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Authors
Advisor(s)
Abstract(s)
Company valuation models attempt to estimate the value of a company in two stages: (1)
comprising of a period of explicit analysis and (2) based on unlimited production period of cash
flows obtained through a mathematical approach of perpetuity, which is the terminal value. In
general, these models, whether they belong to the Dividend Discount Model (DDM), the Discount
Cash Flow (DCF), or RIM (Residual Income Models) group, discount one attribute (dividends,
free cash flow, or results) to a given discount rate. This discount rate, obtained in most cases by
the CAPM (Capital asset pricing model) or APT (Arbitrage pricing theory) allows including in the
analysis the cost of invested capital based on the risk taking of the attributes. However, one
cannot ignore that the second stage of valuation that is usually 53-80% of the company value
(Berkman et al., 1998) and is loaded with uncertainties. In this context, particular attention is
needed to estimate the value of this portion of the company, under penalty of the assessment
producing a high level of error. Mindful of this concern, this study sought to collect the perception
of European and North American financial analysts on the key features of the company that they
believe contribute most to its value. For this feat, we used a survey with closed answers. From the
analysis of 123 valid responses using factor analysis, the authors conclude that there is great
importance attached (1) to the life expectancy of the company, (2) to liquidity and operating
performance, (3) to innovation and ability to allocate resources to R&D, and (4) to management
capacity and capital structure, in determining the value of a company or business in long term.
These results contribute to our belief that we can formulate a model for valuating companies and
businesses where the results to be obtained in the evaluations are as close as possible to those
found in the stock market
Description
Keywords
Firm Value Determinants of Terminal Value Cash Flow Life Expectancy
Citation
Reis, P. M. N., & Augusto, M. G. (2014). Determinants Of Firm Terminal Value: The Perspective Of North American And European Financial Analysts. The International Business & Economics Research Journal (Online), 13(4), 793.
Publisher
Clute Institute