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Finance / Accounting -
Real Options

Topics on this site
Miscellaneous Articles on Valuation and Valuation Methods   
Discounts and Premiums
Discounted Cash Flow (DCF) Valuation
Cost of Capital / Weighted Average Cost of Capital (WACC)
Literature on Financial Modeling
Topics on separate sites of our Knowledgebase:
Real Options



A comparison of dividend, cash flow, and earnings approaches to equity valuation  This paper contrasts dividend discount techniques, discounted cash flow analysis, and techniques based on accrual earnings when applied to a finite-horizon valuation.   
A Strategic Evaluation of the Effects of International Diversification on Firm Value This paper sets out to establish whether a strategy of internationalisation will lead to an increase in the value of a company. Pdf-file 2000  
All P/Es are not created equal High price-to-earnings ratios are about more than just growth. Understanding the ingredients that go into a strong multiple can help executives make the most of this strategic tool. Pdf-file 338 KB. 2004  
Common Errors in Business Valuation Reports Revisited In this article, we will discuss the evolution of business valuation, common errors in valuation reports and the Tax Court's current views.  
Company Valuation Methods Short introduction into different methods for company valuation. Pdf-file  
Consistency in Valuation: A Practical Guide Practitioners very easily break some consistency rules when doing a valuation of assets. In this short and simple note the authors present a practical guide to call the attention upon the most frequent broken consistency rules.  
Cost of Capital Approach and Adjusted Present Value Approach This book chapter develops an approach to valuation where the entire firm is valued, by either discounting the cumulated cashflows to all claim holders in the firm by the weighted average cost of capital (the cost of capital approach) or by adding the marginal impact of debt on value to the unlevered firm value (adjusted present value approach). pdf  
Economic Value Added Model Using of the Economic Value Added Model for Valuation of a Company. Pdf-file  
Emotional Returns and Emotional Costs in Privately Held Family Businesses: Advancing Traditional Business Valuation This article introduces a formula to assess the total value of privately held family businesses from the owner’s perspective. It is argued that the total value of a business is not only composed of its financial worth and private benefits, as is usually assumed by traditional financial theory, but that emotional components also have an impact on valuation.  
Empirical Testing of Unified Valuation Theory It has been a long-held belief by many appraisers that small businesses sell very differently than large businesses, that the rules of the game are totally different. This article shows why that is not true. Pdf-file  
Equity valuation A Comparison of Dividend, Cash Flow, and Earnings Approaches to Equity Valuation, by Theodore Sougiannis and Stephen H. Penman  
Firm Valuation: Free Cash Flow or Cash Flow to Equity? In this paper the relationship between firm value calculated through the FCF and the CFE (cash flow to equity) is examined. Several approaches to the firm value calculations are presented.   
Firm Value Taxes, Financing Decisions and Firm Value, by Eugene F. Fama and Kenneth R. French  
Free Cash Flow and Discounted Cash Flow Approaches - A Monte Carlo Comparison One of the debates in the capital budgeting model selection is between the free cash flow and DCF methods. In this paper an attempt is made to compare SVA against NPV model based on Monte Carlo simulations. Accordingly, NPV is found less sensitive to value driver variations and has got higher forecast errors as compared to SVA model. pdf-file 2002  
Free Cash Flow vs. Capital Cash Flow A comparison. Pdf-file  
Glossary of business valuation terms. Pdf-file  
Glossary International Glossary of Business Valuation Terms. Pdf-file  
How to find value when none exists: pitfalls in using APV and FTE This paper looks at three different methods for valuing firms and projects: the traditional weighted average cost of capital, the flows to equity method and a new challenger the adjusted present value model. Pdf-file  
How to Use Transactional Databases for M&A This informative article includes a checklist for using transaction databases for pricing and valuation, as well as several instructive exhibits. Pdf-file  
Is business appraising for you? Skills needed for business valuation, seen from a CPAs view  
Issues in valuation of privately held firms The authors examine how Danish investors and corporate financial advisers apply present value approaches in valuing privately held companies. They interview 39 corporate advisers and private equity investors who apply present value approaches as a valuation tool for privately held firms.  
Methods of Valuation for Mergers and Acquisitions This note addresses the methods used to value companies in a merger and acquisitions (M&A) setting (discounted cash flow (DCF) approach and  other methods of valuation) TOP
New Developments in Valuation An interview with Tom Copeland. Pdf-file 491 KB  
Overview An overview on business valuation and the process in FAQ format  
Quantitative Marketability Discount Model The following method, from an outspoken and creative valuation professional, adds much to the current discussion and experimentation in the world of valuations. Although considered controversial by some, the methodology below introduces new and valuable ideas and may stimulate others to take business valuation techniques to the next level.  
Rules of Thumb These rules are nothing more than a rough starting point. Unfortunately, these rules have found their way into the valuation profession and are being used by inexperienced valuators in tax and litigation cases, principally due to their simplicity and ease of use.  
Teaching Corporate Finance by Valuing a Corporation This paper describes a firm valuation project that may be incorporated into a second course in finance. Pdf-file 1999  
The Capital Asset Pricing Model Equity Risk Premiums and the Privately held Business. Pdf-file  
The real cost of equity The inflation-adjusted cost of equity has been remarkably stable for 40 years, implying a current equity risk premium of 3.5 to 4 percent. Pdf-file 114 KB. 2002  
Thoughts on Valuation My objective today is to walk through, very logically, why we think value-based analysis is a powerful tool for both investors and the corporations. We’ll approach the issue in three different ways. First, we’ll talk about stock market myths and stock market reality. Next, we will evaluate valuation techniques, weighing the pluses and minuses of each. Finally, we will lay out the case for a value-based model. pdf-file  
Thoughts On Valuation II An Epistemological View. pdf-file
· What is the central role of valuation?
· What can we say, and not say, about the certainty of the valuation process?
· What analogies can help us understand how the market sets price?
· What does empirical evidence tell us?
· Why isn’t the theory accepted in practice?
Valuation Anchors and Premium Multiples This study proposes a previously unexplored approach to the valuation of equity using accounting numbers. The valuation is carried out in two steps. First, a valuation anchor is provided by book value of equity or capitalized earnings. Second, a multiple based on a value driver of comparable firms, where the value driver might differ from the item that is used to provide the anchor, provides an estimate of the premium over the value anchor.  new
Valuation of IPO and SEO Firms This article examines the pricing of initial public offering (IPO) and seasoned equity offering (SEO) firms using a stochastic frontier methodology. Pdf-file 369 KB  
Valuation Techniques Book chapter: This is a how-to-do-it chapter. In the first section, we explain and derive the after-tax WACC and use it to value a project and business. Then in Section 19.2 we work through a more complex and realistic valuation problem. … Top
Value intangibles! Intangible capital can and must be valued – owners and valuers alike will benefit. pdf-file  
Valuing Cyclical Companies Cyclical stocks such as airlines and steel can appear to defy valuation. But an approach based on probability will help managers and investors draw up a reasonable estimate. Pdf-file 2000  
Valuing dot-coms after the fall Last year's fall reminds us that stock prices eventually reflect a company's fundamental economic performance. Here are the key questions to ask. Pdf-file 65 KB, August 2001  
When Tangible Assets Lose Their Value Today’s market demands lower-priced alternatives to arrive at the value of tangible personal property. Two practices in use within the appraisal profession that have responded to this demand are 1) net book value (NBV) equals fair market value (FMV) and 2) trend and depreciate historical property records. The question is whether these lower-cost practices can still provide a reasonable grasp of the asset values in question. 2004  

