Over-valuation : avoid double counting when retaining dividends in the FCFE valuation : understanding discounted cash flow valuation
Autor(a) principal: | |
---|---|
Data de Publicação: | 2017 |
Outros Autores: | |
Tipo de documento: | Artigo |
Idioma: | eng |
Título da fonte: | Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
Texto Completo: | http://hdl.handle.net/10400.5/24658 |
Resumo: | Valuation based on DCF (Discounted Cash Flow) has been the dominant valuation procedure during the last decades. In spite of this dominance, enterprise valuation using the discounted FCF (Free Cash Flow) model has some practical drawbacks, since there is often some confusion on how to effectively use it. Commonly, the valuation procedures start by estimating future FCF figures from historical data, such as mean FCF, growth and retention ratio, alongside many other variables. These FCF forecasts are discounted at the cost of equity (FCFE – FCF to Equity) or the Weighted Average Cost of Capital WACC (FCFF – FCF to Firm). Implicit in the above mentioned valuation procedures is the expectation that the company puts the retained free cash that is generating to good use, yielding a value capable of rewarding appropriately the level of risk inherent in the way it used. Some poorly performed valuation studies however tend to double count (Damodaran, 2006a) the retained cash’s interest in subsequent values of FCF, or include the accumulated cash build-up in the Terminal Value. This paper discusses how these two common double-counting mistakes are made and evaluates their weight in the final valuation figure for the particular case of retained FCFE (the case for the FCFF is analogous, but we focus on FCFE for simplicity) using projected figures |
id |
RCAP_9aa59022f2d965e45a64b822fe547a43 |
---|---|
oai_identifier_str |
oai:www.repository.utl.pt:10400.5/24658 |
network_acronym_str |
RCAP |
network_name_str |
Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
repository_id_str |
7160 |
spelling |
Over-valuation : avoid double counting when retaining dividends in the FCFE valuation : understanding discounted cash flow valuationValuationFree Cash FlowDiscounted Cash FlowReinvestment PerformanceValuation based on DCF (Discounted Cash Flow) has been the dominant valuation procedure during the last decades. In spite of this dominance, enterprise valuation using the discounted FCF (Free Cash Flow) model has some practical drawbacks, since there is often some confusion on how to effectively use it. Commonly, the valuation procedures start by estimating future FCF figures from historical data, such as mean FCF, growth and retention ratio, alongside many other variables. These FCF forecasts are discounted at the cost of equity (FCFE – FCF to Equity) or the Weighted Average Cost of Capital WACC (FCFF – FCF to Firm). Implicit in the above mentioned valuation procedures is the expectation that the company puts the retained free cash that is generating to good use, yielding a value capable of rewarding appropriately the level of risk inherent in the way it used. Some poorly performed valuation studies however tend to double count (Damodaran, 2006a) the retained cash’s interest in subsequent values of FCF, or include the accumulated cash build-up in the Terminal Value. This paper discusses how these two common double-counting mistakes are made and evaluates their weight in the final valuation figure for the particular case of retained FCFE (the case for the FCFF is analogous, but we focus on FCFE for simplicity) using projected figuresSciedu Press - International Journal of Financial ResearchRepositório da Universidade de LisboaSilva, João MarquesPereira, José Azevedo2022-06-23T14:21:57Z20172017-01-01T00:00:00Zinfo:eu-repo/semantics/publishedVersioninfo:eu-repo/semantics/articleapplication/pdfhttp://hdl.handle.net/10400.5/24658engSilva, João Marques and José Azevedo Pereira. (2017). "Over-valuation: avoid double counting when retaining dividends in the FCFE valuation: understanding discounted cash flow valuation”. International Journal of Financial Research, Vol. 8, No. 4: pp. 107-114.1923-4031- EISSNdoi.org/10.5430/ijfr.v8n4p107info:eu-repo/semantics/openAccessreponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãoinstacron:RCAAP2023-03-06T14:54:16Zoai:www.repository.utl.pt:10400.5/24658Portal AgregadorONGhttps://www.rcaap.pt/oai/openaireopendoar:71602024-03-19T17:08:39.322777Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãofalse |
dc.title.none.fl_str_mv |
Over-valuation : avoid double counting when retaining dividends in the FCFE valuation : understanding discounted cash flow valuation |
