eighty Common and Uncommon Problems in Firm Valuation

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 80 Common and Rare Errors in Company Valuation Essay

85 common and uncommon problems in firm valuation

85 common and uncommon problems in company valuation

Pablo Fernández PricewaterhouseCoopers Professor of Corporate Fund IESE Business School. University of Navarra. Camino delete Cerro de Aguila a few. 28023 This town, Spain. Telephone 34-91-357 '08 09. Fax 34-91-357 up to 29 13. email-based: [email protected] edu

ABSTRACT

This paper consists of a collection and classification of 80 problems seen in business valuations performed by monetary analysts, expense banks and financial consultants. The author got access to most of the valuations known in this paper in his potential as a expert in business acquisitions, product sales and mergers, and arbitrage processes. A few of the errors will be taken from published reports by simply financial analysts. We sort out the errors in half a dozen main classes: 1) Problems in the price cut rate computation and about the riskiness in the company; 2) Errors the moment calculating or perhaps forecasting the expected funds flows; 3) Errors in the calculation with the residual benefit; 4) Inconsistencies and conceptual errors; 5) Errors when interpreting the valuation; and 6) Organizational errors.

Keywords: valuation, company valuation, value errors JEL Classification: G12, G31, M21

November 4, 2003

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80 prevalent and rare errors in company value

This paper contains a classification in the 80 errors providing for least an example of each, obtained from actual value. The parts of the newspaper are the following: 1 . Problems in the discount rate calculations and concerning the riskiness of the company 2 . Errors once calculating or perhaps forecasting the expected money flows a few. Errors inside the calculation from the residual worth 4. Inconsistencies and conceptual errors five. Errors once interpreting the valuation six. Organizational errors Appendix 1 ) List of the 80 mistakes Appendix 2 . A value containing multiple errors applying an tempor?r method Bibliography

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80 common and uncommon errors in organization valuation

1 . Errors in the discount level calculation and concerning the riskiness of the company 1 . A. Wrong risk-free rate intended for the valuation 1 . A. 1 . Using the historical common of the free of risk rate while the actual risk-free rate. Case taken from monetary consultant: " The best estimate of the free of risk rate to include in the CAPM is the traditional average from the US risk-free rate from 1928 till today. ” This is patently absurd. Any student whom used an average historical price from 1928 to 2001 in a university or college examination (ofcourse not to mention in an MBA) will be failed on the spot. The free of risk rate is by definition the rate that can be attained now (at the time once Ke is calculated) by purchasing risk-free authorities bonds right now. Expectations and forecasts have little related to the past, or with a normal historical charge. 1 . A. 2 . Using the short-term authorities bond rate as the meaningful risk-free rate within a valuation. Case taken from a financial consultant: " The best calculate of the free of risk rate to use in the CAPM is the come back of 90-day US Treasury Bills. ” The correct way to calculate a company's cost of capital is to use the rate (Yield or IRR) of long lasting government a genuine (using provides of similar duration to that particular of the predicted cash flows) at the time of determining Ke.

1 . B. Wrong beta used for the valuation 1 . M. 1 . Utilize historical industry beta, or maybe the average in the betas of similar businesses, when the effect goes against common sense. The example of this kind of error comes from a report authored by a financial consulting firm. " The purpose of the study have been to make a specialist estimate in the fair worth at thirty-one December 2001 of the shares of INMOSEV, an unlisted real estate firm whose key business involves buying area and building houses pertaining to resale. We now have assumed a capital contribution by a alternative party in the volume of 35 million euros in the year 2002, with nearly return about its investment of 20%; that is, 6th million euros. " Our study is located...

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eighty common and uncommon errors in firm valuation

Ruback, R. (1995), " A note on capital cash flow valuation”, Harvard Business School, Circumstance No . 9-295 069. Ruback, R. (2002), " Capital cash runs: a simple method of valuing dangerous cash flows”, Financial Managing 31, 85-103. Scholes, M. and J. T. Williams (1977), Estimating Betas coming from non-synchronous Info; Journal of Financial Economics, Dec 1977, 5(3), 309-27. Amtszeichen, Jeremy (1998), Stocks for the Long Run. Second edition. Ny: Irwin. Siegel Jeremy J. (1999), " The Shrinking Equity Premium”, Journal of Portfolio Administration, Fall, 1017. Stowe, J. D., Big t. R. Brown, J. Electronic. Pinto and D. Watts. McLeavey (2002), Analysis of Equity Investments: Valuation. Baltimore: Association intended for Investment Meters anagement and Research. Wang, X. (2000), " Size Effect, Book-to-Market Effect, and Survival”, Diary of International Financial Supervision, September-December, twelve, 257-73.

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