what we know about valuation
DESCRIPTION
This presentation is about what we really know about financial valuation--and what's just myth.TRANSCRIPT
for surefinancial valuation?about
What do we know
1
Future Cash Flows
Exact Future Values
The financial value of any venture can only come from the cash generated in the future—no accrued values, no actual or historical performance.
Now
✘
12
Time ValueofMoney
Exact Future ValuesNow
The longer we have to wait for an amount of money the less it is worth right now—that's why future cash flows are discounted.
123
Risk-FreeRate of Return
Exact Future ValuesNow
For every major currency there is an interest rate at which we can invest our money, for any horizon, with practically zero risk—the government bond yield curve. Every investment must be compared to this risk-free rate. %
2134
Importance
Riskof
Exact Future ValuesNow
The more uncertain a cash flow is the less it is worth. If we buy a bunch of uncertain cash flows which provide us—on average—the same return as a risk-free government bond, we would probably go for the bond—or pay less for those cash flows.
2345
ValuationUncertaintyof
Exact Future Values
What Black and Scholes or Cox, Ross, and Rubinstein developed for special cases in the financial world, we can now—with Monte Carlo simulation—ulitize for the valuation of every kind of uncertainty.
Expected Value
Probability of Under-Performance
Value of Uncertainty
OK, let‘s see again what we have ...
Future Cash Flows
Future Cash Flows
Time Value of Money
⌛
Future Cash Flows
Time Value of Money
⌛
Risk-Free Rate of Return
%
Future Cash Flows
Time Value of Money
Risk-Free Rate of Return
⌛
%
Importance of Risk!
Future Cash Flows
Time Value of Money
Importance of Risk
Risk-Free Rate of Return
⌛
%
!
Valuation of Uncertainty
we know about
So, these are the
truthsFivefinancial valuation5
Future Cash Flows
Time Value of Money
Importance of Risk
Risk-Free Rate of Return
Valuation of Uncertainty
⌛
%
!
LiesAnd what don‘t we know?
Or what arethe ?
And what don‘t we know?
(Even if we pretent they were true?)
Lies?Or what arethe
Future Cash FlowsRock-Solid
Exact Future Values
Although everybody knows that future cash flows are highly uncertain, almost all financial projections, planning, budgets, etc. treat them exactly like this—rock-solid figures.
Now
✘
Exact Future Values
So, it's a
Now
✘Lie!
EquityCostofCapital
9.95%
Exact Future Values
The cost of capital is a fiction: A crucial part of capital—equity—has no price tag. Although the WACC* is critical to valuation, there is little practical guidance on how to determin it. The cost of capital is no ingredient to the valuation rather than one of its possible results.
= Cost of Debt
*) Weighted Average Cost of Capital
Cost of EquityWACC +
CAPM
Market Risk Premium
Beta
MCPMTM
Stock Price Volatility
?
7.75%???
Exact Future Values
= Cost of Debt
*) Weighted Average Cost of Capital
Cost of EquityWACC +
CAPM
Market Risk Premium
Beta
MCPMTM
Stock Price Volatility
?
7.75%???
Capital Cost
Lie!is a