Over-valuation : avoid double counting when retaining dividends in the FCFE valuation : understanding discounted cash flow valuation

Detalhes bibliográficos
Autor(a) principal: Silva, João Marques
Data de Publicação: 2017
Outros Autores: Pereira, José Azevedo
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