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

15 Pages Posted: 27 Jul 2012 Last revised: 18 Nov 2015

Pablo Fernandez

University of Navarra - IESE Business School

Date Written: November 17, 2015

Abstract

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

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.

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

JEL Classification: G12, G31, M21

Suggested Citation

Fernandez, Pablo, Valuing Companies by Cash Flow Discounting: Fundamental Relationships and Unnecessary Complications (November 17, 2015). IESE Business School Working Paper No. WP-1062-E. Available at SSRN: https://ssrn.com/abstract=2117765 or http://dx.doi.org/10.2139/ssrn.2117765

Pablo Fernandez (Contact Author)

University of Navarra - IESE Business School ( email )

Camino del Cerro del Aguila 3
28023 Madrid
Spain
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)

HOME PAGE: http://web.iese.edu/PabloFernandez/

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