This page lists recent articles related to corporate finance on this website.
We looked at how to forecast the revenues of a company that has a history of acquisitions. But how do we forecast the revenues of a company that has a history of acquisitions?
We address this question on this page: “How are acquisition costs forecasted for a company that has a history of acquisitions?”
What are the basic requirements of building a DCF model? We discuss the Essential Ingredients of a DCF Valuation Model on this page.
In today’s technology and internet-enabled world, some rapidly growing companies grow at unearthly rates of 50%, 100% and even 200% a year during the first few years. These tremendous growth rates are not sustainable for long periods. These high growth rates usually drop off in a few years and reach more earthly rates of 10%, 15%, 20%, or even 30% which are still fantastic growth rates for most companies. Eventually, even these companies become mature, face competition and encounter obstacles, and over time slow down to grow at historical rates.
What are Three-Stage or Multi-Stage Models?
A company is incorporated as per the corporate laws of the land. When incorporated, it becomes a separate legal entity by itself and continues to function as a separate legal entity unless it is intentionally shut down in accordance with the corporate laws of the land. Since the company is a separate entity and lives on until it is shut down, it theoretically has an infinite lifespan. The owners and managers of the company may come and go but the company theoretically can live forever. How many years do we need to forecast financials?
We address these questions here; “What is the Lifetime of a Business? How many years do we need to forecast financials?
Illiquid assets are often sold at a discount compared to comparable liquid assets when estimating value using multiples of revenues or cash flows or earnings. Studies show a 35% discount for illiquid assets (Maher 1976). How can you compute the liquidity discount- the penalty for not being a liquid asset?
On this page, we address the question: “How is the liquidity discount arrived at?”
Illiquid assets are often sold at a discount compared to comparable liquid assets when estimating value using multiples of revenues or cash flows or earnings. Studies show a 35% discount for illiquid assets (Maher 1976). Is that liquidity discount always appropriate?
We discuss the question: “When is a liquidity discount appropriate?”
Private companies are often sold at a discount compared to publicly listed companies when estimating value using multiples of revenues or cash flows or earnings. Studies show a 30% discount for US private companies and up-to 50% discount for overseas companies. (Koeplin 2005) There are specific reasons when a private company discount applies and when a private company discount does not apply.
On this page, we discuss when a private company discount is irrelevant!
A control premium is a premium that a buyer is willing to pay over and above the market price of a publicly traded company to buy a controlling ownership stake in a company. Many models add a percentage premium to the DCF valuation arrived at to account for management control. Is this always a valid approach? Are there occasions, when a control premium must not be added?
We discuss this question: “What conditions make a control premium irrelevant?”
The DCF valuation model considers the present value of future cash flows of the business to be the driver of value. Could there be more that must be considered when arriving at the value of your business using the DCF valuation model?
On this page, we consider the question: “What additional liabilities must you consider after you have valued a firm using the DCF method?”
Companies invest in each other for a variety of reasons. The accounting for these cross-holdings is specified by the SEC guidelines. Generally speaking, a company has more than 50% ownership of another firm and/or exerts influence, the investment is considered as a majority interest. When the SEC prescribed conditions are met, the financials of the subsidiary company are consolidated in the parent company’s financial statements. When you are valuing the parent company, how does the value of majority interest and minority interest/shareholders get reflected in your DCF valuation model?
We address this question “Where does majority interest feature in your DCF valuation?” here.