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

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Company Valuation Methods: Part1, Part2, Part3, Part4, Part5, Part6, Part7, Part8

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