119 Common Errors in Company Valuations

Abstract

This paper contains a collection and classification of 119 errors seen in company valuations performed by financial analysts, investment banks and financial consultants. The author had access to most of the valuations referred to in this paper in his capacity as a consultant in company acquisitions, sales, mergers, and arbitrage processes.

We classify the errors in six main categories: 1) Errors in the discount rate calculation and concerning the riskiness of the company; 2) Errors when calculating or forecasting the expected cash flows; 3) Errors in the calculation of the residual value; 4) Inconsistencies and conceptual errors; 5) Errors when interpreting the valuation; and 6) Organizational errors.

La versión española de este artículo se puede encontrar en: http://ssrn.com/abstract=962961.

Keywords: company valuation, valuation errors, valuation, historical beta, CAPM

JEL Classification: G12, G29, G31, M21