X. VALUATION PRINCIPLES
A. Difference Between Price and Value
B. Why Valuations are required
C. Sources of Value in a Business – Earnings and Assets
D. Approaches to valuation
E. Discounted Cash Flows Model for Business Valuation
DCF is a valuation method that uses expected future cash flows to estimate the value of a company or investment.
valuation today based on future future cash flows.
What Is an Example of a DCF Calculation?
You have a discount rate of 10% and an investment opportunity that would produce $100 per year for the following three years. Your goal is to calculate the value today—the present value—of this stream of future cash flows.
Since money in the future is worth less than money today, you reduce the present value of each of these cash flows by your 10% discount rate. Specifically, the first year’s cash flow is worth $90.91 today, the second year’s cash flow is worth $82.64 today, and the third year’s cash flow is worth $75.13 today. Adding up these three cash flows, you conclude that the DCF of the investment is $248.68.
NPV Net Present Value adds a fourth step to the DCF calculation process.
F. Relative valuation
G. Earnings Based Valuation Matrices
H. Assets based Valuation Matrices
I. Relative Valuations – Trading and Transaction Multiples
J. Sum-Of-The-Parts (SOTP) Valuation
K. Other Valuation Parameters in New Age Economy and Businesses
L. Capital Asset Pricing Model
M. Objectivity of Valuations
N. Some Important Considerations in the Context of Business Valuation
