Valuing Companies by Cash Flow Discounting: Fundamental Relationships and Unnecessary Complications

Abstract

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.

La versión española de este artículo se puede encontrar en: http://ssrn.com/abstract=2089397.

Keywords: Valuation, discounted cash flow, equity premium, required equity premium, WACC, expected equity premium, beta, VTS

JEL Classification: G12, G31, M21