An 'Enhanced' Corporate Valuation Model: Theory and Empirical Tests

25 Pages Posted: 8 Sep 2015 Last revised: 29 Sep 2015

See all articles by Bradford Cornell

Bradford Cornell

Anderson Graduate School of Management, UCLA

Rajiv Gokhale

Compass Lexecon

Date Written: September 3, 2015

Abstract

In this paper, we develop an enhanced corporate valuation model based on the implied cost of equity capital (ICC). We argue that the enhanced approach extends the standard market multiples and discounted cash flow (DCF) approaches to corporate valuation. Specifically, it incorporates positive aspects of the market comparables and DCF approaches while mitigating the shortcomings of both. Unlike the traditional market comparables approach, the enhanced approach takes account of the full term structure of earnings forecasts. It does so by using the ICC calculated for the comparable companies as an “enhanced multiple” which translates the entire stream of cash flow forecasts into a value estimate. Unlike the DCF approach it does not require estimation of the cost of equity capital. As such, it avoids the complexity and uncertainty associated with estimating the cost of equity capital. In our empirical tests, we find the enhanced approach to be more accurate than either of the two traditional approaches.

Keywords: Valuation, DCF, Market Multiples

JEL Classification: G30, G31

Suggested Citation

Cornell, Bradford and Gokhale, Rajiv, An 'Enhanced' Corporate Valuation Model: Theory and Empirical Tests (September 3, 2015). Available at SSRN: https://ssrn.com/abstract=2657293 or http://dx.doi.org/10.2139/ssrn.2657293

Bradford Cornell (Contact Author)

Anderson Graduate School of Management, UCLA ( email )

Pasadena, CA 91125
United States
626 833-9978 (Phone)

Rajiv Gokhale

Compass Lexecon ( email )

United States

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