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Company valuation methods. The most common errors in valuations

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Author Info

  • Fernández, Pablo

    ()
    (IESE Business School)

Abstract

In this paper, we describe the four main groups comprising the most widely used company valuation methods: balance sheet-based methods, income statement-based methods, mixed methods, and cash flow discounting-based methods. The methods that are conceptually "correct" are those based on cash flow discounting. We will briefly comment on other methods since -even though they are conceptually "incorrect"- they continue to be used frequently. We also present a real-life example to illustrate the valuation of a company as the sum of the value of different businesses, which is usually called the break-up value. We finish the paper with a list of the most common errors that the author has detected in the more than one thousand valuations he has had access to in his capacity as business consultant and teacher.

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Bibliographic Info

Paper provided by IESE Business School in its series IESE Research Papers with number D/449.

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Length: 30 pages
Date of creation: 11 Jan 2002
Date of revision:
Handle: RePEc:ebg:iesewp:d-0449

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Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
Web page: http://www.iese.edu/
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Related research

Keywords: Value; price; free cash flow; equity cash flow; market value;

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References

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  1. Miller, Merton H, 1986. "Behavioral Rationality in Finance: The Case of Dividends," The Journal of Business, University of Chicago Press, vol. 59(4), pages S451-68, October.
  2. Fernández , Pablo, 2002. "The value of tax shields is not equal to the present value of tax shields," IESE Research Papers D/459, IESE Business School.
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Cited by:
  1. Cindea Diana Marieta, 2009. "Methods Designed To Determine The Value Of The Firm And Their Deficiences," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 3(1), pages 131-136, May.
  2. Marc Vilanova & Josep Lozano & Daniel Arenas, 2009. "Exploring the Nature of the Relationship Between CSR and Competitiveness," Journal of Business Ethics, Springer, vol. 87(1), pages 57-69, April.

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