Company Valuation - Value, Structure, Risk

Abstract

DCF (discounted cash flows) valuation has had a long tradition that dates back to early works of Miller, Modigliani, Gordon and Shapiro. The DCF method clearly dominates in most of the valuations of economically sound companies. Besides, other methods are quite straightforward, and do not require sophisticated theories or mathematical models to support. DCF does. The concepts of perfect market, time value of money, cost of capital, portfolio theory and many others laid the foundation for DCF valuation. There are certain standards that apply when DCF is used, some are the part of the common knowledge and are clearly codified, and others have to be presented in detail. This book is focused on the DCF method, the one that is most complicated - hence needs special explanations, the one that is most sophisticated - hence needs attention. Another reason is that the DCF method captures best the value of profitable, economically sound companies. We believe it works for all firms which have real expertise - this is the core of the economy, its salt of the earth. The main purpose of this book is to explain the inner workings of the DCF method, especially the variant in which capital structure constantly affects cost of equity, as it does in reality.