Valuing Companies by Cash Flow Discounting: Fundamental Relationships and Unnecessary Complications
University of Navarra - IESE Business School
February 1, 2013
IESE Business School Working Paper No. WP-1062-E
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Company valuation using discounted cash flows is based on the valuation of the Government bonds: it consists of applying the procedure used to value the Government bonds to the debt and shares of a company. This is easy to understand (sections 1, 2 and 3).
But company valuation is complicated by ‘additions’ (formulae, concepts, theories…) to complicate its understanding (see sections 4 to 15) and to provide a more “scientific”, “serious”, “intriguing”, “impenetrable”, … appearance. Among the most commonly used ‘additions’ are: WACC, beta (B), market risk premium, beta levered and beta unlevered.
Number of Pages in PDF File: 15
Keywords: Valuation, discounted cash flow, equity premium, required equity premium, WACC, expected equity premium, beta, VTS
JEL Classification: G12, G31, M21
Date posted: July 27, 2012 ; Last revised: January 10, 2015
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