Business Valuation - A Discounted Cash Flow Perspective

Updated revenue and expenditure

Business valuation involves the study of many aspects of the activity, including expected income and expenses. Since the cash-flow growth over time, a discounted cash flow (DCF), the model can be a useful tool. Analysis of cash flows for an assessment company requires an analyst to consider, from two factors: (i) a projection of revenues and expenses during the near future, and (ii) identifyTo use the discount rate.

Current revenue and expenditure

Projection of revenues and expenditures of a company must course requires an expertise in the undertaking given area. For example, a DCF analysis for the purchase of an office tower, which requires specialists in commercial property. Similarly, DCF analysis of a mining proposal provides for the participation of geologists.

Discount rate

Have the choice of discount rate, we consider twoComponents: (i) the cost of capital, and (ii) the risk premium with the stream of expected net income are linked.

The capital is a productive resource, a rate of return orders. If a company is financed by debt, the cost of capital is simply equal financial burden for the debt financing. If the company is financed by the owner to buy the equity is the cost of capital in question, the opportunity cost of capital - Net profit for the capital itself would result iftheir next best alternative obligation.

The choice of the discount rate should not only cost the owner of capital, but also the risk of investment by companies. Certain types of investments are riskier than others. In the case of a company most at risk, it should be a discount price higher.

Example DCF model for business

The model predicts the value of a future stream of revenue and expenditure. The modelasks the user to input a stream of expected income and expenditure and the discount rate used. The total value of resources in the left column.