Valuing Companies and VTs

Abstract

This paper presents uniform metrics, calculating the value of the firm, the one and only standard WACC, VTS and shareholder value, all at one and the same time. Valuing companies by cash flow discounting can be done, both unequivocal and quite simple really. It all starts with a set of basic data. This has to be brought in from the outside world. Science cannot answer most of the gauging questions. After the data-acquisition, the matter is signal compilation. Starting with any set of given data, they must be compiled in the same best way. It should be possible to work-out, process and purely transform data, regardless of the value of these signals, with one and the same algorithm. The detours that must be followed when working with the different methods and theories on company valuation applied so far, have been eliminated by the algorithm that is outlined in this paper.

The ten most commonly used methods and nine theories, extensively described by Pablo Fernandez, cannot stand the test. ECF, FCF, CFd, CCF and also EVA® as well as CVA®, these are all incorrect starting-points. Fernandez describes numerous valuation equations of which the very basics exist by way of definition only, with all the resulting consequences. A cortege of famous writers, and still more equations and would-be 'solutions', which are mutually exclusive. This is not acceptable practice. Within money counting problems, everything has to fit together. An optical fit is not good enough. No euro, no dime, no cent can disappear or appear just like that. In other words, all amounts of money (inherent in an exemplary problem) are inter-dependent.

What has been argued by so many people e.g. Pablo Fernandez, about tax shields is not true. Two problems quoted by Fernandez are worked out in detail. In order to show that everything that has been written down in economic literature about 'the value of tax shields' (VTS), together with 'various WACCs', is not necessary. The so-called 'appropriate discount for tax shields' (another rate than standard WACC) exists by way of definition only. Modigliani and Miller studied the effect of leverage on the firm's value, but their famous Proposition 1 (1958, equation 3), stating in the absence of taxes, the firm's value is independent of its debt is abundantly not true. Including the computation of the value of the tax shields (which is a side-issue - the main subject is valuing companies i.e. the key matter in the debate on VBM), it all can be done both finally and easily, as is demonstrated in this paper.

Keywords: Valuing Companies, VTS, The Firm's Value, WACC, Shareholder Value, EVA®, CVA®, NVA, VBM, Valuing Perpetuities, Strategic Investments, US-GAAP, IASB rules