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09 Nov, 2017

Company Valuation Methods. Basic Stages of a Valuation by Cash Flow Discounting (Part 6)

Company Valuation Methods. Basic Stages of a Valuation by Cash Flow Discounting (Part 6)

The basic stages in performing an accurate valuation by cash flow discounting are:

Historic and strategic analysis of the company and the industry

1. Financial analysis

— Evolution of income statements and balance sheets

— Evolution of cash flows generated by the company

— Evolution of the company’s investments

— Evolution of the company’s financing

— Analysis of the financial health

— Analysis of the business’s risk

2. Strategic and competitive analysis

— Evolution of the industry

— Evolution of the company’s competitive position

— Identification of the value chain

— Competitive position of the main competitors

— Identification of the value drivers


Projections of future flows

1. Financial forecasts

— Income statements and balance sheets

— Cash flows generated by the company

— Investments

— Financing

— Terminal value

— Forecast of various scenarios

2. Strategic and competitive forecasts

— Forecast of the industry’s evolution

— Forecast of the company’s competitive position

— Competitive position of the main competitors

3. Consistency of the cash flow forecasts

— Financial consistency between forecasts

— Comparison of forecasts with historic figures

— Consistency of cash flows with the strategic analysis


Determination of the cost (required return) of capital

— For each business unit and for the company as a whole

— Cost of the debt, required return to equity and weighted cost of capital


Net present value of future flows

— Net present value of the flows at their corresponding rate.

— Present value of the terminal value.

— Value of the equity.


Interpretation of the results

— Benchmarking of the value obtained: comparison with similar companies

— Identification of the value creation. Sustainability of the value creation (time horizon)

— Analysis of the value’s sensitivity to changes in the fundamental parameters

— Strategic and competitive justification of the value creation


Other parts of the article «Company Valuation Methods» (Part 1), (Part 2), (Part 3), (Part 4), (Part 5) and (Part 7), (Part 8)

Read also: DD Check List, Mandate F. A. Q.


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