Discounts and Premiums

Best Practices Regarding Control Premiums After everything that has been written over the past 20 years on  the topic of control premiums, it is surprising that so many business valuers still cannot understand why public company shares do not trade as  minority interests, and why it is bad practice to add a control premium when valuing a private company using public company data.  new
Control premiums and minority discounts: the need for specific economic analysis Most valuation experts are familiar with the standard concepts of valuation premiums and valuation discounts.The objectives of this article are: 1. To review the current methodology in these areas; 2. To show the weaknesses and strengths of these approaches, and 3. To suggest other specific valuation techniques that may be more appropriate.  new
Damodaran’s Country Risk Premium: A Serious Critique For several years, when setting discount rates Aswath Damodaran, Ph.D., has advocated more consideration of country risk premiums (CRP) when it comes to the valuation of companies with activities in emerging markets. It is to be noted that Damodaran’s concept has failed to resonate sufficiently with the academic community.  new
IPOs versus Acquisitions and the IPO Valuation Premium Puzzle: An Empirical Analysis This paper presents an empirical analysis of a private firm’s choice between IPOs and acquisitions, and develops the first empirical analysis in the literature of the “IPO valuation premium puzzle” (where many private firms seem to choose to be acquired rather than to go public at higher valuations). 2006  
Overview of Business Valuation Discounts and Premiums and the Bases to Which They Are Applied This book chapter calls attention to the high degree of significance of the topic of discounts and premiums in business valuation and provides an overview of various discounts and premiums and the bases of value to which they may be applied.   
The Value of Control Implications for control premiums, minority discounts and voting share differentials. It is not uncommon in private company and acquisition valua-tions to see large premiums attached to estimated value to reflect the “value of control.” But what, if any, is the value of control in a firm, and, if it exists, how do we go about estimating it? new


