TABLE OF CONTENTS For anyone involved in the field of corporate finance, understanding the mechanisms of company valuation is an indispensable requisite. This is not only because of the importance of valuation in acquisitions and mergers but also because the process of valuing the company and its business units helps identify sources of economic value creation and destruction within the company.
The methods for valuing companies can be classified in six groups:
| Main Valuation Methods | |||||
|---|---|---|---|---|---|
| Balance sheet | Income | Mixed | Cash flow | Value | Options |
| Book value | Multiples | Classic | Free cash flow | EVA | Black and Scholes |
| Adjusted book value | PER | Union of European Accounting Experts | Equity cash flow | Economic profit | Investment option |
| Sales | Dividends | Cash value added | Expand the project | ||
| Liquidation value | P/EBITDA | Abbreviated income | Capital cash flow | Delay the investment | |
| Substantial value | Other multiples | Others | APV | CFROI | Alternative uses |
In this chapter, we will briefly describe the four main groups comprising the most widely used company valuation methods. Each of these groups is discussed in a separate section: balance sheet-based methods (Section 2.2), income statement-based methods (Section 2.3), mixed methods (Section 2.4), and cash flow discounting-based methods (Section 2.5). The methods based on value creation measures are discussed in depth in Chapters 13 and 14, and company valuation using option theory is introduced in Chapter 22.
Section 2.7 uses a real-life example to illustrate the valuation of a company as the sum of the value of different businesses, which is usually called the break-up value.
