy-sell-and-hold recommendations made by students engaged in the management of a student-managed investment fund (SMIF). In their roles as analysts and portfolio managers for the SMIF, undergraduate students were required to follow traditional security analytical techniques such as discounted cash flow analysis and comparative valuation that were taught in the introductory investment management class, which is a pre-requisite. We evaluated the stock price performance of the stocks which the students analyzed across multiple holding periods, following student recommendations to buy, sell, or hold. We also compared the recommendations of the student-analysts to the contemporaneous recommendations of sell-side equity analysts.

The cost of capital is the expected rate of return that the market requires in order to attract funds to a particular investment and is one of the most important concepts in finance. It may be described in simple terms as the expected return appropriate for the expected level of risk and is also commonly called the discount rate, the expected return, or the required return. There are three broad valuation approaches: (i) the income approach, (ii) the market approach, and (iii) the cost or asset-based approach. The country risk premia (CRPs), equity risk premia (ERPs), and relative volatility (RVs) can be used to develop cost of capital estimates for use in income approach-based valuation methods. Of the three aforementioned approaches to estimating value, only the income approach typically requires cost of capital estimates. The cost of capital is a critical input used in income approaches to equate the future economic benefits (typically measured by projected cash flows) of a business, business ownership interest, security, or intangible asset to present value. The income approach is most often applied through a discounted cash flow (DCF) model. A basic insight of capital market theory, that expected return is a function of risk, still holds when dealing with cost of equity capital in a global environment. Estimating a proper cost of capital (i.e., a discount rate) in developed countries, where a relative abundance of market data and comparable companies exist, requires a high degree of expertise. Estimating cost of capital in less-developed (i.e., “emerging”) economies can present an even greater challenge, primarily due to lack of data (or poor data quality) and the potential for magnified financial, economic, and political risks. A good understanding of cost of capital concepts is, therefore, essential for making global investment decisions.

This chapter illustrates the valuation guidelines for normal businesses that represent a benchmark even for startups. The valuation of a startup is a key element to attract investors and to monitor value growth across time. Several appraisal approaches are used to estimate the potential fair market value, ranging from Discounted Cash Flows to market multipliers or income/asset-based methodologies. The valuation is complicated by the difficulty to estimate future earnings and cash flows, especially for startups with no track record and uncertain perspectives.

In this paper we outline how to value private companies and work through a real case study. The corporate finance and valuation techniques on display can be used to value any private company or project that is illiquid with little or no market data. Together with this paper we provide the full background information for the case study, including consolidated balance sheet, cash flow and income statements and an Excel workbook with a full valuation breakdown . Two valuation approaches are presented. The first approach is called ‘multiples’ and requires we first identify sensible comparable companies with public data and can serve as a reasonable proxy for our underlying firm or project. Known proxy enterprise values are converted into multiples of EBITDA and extrapolated to value the private company or project of interest. Enterprise value can be measured as a multiple of sales, earnings, EBITDA, EBIAT and many income factors. Typically practitioners measure enterprise value as a multiple of EBITDA to exclude sales margin, capital structure, debt and leverage and other idiosyncratic biases. The second valuation method takes a discounted cash flow (DCF) approach. This approach is forward looking; it projects and values the future cash flows of a company. This method lends itself to richer analysis compared to the multiples approach, but relies heavily on assumptions surrounding cash flow projections, growth rates and the weighted average cost of capital (WACC). The WACC acts as a yield or discount factor and is required to value the cash flows of the firm or project (Burgess, 2020). Finally we compare the prices from several different approaches to arrive at a suitable price range. It is important to note that all approaches involve assumptions and approximations of some kind. Therefore practitioners seek to establish a reasonable price range rather than a single price. Transactions however must take place at a single price and law suits are a popular commonplace negation tactic to squeeze for additional value.

Valuation in any merger is the amount a buyer is willing to pay the seller and if the latter is willing to accept the deal amount. There are different techniques to value a company, and it depends on the industry or situation-specific. The most common techniques are: Discounted Cash Flow (DCF) Analysis, Comparable Company Analysis, Comparable Transaction Analysis, and Net Present Value (NPV) method. Other methods may be used as well. Valuation analysts may be retained to provide fairness opinions for private company M&A transactions.