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Where does minority interest feature in your DCF valuation?

Companies invest in each other for a variety of reasons. The accounting for these cross holdings are specified by the SEC guidelines. Generally speaking, a company has less than 50% ownership of another firm and does not exert influence, the investment is considered as a minority interest. When the SEC prescribed conditions for minority interest are met, the financials of the subsidiary company are not consolidated in the parent company. When you are valuing the parent company, how does the value of minority interest get reflected in your DCF valuation model?

We address this question “Where does minority interest feature in your DCF valuation?” here.

What additional assets must you consider after you have valued a firm using the DCF method?

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 adds value to the business or company?

We address this question here: “What additional assets must you consider after you have valued a firm using the DCF method?”

What could you have missed out on if you did a DCF valuation?

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 adds value to the business or company?

We address this question here: “What could you have missed out on if you did a DCF valuation?

How can you estimate the probability of bankruptcy of a firm?

The risk of bankruptcy is real. This may be truer for some companies over other companies – those with higher debt levels are considered riskier than those with less debt. Nevertheless, you must account for this additional risk. But how do you estimate the additional risk to account for it?

We address the question: “How can you estimate the probability of bankruptcy of a firm?”

How can you feature the risk of bankruptcy in your DCF model?

The risk of bankruptcy is real. This maybe truer for some companies over other companies – those with higher debt levels are considered riskier than those with less debt. Nevertheless, how do you account for the risk of bankruptcy? How do you account for this additional risk?

We address this question: “How can you feature the risk of bankruptcy in your DCF model?

Is there an appropriate discount rate you must use?

Apples to apples and oranges to oranges. Different types of cash flows need to be discounted with different types of discount rates. How do you decide which discount rate is the appropriate discount rate for the different types of cash flows you will encounter?

We address this question here: “Is There an appropriate discount rate you must use?

What are the drawbacks of the adjusted present value (APV) (if any)?

The APV method conceptually is well accepted. The primary benefit of the APV method is that it separates the value derived from operations from the value derived from other sources such as tax shields, ancillary revenues/cash flows. However, there are some concerns.

We address the question “What are the drawbacks of the adjusted present value (APV) (if any)” here.

How is the adjusted present value (APV) method different from your standard DCF -WACC method?

The DCF approach to valuation and the multiples method of valuation are common. Where does the APV method come in? What are the advantages of the adjusted present value (APV) method of valuation? How is it different?

We address this question on this webpage. “How is the adjusted present value (APV) method different from your standard DCF -WACC method?”

Why would you consider the adjusted present value (APV) method of valuation?

The DCF approach to valuation and the multiples method of valuation are common. Where does the APV method come in? What are the advantages of the adjusted present value (APV) method of valuation?

We address this question on this webpage. “Why would you consider the adjusted present value (APV) method of valuation?”

Are enterprise value multiples considered better than equity multiples?

There are a large number of multiples you can choose from to do a multiples-based valuation. Examples include PE or Price Earning multiple, EV/Cash flow, EV/EBITDA, EV/EBIT, EV/Eyeballs, PEG, Value/Barrel, EV/Sales, EV/EBIT, EV/sales, etc. What factors help you decide on the multiples you pick? Which ones do you use? Which ones should you avoid? Are some multiples better than others?

We discussed elsewhere that multiples closer to cash flows should be preferred to other multiples because cash flows drive valuation. However, how do you select the numerator? Show you be considering enterprise values or equity of something else?

We address this question: Why are enterprise value multiples considered better than equity multiples?

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