title |
Over-valuation : avoid double counting when retaining dividends in the FCFE valuation : understanding discounted cash flow valuation |
spellingShingle |
Over-valuation : avoid double counting when retaining dividends in the FCFE valuation : understanding discounted cash flow valuation Silva, João Marques Valuation Free Cash Flow Discounted Cash Flow Reinvestment Performance |
title_short |
Over-valuation : avoid double counting when retaining dividends in the FCFE valuation : understanding discounted cash flow valuation |
title_full |
Over-valuation : avoid double counting when retaining dividends in the FCFE valuation : understanding discounted cash flow valuation |
title_fullStr |
Over-valuation : avoid double counting when retaining dividends in the FCFE valuation : understanding discounted cash flow valuation |
title_full_unstemmed |
Over-valuation : avoid double counting when retaining dividends in the FCFE valuation : understanding discounted cash flow valuation |
title_sort |
Over-valuation : avoid double counting when retaining dividends in the FCFE valuation : understanding discounted cash flow valuation |
author |
Silva, João Marques |
author_facet |
Silva, João Marques Pereira, José Azevedo |
author_role |
author |
author2 |
Pereira, José Azevedo |
author2_role |
author |
dc.contributor.none.fl_str_mv |
Repositório da Universidade de Lisboa |
dc.contributor.author.fl_str_mv |
Silva, João Marques Pereira, José Azevedo |
dc.subject.por.fl_str_mv |
Valuation Free Cash Flow Discounted Cash Flow Reinvestment Performance |
topic |
Valuation Free Cash Flow Discounted Cash Flow Reinvestment Performance |
description |
Valuation based on DCF (Discounted Cash Flow) has been the dominant valuation procedure during the last decades. In spite of this dominance, enterprise valuation using the discounted FCF (Free Cash Flow) model has some practical drawbacks, since there is often some confusion on how to effectively use it. Commonly, the valuation procedures start by estimating future FCF figures from historical data, such as mean FCF, growth and retention ratio, alongside many other variables. These FCF forecasts are discounted at the cost of equity (FCFE – FCF to Equity) or the Weighted Average Cost of Capital WACC (FCFF – FCF to Firm). Implicit in the above mentioned valuation procedures is the expectation that the company puts the retained free cash that is generating to good use, yielding a value capable of rewarding appropriately the level of risk inherent in the way it used. Some poorly performed valuation studies however tend to double count (Damodaran, 2006a) the retained cash’s interest in subsequent values of FCF, or include the accumulated cash build-up in the Terminal Value. This paper discusses how these two common double-counting mistakes are made and evaluates their weight in the final valuation figure for the particular case of retained FCFE (the case for the FCFF is analogous, but we focus on FCFE for simplicity) using projected figures |
publishDate |
2017 |
dc.date.none.fl_str_mv |
2017 2017-01-01T00:00:00Z 2022-06-23T14:21:57Z |
dc.type.status.fl_str_mv |
info:eu-repo/semantics/publishedVersion |
dc.type.driver.fl_str_mv |
info:eu-repo/semantics/article |
format |
article |
status_str |
publishedVersion |
dc.identifier.uri.fl_str_mv |
http://hdl.handle.net/10400.5/24658 |
url |
http://hdl.handle.net/10400.5/24658 |
dc.language.iso.fl_str_mv |
eng |
language |
eng |
dc.relation.none.fl_str_mv |
Silva, João Marques and José Azevedo Pereira. (2017). "Over-valuation: avoid double counting when retaining dividends in the FCFE valuation: understanding discounted cash flow valuation”. International Journal of Financial Research, Vol. 8, No. 4: pp. 107-114. 1923-4031- EISSN doi.org/10.5430/ijfr.v8n4p107 |
dc.rights.driver.fl_str_mv |
info:eu-repo/semantics/openAccess |
eu_rights_str_mv |
openAccess |
dc.format.none.fl_str_mv |
application/pdf |
dc.publisher.none.fl_str_mv |
Sciedu Press - International Journal of Financial Research |
publisher.none.fl_str_mv |
Sciedu Press - International Journal of Financial Research |
dc.source.none.fl_str_mv |
reponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação instacron:RCAAP |
instname_str |
Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação |
instacron_str |
RCAAP |
institution |
RCAAP |
reponame_str |
Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
collection |
Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
repository.name.fl_str_mv |
Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação |
repository.mail.fl_str_mv |
|
_version_ |
1799131180573917184 |