Every day, thousands of participants in the investment profession — investors, portfolio managers, regulators, researchers — face a common and often perplexing question: What is the value of a particular asset? The answers to this question usually determine success or failure in achieving investment objectives.
When you are citing the document, use the following link http://essuir.sumdu.edu.ua/handle/123456789/3126

Fashchuk, Y.V.

Guzenko, D.D.

Shkurko, Y.I.

Smolennikov, Denys Olehovych

Смоленников, Денис Олегович

Смоленніков, Денис Олегович

English

Electronic Sumy State University Institutional Repository

  PRACTICAL APPLICATION OF MODERN APPROACHES TO BUSINESS VALUATION  Smolennikov D.O., assistant  Shkurko Y.I., Fashchuk Y.V., Guzenko D.D., students  Sumy State University (Sumy, Ukraine)  Every  day,  thousands  of  participants  in  the  investment  profession  — investors, portfolio managers, regulators, researchers — face a common and often perplexing question: What is the value of a particular asset? The answers to this question usually determine success or failure in achieving investment objectives. In general, the valuation process involves the following five steps:  Understanding  the  business.  Industry  and  competitive  analysis,  together with an analysis of financial statements and other company disclosures, provides a basis for forecasting company performance.  Forecasting company performance. Forecasts of sales, earnings, dividends, and financial position (pro forma analysis) provide the inputs for most valuation models. Selecting the appropriate valuation model. Depending on the characteristics of the company and the context of valuation, some valuation models will be more appropriate than others.  Converting  forecasts  to  a  valuation.  Beyond  mechanically  obtaining  the output of valuation models, estimating value involves judgment.  Applying the valuation conclusions. Depending on the purpose, an analyst may use the valuation conclusions to make an investment recommendation about a particular stock, provide an opinion about the price of a transaction, or evaluate the economic merits of a potential strategic investment.  Discounted cash  flow (DCF) is a  valuation  method used to estimate the attractiveness of  an investment opportunity. DCF  analysis uses future  free  cash flow projections and discounts them (most often using the weighted average cost of capital, to arrive at a present value, which is then used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one. In  simple  terms,  discounted  cash  flow  tries  to  work  out  the  value  of  a company today, based on projections of how much money it's going to make in the future. DCF analysis says that a company is worth all of the cash that it could make available  to  investors  in  the  future.  It  is  described  as  "discounted"  cash  flow because cash in the future is worth less than cash today.  DCF models are powerful, but they do have shortcomings. Small changes in inputs  can  result  in  large  changes  in  the  value  of  a  company.  Investors  must constantly second-guess  valuations; the inputs that produce these  valuations  are always changing and are susceptible to error. Meaningful valuations depend on the user's ability to  make solid cash flow projections. While forecasting  cash flows   more than a few  years into the future is difficult, terminal  value techniques are often used. Also, the DCF model focuses on long-range investing; it isn't suited for short-term investments. Investors shouldn't base a decision to buy a stock solely on discounted cash flow analysis – it is a  moving target, full of  challenges.  Any time expectations change, the DCF-generated value is going to change. Even if one believes that DCF is the final word in assessing the value of an equity investment, it is very useful to supplement the approach with multiple-based target price approaches. If you are going to project income and cash flows, it is easy to use the supplementary approaches. It is important to assess which trading multiples (P/E, price/cash flow, etc.) are applicable based on the company's history and its sector. Choosing a target multiple range is where it gets tricky. While  this  is  analogous  to  arbitrary  discount  rate  selection,  by  using  a trailing earnings number two years out and an appropriate P/E multiple to calculate a target price, this will entail far fewer assumptions to "value" the stock than under the DCF scenario. This improves the reliability of the conclusion relative to the DCF  approach.  Because  we  know  what  a  company's  P/E  or  price/cash  flow multiple is after every trade, we have a lot of historical data from which to assess the future multiple possibilities. In contrast, the DCF model discount rate is always theoretical,  and  we  do  not  really  have  any  historical  data  to  draw  from  when calculating it. Although  technical  analysis  and  fundamental  analysis  are  seen  by  many analysts as polar opposites – the oil and water of investing – we believe the best way is to combine both types of analysis. You do not need to choose one approach over the other. To be honest, neither one is superior to the other.  Technical  analysis  is  a  method  of  evaluating  securities  by  analyzing  the statistics  generated  by  market  activity.  Unlike  fundamental  analysts,  technical analysts don’t care whether a stock is undervalued – the only thing that matters is a security's past trading data and what information this data can provide about where the security might move in the future.  The field of technical analysis is based on three assumptions:  1) the market discounts everything;  2) price moves in trends;  3) history tends to repeat itself. Technical  analysis employs  models and trading  rules based on price and volume  transformations,  such  as  the  relative  strength  index,  moving  averages, regressions, inter-market and intra-market price correlations, business cycles, stock market cycles or, classically, through recognition of chart patterns. That's  why using fundamental  analysis  (DCF & peers analysis) to select healthy companies and technical analysis as a timing tool can be well utilised if you know what to look for.     Економічні  проблеми  сталого  розвитку  :  матеріали  Міжнародної науково-практичної конференції, присвяченої пам'яті проф. Балацького О.Ф., м.  Суми,  24-26  квітня  2013  р.  /  За  заг.  ред.  О.В.  Прокопенко.  —  Суми  : СумДУ, 2013. — Т.2. — С. 213-215. 

