BU121 Lecture Notes - Lecture 14: Discounted Cash Flow, Operating Cash Flow, Income Approach
Document Summary
Based on assumption that value of business = sum of the present values of any expected future benefits. Income stream and/or liquidity event: market approach. Value is determined based on comparisons to similar companies for which values are known. Value determined as measure of new cost of assets, original amount invested or cost to duplicate. Discounted cash flow: determine free cash flows. Use cash surpluses from cash budget + potential liquidity event: discount for risk and time value of money. Investors will use a relatively high discount rate for risk involved. Venture capital method: explanation in text. No hard and fast rules for valuing early stage companies. Valuation professionals need 3 things to value any asset: too many unknowns, an income stream, a growth rate, a discount rate. In early stage companies at least 2 of the 3 is subject to substantial uncertainty.