Discounted Cash Flow Valuation
25 Questions on DCF valuation Every valuation analyst has faced one or more of these questions in real world valuations and has had to come up with an answer. These are my very opinionated (and not necessarily correct) answers to the 25 top questions that we face in DCF valuation. Take it for a spin!  
A Simple Method for Assessing Project Risk by Adjusting for Growth Options Leverage Capital budgeting methods require estimates of project betas which, using the Capital Asset Pricing Model (CAPM), allow us to estimate the cost of capital used for discounting expected future cash flows. We show a simple method for unlevering asset betas for growth options leverage which can then be used to properly value investment projects.  
A User's Guide to Understanding the Discounted Future Benefits (Cash Flow) Valuation Methods Discounted future benefits valuation methods, often called discounted cash flow methods, are at once, theoretically sound, fairly straightforward in terms of concept, widely used, and widely misunderstood.   
An analysis of discounted cash flow (DCF) approach to business valuation in Sri Lanka Discounted cash flow (DCF) method is the mostly used fundamental method in business valuation, consequently the basic problem that this study is faced with is; how can improvements to the discounted cash flow model, as it is used to value firms, be achieved?  
Capital Cash Flows Capital Cash Flows: A simple Approach to valuing risky Cash Flows, by Richard S. Ruback  
Forecasting Cash Flow: Mathematics of the Payout Ratio The main purpose of this article is to provide the mathematics that will simplify the mechanics of forecasting cash flow in many situations, thus making the DCF easier to do and reducing the temptation to take the shortcuts that lead to overvaluations. pdf-file  
Free Cash Flow - Firm Valuation Free Cash Flow or Cash Flow to Equity? Pdf-file  
Free Cash Flow to Equity Discount Models This book chapter uses a more expansive definition of cashflows to equity as the cashflows left over after meeting all financial obligations. It discusses the reasons for differences between dividends and free cash flows to equity, and presents the discounted free cashflow to equity model for valuation. pdf-file  
Valuing Companies by Cash Flow Discounting - Ten Methods and Nine Theories This paper is a summarized compendium of all the methods and theories on company valuation using discounted cash flows. It illustrates ten methods. The paper analyses and illustrates nine different theories of the calculation of the VTS; and lists the most important valuation equations according to each of these theories. pdf  

Cost of Capital / Weighted Average Cost of Capital (WACC)
Cost of Capital Approach and Adjusted Present Value Approach This book chapter develops an approach to valuation where the entire firm is valued, by either discounting the cumulated cashflows to all claim holders in the firm by the weighted average cost of capital (the cost of capital approach) or by adding the marginal impact of debt on value to the unlevered firm value (adjusted present value approach). pdf  
Cost of Capital in Valuation of Stock by the Income Approach: Updated for an Economy in Crisis In valuation and financial decision making, the cost of capital estimate is just as important as the estimate of the expected amounts of income to be discounted or capitalized.   
Method and Formula Brief description  
Method and Formula II Not so brief description  
Method and Formula III In-depth description TOP
The Cost of Debt This paper proposes a practical way of estimating the cost of risky debt for use in the cost of capital. Pdf-file  
The Weighted Average Cost of Capital (WACC) for Firm Valuation Calculations WACC obtained by the standard formula leads to significant errors in Net Present Value of the Firm calculations; particularly in those that apply perpetual cash flow series.   
WACC - Definition, Misconceptions and Errors The paper presents seven errors caused by not remembering the definition of WACC and shows the relationship between WACC and the value of the tax shields.  

Multiples Valuation
Equity Valuation Using Multiples: An Empirical Investigation  In spite of their prevalent usage in practice, not so much theoretical background is provided to guide the practical application of multiples. The present DBA-Dissertation by Andreas Schreiner develops a comprehensive multiples valuation framework, which overcomes  these problems.  
Market Multiples: Assessing the Relationships between M&A Deal Multiples, Market Conditions, and Target Accounting Measures Mergers and Acquisitions research often focuses on the prices paid, as a multiple of earnings or cash flow, by strategic acquirers for their targets. A variety of factors influence the size of these multiples, including prevailing macroeconomic conditions, the particular industry of the target company, the target’s profitability, and company-specific factors such as the market’s perceived risk of the target.   
Multiples: First Principles In relative valuation, the objective is to value assets, based upon how similar assets are currently priced in the market. While multiples are easy to use and intuitive, they are also easy to misuse. Consequently, a series of tests were developed that can be used to ensure that multiples are correctly used. T  
Not enough comps for valuation? Try statistical modeling Traditional approaches rely on data from comparable businesses — but such data aren’t always available. Statistical modeling can broaden the comparison while controlling for differences.   
Valuation Multiples: A Primer This document explains how to calculate and use multiples commonly used in equity analysis.   

