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Company valuation methods. The most common errors in valuations

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  • 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.

Suggested Citation

  • Fernández, Pablo, 2002. "Company valuation methods. The most common errors in valuations," IESE Research Papers D/449, IESE Business School.
    • Handle: RePEc:ebg:iesewp:d-0449
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    File URL: http://www.iese.edu/research/pdfs/DI-0449-E.pdf
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    References listed on IDEAS

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    1. Fernandez, Pablo, 2004. "The value of tax shields is NOT equal to the present value of tax shields," Journal of Financial Economics, Elsevier, vol. 73(1), pages 145-165, July.
    2. Miller, Merton H, 1986. "Behavioral Rationality in Finance: The Case of Dividends," The Journal of Business, University of Chicago Press, vol. 59(4), pages 451-468, October.
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    Cited by:

    1. Takács, András & Várkonyi, Patrik, 2022. "A hazai kis- és középvállalati szektor vállalatértékelési sajátosságai [Specialities in the valuation of Hungarian SMEs]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(10), pages 1195-1212.
    2. Laimutė Urbšienė & Viktorija Nemunaitytė & Artūras Zatulinas, 2015. "Comparison Of Premiums Of Chinese And European Companies In Mergers And Acquisitions In Europe," Organizations and Markets in Emerging Economies, Faculty of Economics, Vilnius University, vol. 6(2).
    3. Anita Kiss, 2017. "The Empirical Examination Of Changes Related To Value Drivers In The Effects Of The 2007-2008 Crisis," APSTRACT: Applied Studies in Agribusiness and Commerce, AGRIMBA, vol. 10(4-5), April.
    4. Sofiane DELFOUF, 2016. "The Determinants of the Financing Decision: A panel Data Study of Listed Firm in Malaysian Stock Exchange (2005-2016)," Turkish Economic Review, KSP Journals, vol. 3(4), pages 668-676, December.
    5. 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.
    6. Nicolae BALTE? & Alexandra-Gabriela-Maria DRAGOE, 2018. "Study Regarding The Assessment Of The Position And Financial Performance Of The Companies Through The Capital Market Indicators," Contemporary Economy Journal, Constantin Brancoveanu University, vol. 3(2), pages 5-13.
    7. 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.
    8. 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.

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    More about this item

    Keywords

    Value; price; free cash flow; equity cash flow; market value;
    All these keywords.

    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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