Valuing Companies by Cash Flow Discounting: Fundamental Relationships and Unnecessary Complications

Abstract

Company valuation using discounted cash flows is based on the valuation of government bonds: it consists of applying the procedure used to value government bonds to the debt and shares of a company. This is easy to understand (sections 1, 2 and 3). But company valuations are often complicated by "additions" (formulae, concepts, theories…) to complicate its understanding (see sections 4 to 15) and to provide a more "scientific," "serious," "intriguing," "impenetrable" … appearance. Among the most commonly used "additions" are: WACC, beta ( ), market risk premium, beta unlevered, value of tax shields…. Most of these "additions" are unnecessary complications and are the source of many errors (section 16).