Free Cash Flow Model Research Articles

Case Study of Enterprise Value Assessment

Along with the gradual advancement of the deepening reform of our country's socialist market economy and the further optimization of resource allocation, the restructuring, investment, acquisition and merger of enterprises are becoming increasingly frequent economic activities. The evaluation of the value of the target enterprise is one of the important links. This paper takes the small household appliance industry as the starting point, takes the small B Electric Appliance Co., Ltd. as an example, and uses the discounted free cash flow model in the income method to estimate its market value. It can reflect that this method is conducive to providing detailed and solid basis for value assessment relatively comprehensively from the aspects of enterprise profitability, profit quality, future profit sustainability, expected rate of return of the industry in which it is located, and time cost of funds, etc., and is widely used in the capital financial market and market information disclosure requirements.

So sánh tính đáng tin cậy của các ước tính giá trị nội tại tạo ra từ ba mô hình định giá dòng tiền và mô hình bội số

Different equity valuation models in theory provide identical estimates of equity intrinsic values if they are implemented with consistent assumptions. In practice, it is not unusual to obtain different value estimates from different models. Prior research on the comparison between multiples-based valuation model and flowsbased valuation models are quite limited. This research contributes to the literature by comparing the accuracy and reliability of three flows-based valuation models (discount dividend model, discounted free cash flow model, residual income valuation model) and multiples-based valuation model using one-year forward forecasted earning (PE1). For the analysis, all models are tested for bias, accuracy and explainability using t-tests, Wilcoxon tests and OLS regressions with a large sample of 40.547 observations from U.S public firms during the period from 2010 to 2020. Results show that PE1 value estimates are more accurate and reliable than that of flows-based models; and among flows-based models, residual income valuation model performs best. This research provides evidence for the performance and usage of such models to support sell-side equity analysts while making decisions of which model to use.

A note on free cashflow analysis: Theory versus practice

AbstractIn this note, we compare the methodologies in academic textbooks and the CFA practitioner's guide while demonstrating which academic approach provides the most consistent valuation metric with practitioners. There are many differences when it comes to the items or approaches considered for free cash flow calculations. Some differences, however, are related to the purpose of the calculated free cash flow, for example, the actual free cash flow a company generates during a certain year versus the free cash flow for firm valuation purposes. This note attempts to address this gap and may serve as a guide to faculty as well as practitioners. In what follows, different expositions of the free cash flow model are explored and compared.

The Financial Modeling for Airbus by Free Cash Flow Model

The Financial Modeling for Airbus by Free Cash Flow Model

The impact of COVID-19 on the valuations of non-financial European firms

This paper assesses the impact of the COVID-19 pandemic on non-financial firms' valuations in the European Union (EU) using a stress testing approach. Notably, the paper investigates the extent to which the COVID-19 may deteriorate non-financial firms' value in the ten EU countries to provide a robust anchor to policymakers in formulating strategic government interventions. We employ a sample of 5342 listed non-financial firms across the selected member states that have consistent analyst coverage from 2010 to 2019. First, we estimate the input sensitivities of free cash flow and residual income models using a random effect panel employed to in-sample data. Second, based on these sensitivities, we compute the model-driven ex-post valuations and compare their robustness with actual price and analyst forecasts for the same period. Finally, we introduce multiple stress scenarios that may emanate from COVID-19, i.e., a decline in expected sales and an increase/decrease in equity cost. Our findings show a significant loss in valuations across all sectors due to a possible reduction in sales and an increase in equity cost. In extreme cases, average firms in some industries may lose up to 60% of their intrinsic value in one year. The results remained consistent regardless of the cash flow or residual income-driven valuation.

Ex-Ante Evaluation of Economic Impacts of Adopting Improved Forages in the Colombian Orinoquía

