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110 common errors in company valuations

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Author Info

  • Fernandez, Pablo

    ()
    (IESE Business School)

  • Bilan, Andrada

    (IESE Business School)

Abstract

This paper contains a classified collection of 110 errors seen in company valuations performed by financial analysts, investment banks and financial consultants. The author had access to most of the valuations referred to in this paper in his capacity as a consultant in company acquisitions, sales, mergers, and arbitrage processes. We classify the errors into six main categories: 1) errors in the discount rate calculation and concerning the riskiness of the company; 2) errors when calculating or forecasting the expected cash flows; 3) errors in the calculation of the residual value; 4) inconsistencies and conceptual errors; 5) errors when interpreting the valuation; and 6) organizational errors.

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Bibliographic Info

Paper provided by IESE Business School in its series IESE Research Papers with number D/714.

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Length: 40 pages
Date of creation: 05 Nov 2007
Date of revision:
Handle: RePEc:ebg:iesewp:d-0714

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Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
Web page: http://www.iese.edu/
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Keywords: company valuation; valuation errors; valuation;

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References

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  1. Jacques Hamon & Bertrand Jacquillat, 1999. "Is there Value‐Added Information in Liquidity and Risk Premiums?," European Financial Management, European Financial Management Association, European Financial Management Association, vol. 5(3), pages 369-394.
  2. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 15(2), pages 145-161, March.
  3. Stephen Godfrey & Ramon Espinosa, 1996. "A Practical Approach To Calculating Costs Of Equity For Investments In Emerging Markets," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 9(3), pages 80-90.
  4. Richard S Ruback, 2002. "Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows," Financial Management, Financial Management Association, Financial Management Association, vol. 31(2), Summer.
  5. Campa, Jose M. & Kedia, Simi, 2000. "Explaining the diversification discount," IESE Research Papers, IESE Business School D/424, IESE Business School.
  6. Hamon, Jacques & Jacquillat, Bertrand, 1999. "Is there value-added information in liquidity and risk premiums?," Economics Papers from University Paris Dauphine 123456789/12648, Paris Dauphine University.
  7. Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(3), pages 309-327, December.
  8. Graciela Kaminsky & Sergio L. Schmukler, 2002. "Emerging Market Instability: Do Sovereign Ratings Affect Country Risk and Stock Returns?," World Bank Economic Review, World Bank Group, World Bank Group, vol. 16(2), pages 171-195, August.
  9. Knez, Peter J & Ready, Mark J, 1997. " On the Robustness of Size and Book-to-Market in Cross-Sectional Regressions," Journal of Finance, American Finance Association, American Finance Association, vol. 52(4), pages 1355-82, September.
  10. Erik Durbin & David Tat-Chee Ng, 1999. "Uncovering country risk in emerging market bond prices," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 639, Board of Governors of the Federal Reserve System (U.S.).
  11. Bruner, Robert F. & Conroy, Robert M. & Estrada, Javier & Kritzman, Mark & Li, Wei, 2002. "Introduction to 'Valuation in Emerging Markets'," Emerging Markets Review, Elsevier, Elsevier, vol. 3(4), pages 310-324, December.
  12. Rajnish Mehra, 2003. "The Equity Premium: Why is it a Puzzle?," NBER Working Papers 9512, National Bureau of Economic Research, Inc.
  13. Fernandez, Pablo, 2003. "How to value a seasonal company by discounting cash flows," IESE Research Papers, IESE Business School D/511, IESE Business School.
  14. Wang, Xiaozu, 2000. "Size effect, book-to-market effect, and survival," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 10(3-4), pages 257-273, December.
  15. Donald R. Lessard, 1996. "Incorporating Country Risk In The Valuation Of Offshore Projects," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 9(3), pages 52-63.
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Cited by:
  1. Wiktor Patena, 2011. "Company Valuation. How to Deal with a Range of Values?," "e-Finanse", University of Information Technology and Management, Institute of Financial Research and Analysis, vol. 7(3), pages 75-84, November.

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