Concepts of Business Valuation – Critical Review of the Discounted Cash Flow (Dcf) Analysis and Its Applicability in Today’s Business World

Topics: Discounted cash flow, Cash flow, Net present value Pages: 20 (6809 words) Published: July 10, 2013
Concepts of business valuation – Critical review of the Discounted Cash Flow (DCF) analysis and its applicability in today’s business world SEMINAR PAPER

Table of contents
page 1. Introduction...............................................................................................................3 1.1 1.2 2. The importance of business valuation ..................................................................3 Key indicators covered in this seminar paper .......................................................4

The Discounted Cash Flow Analysis .......................................................................4 2.1 2.2 2.3 2.4 Foundational principles ........................................................................................4 Free cash flow as the key figure ..........................................................................5 Growth .................................................................................................................6 Return on invested capital (ROIC) .......................................................................8

3.

DCF methods applied ...............................................................................................9 3.1 ..

WACC approach..................................................................................................9 The circularity problem...................................................................................................10 APV Adjusted Present Value Approach .............................................................11 Equity approach.................................................................................................12 The risk of making wrong assumptions ..............................................................13 Detailed planning period and terminal value .......................................................13 Determining the terminal value ..............................................................................13

3.2 3.3 3.4

3.4.1 3.4.2 4.

Capital Asset Pricing Model ...................................................................................14 4.1 Criticism of the CAPM model and new valuation methods .................................14 Deficits of the CAPM model ...................................................................................14 Fama-French Three-Factor Model, multi factor models ....................................15

4.1.1 4.1.2 5.

Summary, reflection and critical evaluation .........................................................15 5.1 5.2 5.3 Reflection ..........................................................................................................15 Critical evaluation ..............................................................................................16 Conclusion and outlook .....................................................................................17

Bibliography...................................................................................................................18 List of internet sources .................................................................................................19

II

List of abbreviations
APV CAPM CV DC DCF EBIT EVA EQ FCF MV MVA NOPLAT oFCF ROIC WACC Adjusted Present Value Capital Asset Pricing Model Continuing Value Debt Capital Discounted Cash Flow Earnings before interest and taxes Economic Value Added Equity Free Cash Flow Market Value Market Value Added Net operating profit less adjusted taxes Operating Free Cash Flow Return on invested Capital Weighted Average Cost of Capital

1. Introduction 1.1 The importance of business valuation Business valuation is a broad field of theory in literature and covered by a large number of researchers with very different focuses, aims, approaches and opinions. Quite a number of available literature is focused on practical implementation of business valuation, able to serve as guidelines on how...

Bibliography: Copeland, T.; Koller, J.; Murrin, J. (2000): Valuation – Measuring and Managing the Value of Companies. 3rd edition. New York et al. 2000. Drukarczyk, J.; Schüler, A. (2009): Unternehmensbewertung. 6. Auflage. Munich 2009. Enzinger, A.; Kofler, P. (2011): Das Roll Back-Verfahren zu Unternehmensbewertung. In: IACVA (ed.) Bewertungspraktiker Nr. 4, 2011. Frankfurt 2011. Ernst, D.; Schneider, S.; Thielen, B. (2012): Unternehmensbewertungen erstellen und verstehen. 5. Auflage. Munich 2012. Ernst, D.; Häcker, J. (2012): Applied International Corporate Finance. Munich 2012. Ernst, D. et al. (2012): Internationale Unternehmensbewertung. Ein Praxisleitfaden. Munich 2012. Gildersleeve, R. (1999): Winning business: How to use financial analysis and benchmarks to outscore your competition. Texas 1999. Griffin, J. (2002): Are the Fama and French Factors Global or Country Specific?“ In: The Review of Financial Studies 15. Oxford 2002. Gröger, H. (2009): Kapitalmarktorientierte Unternehmensbewertung. Wiesbaden 2009. IDW (ed.) (2008): IDW Standard: Grundsätze zur Durchführung von Unternehmensbewertungen. Düsseldorf 2008. IDW (ed.) (2007): WP-Handbuch 2008. Düsseldorf 2007. Koller, T.; Goedhart, M.; Wessels, D. (2010): Valuation: Measuring and Managing the Value of Companies, University Edition. Hoboken 2010. Krutschwitz, L.; Löffler, A. (2003): Semi-subjektive Bewertung. Hanover 2003. Kruschwitz, L. et al. (2011): Damodarans Country Risk Premium und was davon zu halten ist. In: Die Wirtschaftprüfung 4/2011 p.167-174. Düsseldorf 2011. Mandl, G.; Rabel, K. (1997): Unternehmensbewertung: Eine praxisorientierte Einführung. Vienna et al. 1997. Moccero, D., S. Watanabe; B. Cournède (2011): What Drives Inflation in the Major OECD Economies? Paris 2011. Padberg, T. (2008): IFRS-AnhangPraxis. Benchmarking für Unternehmen. Berlin 2008. Peemöller (ed.) (2012): Praxishandbuch der Unternehmensbewertung. 5. Auflage. Herne 2012. Wallmeier, M. (1999): Kapitalkosten und Finanzierungsprämissen. In: Zeitschrift für Betriebswirtschaft. Wiesbaden 1999.
19 List of internet sources De Goey, J. (2011): Tilting the three factor model: http://www.advisor.ca/mypractice/taking-stock-of-dfas-55257 (status as of 18.02.2013) French, K. (2013): Current Research Returns: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html (status as of 19.02.2013) Gaebler (pdu): Growth by Geographic Expansion: http://www.gaebler.com/GeographicExpansion.htm (status as of 10.02.2013) Greimel, H. (2000): Big Losses, Little Synergy at DaimlerCrysler: http://abcnews.go.com/Business/story?id=88714&page=1 (status as of 06.02.2013) Küting, K. (2000): Vodafone Mannesmann: War es das wirklich wert?: http://www.welt.de/print-welt/article505068/Vodafone-Mannesmann-War-es-das-wirklichwert.html (status as of 06.02.2013) Labs, L. (2010): HP verliert weiteren Palm-Manager: http://www.heise.de/mobil/meldung/HP-verliert-weiteren-Palm-Manager-1053134.html (status as of 06.02.2013) McClure, B. (pdu): Mergers and Acquisitions: Valuation Matters: http://investopedia.com/university/mergers/mergers2.asp (status as of 06.02.2013) MoneyInstructor (pdu): What is a Bull and a Bear Market? http://content.moneyinstructor.com/693/what-bull-bear-market.html (status of 10.02.2013) MoneyWatch (2012): Why mergers fail. http://www.cbsnews.com/8301-505125_16257411239/why-mergers-fail/ (status as of 19.02.2013) QuickMBA (pdu): Consumer Price Index (CPI): http://www.quickmba.com/econ/macro/cpi/ (status as of 10.02.2013) Roth, M; Preuss, S. (2008): Adolf Merckle verspekuliert sich mit VW-Aktien: http://www.faz.net/aktuell/wirtschaft/unternehmen/erstes-prominentes-opfer-adolf-merckleverspekuliert-sich-mit-vw-aktien-1730642.html (status as of 06.02.2013)
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