Forage-based cattle systems play a key role in rural economies of developing countries in terms of food security and poverty alleviation. However, they can generate negative environmental impacts by contributing to increased greenhouse gas emissions, land degradation, and reduction of biodiversity. As a result of that, large amounts of resources have been allocated to research and development (R&D) in forage material improvement and a broad range of improved materials were released showing superior characteristics in terms of productivity and environmental impacts compared to native or naturalized materials. However, data are still scarce on both the economic and environmental “yields” of investments in R&D activities around improved forage materials. Through an ex-ante evaluation, this study aims at estimating the potential “yields” of the investment in R&D and diffusion activities of the improved forage variety Brachiaria brizantha 26,124 cv. Agrosavia Caporal in the Colombian Orinoquía region. The analysis used two evaluation methodologies: 1) a combined discounted free cash flow model and Monte Carlo simulation using the simulation software @Risk to determine the impact on individual welfare, and 2) an economic surplus model an risk analysis to determine the potential social benefits of the technologies and their distribution among producers and consumers, considering changes in adoption rates, productivity levels and probability of success. The results suggest that the evaluated material presents important economic benefits for the study region and results in a positive return on the investments made in R&D activities. The results are a key input for decision making processes among public and private institutions involved in funding and executing the development of improved forage materials and will help to set research priorities and resource allocation.

The impact of COVID-19 on valuations of non-financial European firms

This paper assesses the impact of the COVID-19 pandemic on valuation of non-financial firms in the European Union (EU) using a stress testing scenario approach. Particularly, the paper investigates to what extent the COVID-19 may deteriorate the value of non-financial firms in the 10 EU countries in order to provide a robust anchor to policy makers in formulating strategic government interventions. We utilize a sample of 5342 listed non-financial firms across 10 EU member states that have consistent analyst coverage from 2010 to 2019. First, we estimate the input sensitivities of free cash flow and residual income models using a random effect panel employed to in-sample data. Second, based on these sensitivities, we compute the model driven ex post valuations and compare their robustness with actual price and analyst forecasts for the same period. Finally, we introduce multiple stress scenarios that may emanate from COVID-19, i.e. decline in expected sales and increase/decrease in cost of equity.Our findings show a significant loss in valuations across all sectors due to a possible decline in sales and increase in cost of equity. In the extreme cases, average firms in some sectors may lose up to 60% of their intrinsic value in one year. The results remained consistent regardless of the cash flow or residual income driven valuation. While the impact of global financial crisis (2007-2008) and European crisis (2010-2012) on non-financial firms is well-documented, this paper is the first study that analyzed the impact of the COVID-19 crisis on the non-financial firms’ valuation in the European Union and reports that pandemic is the main driver behind the shareholder value destruction.

Cash management in the travel and leisure sector: evidence from the United Kingdom

ABSTRACTThis study investigates the determinants of cash holdings for companies operating in the travel and leisure (TL) sector of the United Kingdom (UK) between 2005 and 2016. The study finds that growth opportunities, cash flow, and cash flow volatility affect cash holdings positively, while size, leverage, liquidity, asset intangibility and dividend payments affect negatively. Companies operating in the airlines sub-sector hold more cash, while companies in the hotels and restaurants and bars sub-sectors hold less cash than the reference sub-sector of travel and tourism. Except for the free cash flow model, the trade-off and pecking order models of cash holdings are empirically supported for the TL sector.

Performance Evaluation of Stocks’ Valuation Models at MSE

Abstract Subject and purpose of work: The main task of this paper is to examine the proximity of valuations generated by different valuation models to stock prices in order to investigate their reliability at Macedonian Stock Exchange (MSE) and to present alternative “scenario” methodology for discounted free cash flow to firm valuation. Materials and methods: By using publicly available data from MSE we are calculating stock prices with three stock valuation models: Discounted Free Cash Flow, Dividend Discount and Relative Valuation. Results: The evaluation of performance of three stock valuation models at the MSE identified that model of Price Multiplies (P/E and other profitability ratios) offer reliable stock values determination and lower level of price errors compared with the average stocks market prices. Conclusions: The Discounted Free Cash Flow (DCF) model provides values close to average market prices, while Dividend Discount (DDM) valuation model generally mispriced stocks at MSE. We suggest the use of DCF model combined with relative valuation models for accurate stocks’ values calculation at MSE.

Comparing Efficiency Free Cash Flow Models in Valuing Companies

The main objective of this paper is to comparing efficiency Kapeland, Lehn and Poulsen, and Verdi free cash flow models in company valuation. To valuation of company we use three models, that are discounted free cash flows, Ohlson’s residual income and Ohlson’s adjusted Model. To test hypothesis of the study we use a sample of 85 listed companies on Tehran Stock Exchange over a seven- year period (2004-2010). The results show that Ohlson’s adjusted model have more explanation power than other Models, and Free Cash Flow from Lehn and Poulsen, Verdi and Kapeland models respectively have more efficiency at Ohlson’s adjusted model to determining stock market value.