Related Information
Knowledgebase - Marketing - Branding - Brand Valuation



Publications at

Electronic Spreadsheets: The Good, the Bad & the Ugly
Rick Hesse, DSc, Chair and Professor of Decision Sciences
On the 25th anniversary of the development of electronic spreadsheets, the good news is that spreadsheets have had a positive impact on the way businesses operate behind the scenes—from finance and accounting to operations and marketing and human resources—and they save time. The bad news is that training is woefully inadequate and haphazard. The ugly news is that spreadsheets are full of errors, with a majority of firms using them in some way for financial reporting that falls under the Sarbanes Oxley act.  ... more




More literature recommendations:
>> M&A >> Valuation / Financial Modelling

Valuation for M&A: Building Value in Private Companies
by Frank C. Evans, David M. Bishop
There is too much mystery about what companies are worth. The problem is especially acute in the case of a private company that lacks the guidance of a stock market price. Valuation for M&A lays out the steps for measuring and managing value creation in nonpublicly traded entities, and helps investors, executives, and their advisors determine the optimum strategy to enhance both market value and strategic value and maximize return on investment.

Valuation: Measuring and Managing the Value of Companies
by McKinsey & Company Inc., Tom Copeland, Tim Koller, Jack Murrin
The #1 guide to corporate valuation is now better than ever! Hailed by financial professionals worldwide as the single best guide of its kind, Valuation provides crucial insights into how to measure, manage, and maximize a company's value.

Investment Valuation: Tools and Techniques for Determining the Value of Any Asset
by Aswath Damodaran
Noted valuation authority and acclaimed NYU finance professor Aswath Damodaran uses real-world examples and the most current valuation tools, as he guides you through the theory and application of valuation models and highlights their strengths and weaknesses.

Valuation for Mergers, Buyouts, and Restructuring  
by Enrique R. Arzac
This book offers a unique combination of practical valuation techniques and the most current thinking to provide an up-to-date synthesis of valuation theory as it applies to mergers, buyouts, and restructuring.

What you also might need when doing a business valuation - Financial Modeling

Building Financial Models
by John Tjia
A Guide to Creating and Interpreting Financial Statements
This highly recommended book step-by-step process for creating a core model and then customizing it for companies in virtually any industry. Covering every aspect of building a financial model, it provides a broad understanding of the actual mechanics of models, as well as their foundational accounting and finance concepts.

Building Financial Models with Microsoft Excel: A Guide for Business Professionals
by K. Scott Proctor
A financial model is a quantitative representation of a company’s past, present, and future business operations. Companies of all types and sizes use financial models every day to analyze and plan their business activities. Financial models serve as the foundation and basis of standard financial accounting reports, including the balance sheet, the income statement, and the statement of cash flows. While many business professionals are familiar with the "output" of financial models, namely consolidated financial statements, few are truly adept at building an accurate and effective financial model from the ground up. Building Financial Models with Microsoft Excel addresses this real, immediate, and significant issue like no other book. Written in a straightforward and accessible manner, it is a comprehensive resource for business professionals with a beginner or intermediate level of experience in both Microsoft Excel and finance or accounting.

Financial Modeling Using Excel and VBA
by Chandan Sengupta
This book, designed for self-study, classroom use, and reference, presents a comprehensive approach to developing simple to sophisticated financial models in all major areas of finance. A companion CD includes all working versions of all the models presented in the book and additional useful reference material.
more about this book

The Oxford Guide to Financial Modeling: Applications for Capital Markets, Corporate Finance, Risk Management and Financial Institutions
by Thomas S. Y. Ho, Sang Bin Lee
The book presents the financial models of stock and bond options, exotic options, investment grade and high-yield bonds, convertible bonds, mortgage-backed securities, liabilities of financial institutions -- the business model and the corporate model. It also describes the applications of the models to corporate finance. Furthermore, it relates the models to financial statements, risk management for an enterprise, and asset/liability management with illiquid instruments.
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