Company Valuation in an Emerging Economy - Caldonia: A Case Study
The Valuation Journal, Vol. 5, No. 2, pp. 4-45, 2010
25 Pages Posted: 1 Nov 2010 Last revised: 28 Aug 2011
Date Written: October 31, 2010
In this article we use a real life case from an emerging country to illustrate the valuation with discounted cash flow methods that include complexities such as unpaid taxes, losses carried forward, foreign exchange debt, presumptive income and inflation adjustments to the Financial Statements. These complexities pose problems regarding the determination of cash flows and cost of capital. We use market values to calculate the discount rates and solve the circularity between estimated value and discount rates. Discount rate formulas depend on the assumption on the discount rate for the tax shields. We assume that this discount rate is the unlevered cost of equity and use the set of formulas derived from that assumption. We show that using a consistent set of formulas we find a perfect matching between values calculated with different methods: Free Cash Flow and Weighted Average Cost of Capital (WACC), Cash flow for Equity and levered cost of equity and Capital Cash Flow, which is equivalent to the Adjusted Present Value when the discount rate for tax shields is the unlevered cost of equity. The relevance of this work relies on the use of general formulation different from the standard textbook formula for cost of capital which does not allow introducing these complexities. Although the complexities require a special attention to follow, the case study shows that it is possible to properly calculate value in a consistent manner.
Keywords: Free cash flows, equity and firm value, Losses carried forward, exchange losses, presumptive Income, inflation adjustments to Financial Statements
JEL Classification: M21, M40, M46, M41, G12, G31, J33
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