A Supermarket Acquisition Case: Daring's Market

This case chronicles the growth of a family-owned retail food store business across three generations. Stange’s, Inc. is now managed by the grandsons of the founder, John Stange, Sr. Recently, the opportunity arose to purchase Daring’s Market, a well-established local grocery store. Students will assume the role of business valuation consultants and prepare pro-forma financial statements for management. This business valuation engagement will utilize several approaches to determine an appropriate asking price, including a free cash flow model and an earnings-based estimate approach.

Equity- And Entity-Based Multiples In Emerging Markets: Evidence From The JSE Securities Exchange

<span style="font-family: Times New Roman; font-size: small;"> </span><p style="margin: 0in 0.5in 0pt; text-align: justify; mso-pagination: none;" class="MsoNormal"><span style="color: black; font-family: "Times New Roman","serif"; mso-bidi-font-size: 10.0pt;"><span style="font-size: x-small;">Analysts typically distinguish between equity- and entity-based approaches when employing the free cash flow model to perform equity valuations. However, when multiples are used to perform equity valuations, analysts often neglect to distinguish between equity- and entity-based approaches. In addition, limited empirical evidence exists on the relative valuation performance of equity- and entity-based multiples in developed capital markets and the emerging markets literature is entirely silent in this regard. In this paper the valuation accuracy of equity-based multiples is compared to that of entity-based multiples in valuing the equity of South African companies listed on the JSE Securities Exchange for the period 2001-2010. The research results reveal that equity-based multiples significantly outperform entity-based multiples, indicating a potential increase in valuation accuracy of as much as 15.37%.</span></span></p><span style="font-family: Times New Roman; font-size: small;"> </span>

Equivalent valuations in cash flow and accounting models

This paper investigates the equivalence of equity valuation between the free cash flow model and the residual income model. Two conditions are found to be jointly sufficient for Residual Income and Free Cash Flow models to produce the same equity valuation: (a) the models’ discount rates jointly satisfy the Modigliani and Miller (Am Econ Rev 48:261–297, 1958) condition which relates discount rates for levered equity, unlevered equity, tax savings and debt, and (b) forecasts of the two models’ variables jointly satisfy the income statement and balance sheet identities. Past discussions fail by ignoring or misusing (a).

SPREADSHEET ERROR DETECTION: AN EMPIRICAL EXAMINATION IN THE CONTEXT OF GREECE

The personal computers era made advanced programming tasks available to end users. Spreadsheet models are one of the most widely used applications that can produce valuable results with minimal training and effort. However, errors contained in most spreadsheets may be catastrophic and difficult to detect. This study attempts to investigate the influence of experience and spreadsheet presentation on the error finding performance by end users. To reach the target of the study, 216 business and finance students participated in a task of finding errors in a simple free cash flow model. The findings of the study reveal that presentation of the spreadsheet is of major importance as far as the error finding performance is concerned, while experience does not seem to affect students on their performance. Further research proposals and limitations of the study are, moreover, discussed.

Bias, accuracy and explainability of the Ohlson (1995) valuation model vs. the traditional dividend, abnormal earnings and free cash flow models: evidence from the Spanish stock market

ABSTRACTIn this paper we compare the bias, accuracy and explainability of the Ohlson (1995) valuation model versus the traditional dividend, abnormal earnings and free cash flow models for a sample of Spanish listed firms over the period 2000–2008. The study aims to replicate the actual behaviour of financial practitioners when they estimate the value of a firm's shares. Our results document that the most accurate model is the Ohlson (1995) specification that considers the «other information» variable and intermediate persistence for both abnormal earnings and the «other information» variable. The abnormal earnings model also has a high performance, especially for the zero-growth case, confirming that a firm cannot increase abnormal earnings indefinitely. Finally, we have also assessed the relative performance of each model by computing future abnormal returns from a strategy based on the V/P ratio (intrinsic value divided by price). Our results provide evidence that most models are able, on average, of identifying overvalued and undervalued shares.

Reconciliation of Residual Income and Free Cash-Flow Valuation Models

Ohlson & Juettner-Naworth (2005) show, using a “scheme” developed in Ohlson 1998, 2000, that one can derive the residual income model from the discounted dividend model. However, their method involves the condition that an infinite sum (book value per share) divided by the infinite sum of discount factors will converge towards zero (“mild transversality condition”). Mathematically this needs not be the case as infinity divided by infinity is indeterminate. The following presents two reconciliation methods which are free from the convergence assumption.

