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How to Value a Seasonal Company’s Discounting Cash Flows


  • Pablo Fernandez


The correct way of valuing seasonal companies by cash flow discounting is to use monthly data. We may use annual data, but it requires some adjustments. We show that when using annual data in the context of the adjusted present value (APV), the value of the unlevered equity (Vu) and the value of the tax shields (VTS) calculations must be adjusted. However, the debt that we have to substract to calculate the equity value does not need to be adjusted. We derive the adjustments to be made. Errors due to using annual data without doing the adjustments are big. To adjust only by using average debt and average working capital requirements does not provide a good approximation. When the inventories are a liquid commodity such as grain or seeds, it is not correct to consider all of them as working capital requirements. The excess inventories financed with debt are equivalent to a set of futures contracts. We show that not considering it undervalues the company. This paper values a company in which the seasonality is due to the purchases of raw materials: the company buys and pays all raw materials in the moth of December. We show that the equity value calculated using annual data without doing the adjustments understates the true value in a 45% if the valuation is done at the end of December, and overstates the true value in a 38% if the valuation is done at the end of November. The error of adjusting only by using average debt and average working capital requirements ranges from –17.9% to 8.5%.

Suggested Citation

  • Pablo Fernandez, 2011. "How to Value a Seasonal Company’s Discounting Cash Flows," European Research Studies Journal, European Research Studies Journal, vol. 0(2), pages 27-52.
  • Handle: RePEc:ers:journl:v:xiv:y:2011:i:2:p:27-52

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    References listed on IDEAS

    1. Fernandez, Pablo, 2004. "Shareholder value creation of microsoft and GE," IESE Research Papers D/564, IESE Business School.
    2. Fernandez, Pablo, 2004. "The value of tax shields is NOT equal to the present value of tax shields," Journal of Financial Economics, Elsevier, pages 145-165.
    3. Fernandez, Pablo, 2002. "Valuation Methods and Shareholder Value Creation," Elsevier Monographs, Elsevier, edition 1, number 9780122538414.
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    Cited by:

    1. Nangia, Vinay Kumar & Agrawal, Rajat & Reddy, K. Srinivasa, 2011. "Business Valuation: Modelling Forecasting Hurdle Rate," MPRA Paper 60420, University Library of Munich, Germany, revised 2011.

    More about this item


    Valuation of Seasonal Companies; Seasonality; Cash Flow Discounting;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics


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