A Note on Valuation of Companies with Growth Opportunities

Abstract

Each company faces day to day investment opportunities. Just by staying in business the company is taking a decision of reinvesting. The question arising for those managers who have the responsability of allocating capital is the criteria they should use to differentiate between investment alternatives. The most proven, traditional and popular method of valuation is Discounted Cash Flow (henceforth DCF), which provides comparable information. This method requires both the assesment of expected future cash flows and a risk adjusted rate (used in the discount coefficient). Besides the current business the company is in, it can also face horizontal or vertical growth opportunities should events unfold favourable. Given the existence of these options for contingent or future growth, what would therefore be the value of the project (or firm)?