호텔기업의 잉여현금흐름 모형에 의한 기업가치와 회계지표와의 관련성 분석

우리나라 대부분 호텔기업의 가치평가는 자산가치에 초점을 두어 임시 단편적으로 결정되고 주로 거래당시의 부동산 시장환경에 큰 영향을 받아왔다. 그러나 호텔기업도 다른 업종의 기업과 마찬가지로 수익창출을 통한 기업가치의 극대화를 목적으로 하기 때문에 호텔기업의 가치평가는 수익가치로 계산하는 것이 타당할 것이다. 이에 본 연구는 호텔기업의 회계적 지표와 기업가치 간의 관련성 및 기업가치에 미치는 영향을 분석하여 기업의 외부정보이용자에게 호텔기업에 투자할 경우 합리적인 판단을 할 수 있도록 정보를 제공함을 목적으로 하였다. 연구결과는 다음과 같다. 첫째, 호텔기업들은 변수들간 상하위 25%의 차이가 많이 발생하고 있다. 특히 신규투자증가율과 매출액증가율 그리고 자기자본순이익은 하위 25%의 호텔기업이 음(-)의 부호를 보이고 있다는 것이다. 둘째, 특1급 호텔의 경우 자산규모와 부채비율간에는 99% 수준에서 음(-)의 유의함을 보여주고 있다. 이는 자산규모가 클수록 부채비율이 낮음을 나타내는 것 이다. 신규투자증가율과 부채비율도 99% 수준에서 음(-)의 유의함을 보여주고 있어 부채비율이 높을수록 투자율이 낮음을 알 수 있다. 셋째, 특1급 호텔과 특2급 호텔의 총자산규모 기업가치에 99% 수준에서 유의한 영향을 미치는 것으로 나타났다. 또한 특2급 호텔의 경우에는 유보율도 90% 수준에서 양(+)의 차이가 나타났다. A valuation of the most hotels in Korea have been decided by their asset value and influenced by real estate market. On the other hand, most hotels aim to maximize their through generating profit as other enterprise do it. Therefore a valuation of the hotel industry should be decided from calculating in their profit value. This study is tried to find out the relationships of the company value by free cash flow model between accounting index in hotel industry. The results are as follows. First, there is a 25% gap between high level and low level in hotel industry. Second, in the first rate hotels it is meaningful 99% between asset size and liability rate. Third, there is 99% meaningful relationship asset size of the first level and second level hotels and company values.

Comparison of the Residual Income Valuation, Abnormal Earnings Growth and Free Cash Flow Models: An empirical study of the Brazilian capital market

This study compares the explanatory power of the residual income valuation (RIV), abnormal earnings growth (AEG) and free cash flow (FCF) models in the Brazilian capital market, through an empirical test to compare the three models, using data on companies listed on the BOVESPA. Each model was analyzed annually over the period from 1995 to 2002 by multiple linear regression. The results show that from 1995 to 1999 the RIV model had better explanatory power than the other two models, and from 2000 to 2002 the AEG and RIV models were the same, an indicator of the Brazilian market’s development in the more recent years of the study period. The FCF model had the least explanatory power in all the years analyzed. The results were confirmed by panel data analysis.

Free cash flow models, terminal values and the timing of asset replacements*

This paper analyses the issue of the timing of expenditures in replacing fixed assets within the context of valuing firms using the free cash flow approach. Standard practice amongst both practitioners and academics is to assume a smooth pattern in these expenditures past some future point, and such a pattern is improbable. This paper develops a model that rests upon much less restrictive assumptions, shows that the model is readily amenable to implementation, and that the difference in valuation results could be quite substantial.

A hybrid knowledge-based decision support system for enterprise mergers and acquisitions

This paper presents a hybrid knowledge-based decision support system for enterprise mergers and acquisitions. The HKDSS system provides not only practical merger and acquisition procedures, related regulations, and legal problems but also feasible solutions or actions through the performance of rule-based reasoning. The hybrid system integrates a database, case base, rule base and model base to create a tool that managers can use to deal with decision-making problems via the Internet. Rules in the rule base are explained here in detail to illustrate the process of reasoning, and four practical cases in the case base also used to show how a case can be dealt with as a new case arrives. In order to evaluate a business's value, a discounted free cash flow model and economic profit model in the model base have been developed. Finally, a scenario analysis is employed to show how the user can deal with an uncertain growth rate and present value.