Practical application of modern approaches to business valuation

SocioEconomic Challenges Journal (Sumy State University)

 
 
PRACTICAL APPLICATION OF MODERN APPROACHES TO 
BUSINESS VALUATION 
 
Smolennikov D.O., assistant  
Shkurko Y.I., Fashchuk Y.V., Guzenko D.D., students  
Sumy State University (Sumy, Ukraine) 
 
Every day, thousands of participants in the investment profession — 
investors, portfolio managers, regulators, researchers — face a common and often 
perplexing question: What is the value of a particular asset? The answers to this 
question usually determine success or failure in achieving investment objectives.  
In general, the valuation process involves the following five steps:  
Understanding the business. Industry and competitive analysis, together 
with an analysis of financial statements and other company disclosures, provides a 
basis for forecasting company performance.  
Forecasting company performance. Forecasts of sales, earnings, dividends, 
and financial position (pro forma analysis) provide the inputs for most valuation 
models. 
Selecting the appropriate valuation model. Depending on the characteristics 
of the company and the context of valuation, some valuation models will be more 
appropriate than others.  
Converting forecasts to a valuation. Beyond mechanically obtaining the 
output of valuation models, estimating value involves judgment.  
Applying the valuation conclusions. Depending on the purpose, an analyst 
may use the valuation conclusions to make an investment recommendation about a 
particular stock, provide an opinion about the price of a transaction, or evaluate the 
economic merits of a potential strategic investment.  
Discounted cash flow (DCF) is a valuation method used to estimate the 
attractiveness of an investment opportunity. DCF analysis uses future free cash 
flow projections and discounts them (most often using the weighted average cost of 
capital, to arrive at a present value, which is then used to evaluate the potential for 
investment. If the value arrived at through DCF analysis is higher than the current 
cost of the investment, the opportunity may be a good one. 
In simple terms, discounted cash flow tries to work out the value of a 
company today, based on projections of how much money it's going to make in the 
future. DCF analysis says that a company is worth all of the cash that it could make 
available to investors in the future. It is described as "discounted" cash flow 
because cash in the future is worth less than cash today.  
DCF models are powerful, but they do have shortcomings. Small changes in 
inputs can result in large changes in the value of a company. Investors must 
constantly second-guess valuations; the inputs that produce these valuations are 
always changing and are susceptible to error. Meaningful valuations depend on the 
user's ability to make solid cash flow projections. While forecasting cash flows 
 
 
more than a few years into the future is difficult, terminal value techniques are 
often used. Also, the DCF model focuses on long-range investing; it isn't suited for 
short-term investments. 
Investors shouldn't base a decision to buy a stock solely on discounted cash 
flow analysis – it is a moving target, full of challenges. Any time expectations 
change, the DCF-generated value is going to change. 
Even if one believes that DCF is the final word in assessing the value of an 
equity investment, it is very useful to supplement the approach with multiple-based 
target price approaches. If you are going to project income and cash flows, it is 
easy to use the supplementary approaches. It is important to assess which trading 
multiples (P/E, price/cash flow, etc.) are applicable based on the company's history 
and its sector. Choosing a target multiple range is where it gets tricky. 
While this is analogous to arbitrary discount rate selection, by using a 
trailing earnings number two years out and an appropriate P/E multiple to calculate 
a target price, this will entail far fewer assumptions to "value" the stock than under 
the DCF scenario. This improves the reliability of the conclusion relative to the 
DCF approach. Because we know what a company's P/E or price/cash flow 
multiple is after every trade, we have a lot of historical data from which to assess 
the future multiple possibilities. In contrast, the DCF model discount rate is always 
theoretical, and we do not really have any historical data to draw from when 
calculating it. 
Although technical analysis and fundamental analysis are seen by many 
analysts as polar opposites – the oil and water of investing – we believe the best 
way is to combine both types of analysis. You do not need to choose one approach 
over the other. To be honest, neither one is superior to the other.  
Technical analysis is a method of evaluating securities by analyzing the 
statistics generated by market activity. Unlike fundamental analysts, technical 
analysts don’t care whether a stock is undervalued – the only thing that matters is a 
security's past trading data and what information this data can provide about where 
the security might move in the future.  
The field of technical analysis is based on three assumptions: 
 1) the market discounts everything;  
2) price moves in trends;  
3) history tends to repeat itself. 
Technical analysis employs models and trading rules based on price and 
volume transformations, such as the relative strength index, moving averages, 
regressions, inter-market and intra-market price correlations, business cycles, stock 
market cycles or, classically, through recognition of chart patterns. 
That's why using fundamental analysis (DCF & peers analysis) to select 
healthy companies and technical analysis as a timing tool can be well utilised if 
you know what to look for. 
 
 
 
 
Економічні проблеми сталого розвитку : матеріали Міжнародної 
науково-практичної конференції, присвяченої пам'яті проф. Балацького О.Ф., 
м. Суми, 24-26 квітня 2013 р. / За заг. ред. О.В. Прокопенко. — Суми : 
СумДУ, 2013. — Т.2. — С. 213-215. 


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Practical application of modern approaches to business valuation

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