Valuation is the essence of Corporate Finance. A key objective of management is shareholder value maximization. Without a good way to measure value, decisions can’t be made to maximize shareholder value! Valuation is what can guide management to be objective in decision making. Valuation is often also required by law. For example the IRS may require you to value assets inherited, exchanged in a transaction or gifted so the appropriate tax can be collected or paid. The SEC/ accounting rules require you to value assets if you are required to disclose market values especially if there are no readily available or comparable market values.
There are broadly three methods of valuing any asset. This info-graphic highlights the key aspects of one method of valuation which is the discounted cash flow method. The other methods of valuation are the multiples method or relative valuation and options theory based valuation.
According to the discounted cash flow method of valuation, the value of any asset is the sum of the present values of all future cash flows. It’s that simple. This info-graphic highlights the formula and key ingredients of the discounted cash flow method. Each ingredient is a estimated value and must be carefully arrived. The quality of the result will depend on the quality of the judgement used.
Valuation: The Essence of Corporate Finance (DCF method) – An infographic by the team at Corporate Finance tutoring team at GraduateTutor.com