In valuation practice, the most common and generally accepted method of business valuation is the discounted cash flow method. This method is based on the forecasting of cash-flows generated by the business for a certain number of years. As a rule, appraisers use two models of cash flow calculation, namely free cash flow for the firm (FCFF) and free cash flow for equity (FCFE). In this program, there are both models of cash flow, and a special macro allows the user to determine which model is most suitable for him.
The most important task in building a model within discounted cash flow method is to correctly predict the growth rate of income and expenses of the company. This program allows you to use several types of models: two-stage and multi-stage growth. At the same time, the program has two options for forecasting capital expenditures and working capital. The first method of forecasting is carried out in accordance with the method of calculating the reinvestment amount proposed by Aswath Damodaran. Damodaran’s method links financial indicators and prevents the valuer from making changes within the model. The second method of forecasting involves free forecasting of financial indicators and their change within the model.
- A. Damodaran. The dark side of valuation: A Jedi guide to valuing difficult to value companies. (www.damodaran.com)
- James R. Hitchner. Financial valuation. Applications and models. – 3rd edition. Wiley, 2011.
- Joshua Rosenbaum, Joshua Pearl. Investment banking. Valuation, leveraged buyouts and mergers&acquisitions. – 2nd edition. Wiley, 2013
Vadim Sobkin (www.economist-mate.com)