Income approach to business valuation. Income approach to business valuation. Choosing the amount of profit to be capitalized

The income method is the best choice for determining the value of most companies. However, when determining the value of an enterprise based on future income, it is important to take into account some nuances. In particular, to determine the period for drawing up a traffic forecast Money, choose a method for calculating cash flow and determine the terminal value of the company. After the calculations, it is worth checking if something has been overlooked.

The essence of the income approach is that the value of an enterprise is determined on the basis of the future income that it can bring to its owner. As for specific calculations, there are two main methods that operate on information about the forthcoming business income: discounting and capitalization. cash flows... Let us dwell on discounting in more detail; it is more often used in practice to assess an operating enterprise. When using it, the order of actions will be as follows:

• determination of the forecasting period;
• preparation of a cash flow forecast;
• calculation of terminal value (future business value at the end of the forecasting period);
• business value calculation - the sum of discounted cash flows for the forecasting period and terminal value;
• making final adjustments.

Alexander Matyushin, Deputy Director of the Appraisal Department of FBK Grant Thornton, explains more about what the profitable approach is.

Now about everything in order and Special attention the nuances of assessing the value of a business using the discounted cash flow method.

Determination of the forecasting period

For how long to draw up a cash flow forecast to assess the value of the company? As a rule, the lower of the following three values ​​is taken as the forecasting period:

• the time for which strategic investors usually enter a similar business;
• the period during which the annual performance indicators of the enterprise can be predicted most reliably (5-10 years);
• time after which the company will generate either constant cash flows, or a stable dynamics will appear - the cash flow from year to year will grow (decrease) at approximately the same rate.

Preparing a cash flow plan

There are two ways to calculate cash flows - direct and indirect. When using the direct method to build a forecast, gross cash flows are analyzed by their main types based on the data accounting... The turnovers on the corresponding accounts (sales, settlements with suppliers, short-term loans, etc.) are adjusted for changes in inventory balances, receivables and payables, in order to ultimately receive only those transactions that are paid in real money. The method is accurate, but incredibly laborious and not informative enough - it does not allow tracing the transformation of net profit into cash flow. Therefore the indirect method calculating cash flow preferable. We will talk about it further.

Cash flow classification. The simplest is the division of flows by type of activity: operating, investment and financial. However, such a structure of cash flows is not enough to predict.

It is important to consider that cash flow for equity or invested capital can be used to calculate the value of a business. The cash flow for invested capital is projected on the assumption that all funds invested in the company, including loans, are considered equity. Hence, interest payments are not counted as a diversion of funds. In the case of a cash flow forecast for equity capital money spent on servicing loans is taken into account as usual (see table).

table Indirect Cash Flow Calculation Scheme

For equity			For invested capital
Inflow (+) / Outflow (-)	Index	View activities	Inflow (+) / Outflow (-)	Index	View activities
	Revenue from the main activities	Operating room		Operating income	Operating room
	Primary cost price activities			Cost of core business
				Financial result from other operations
	Net profit			Net profit
	Depreciation			Interest on loans by the amount of which the net profit was reduced
				Depreciation
	Change in long-term debt	Financial		Change in the value of own working capital
	Capital investments	Investment		Capital investments	Investment

Which approach to take depends on how well the company's current capital structure matches industry funding trends. V general case it is customary to use a model for calculating the cash flow for the invested capital to assess the value. If the evaluated company is fundamentally different in terms of its ability to attract borrowed money from similar companies or works only for own funds ah, it is more correct to predict the cash flow for equity capital. Such a rarity, therefore, we will further discuss the forecast of cash flows for the invested capital.

One more nuance. Quite often, real cash flow is used for forecasts, which does not take into account inflation. At the same time, when it comes to the activities of a Russian enterprise, the rise in prices for different groups goods has significant differences, which may affect business profitability ... Therefore, estimating the value of a company operating in emerging markets on the basis of nominal cash flow (adjusted for inflation) will be more accurate. Now, in more detail about how and what to take into account when forecasting the indicators used to calculate cash flows using the indirect method: revenue, cost, equity, depreciation, etc.

Future income and expenses. Let's start with the revenue, after calculating which we can safely undertake the assessment of the value of the enterprise. Its forecasting methods can be roughly divided into two groups: detailed and trend. A detailed forecast of revenue is rather laborious, since in the context of the main product groups, it is necessary to plan future sales volumes and prices for them (including the dynamics of price changes). The so-called trend methods are based on historical statistics. All of them involve the use of mathematical modeling methods.

As for the cost price, if we do not take into account the most time consuming and reliable method of forecasting costs based on the workshop cost (when there is a forecast for revenue in kind, it is possible to predict the cost based on the volume), there are still two options that allow us to estimate future costs ... The first is trending. The logic will be approximately the same as in the case of revenue. The second is detailed cost planning linked to the revenue forecast. For example, if the cost of raw materials and supplies is 10 percent of revenue, and the company is stable, it can be assumed that the ratio will remain the same throughout the forecast period.

But to use both the trend and the detailed method of assessing the value of a business, a preliminary cost analysis for the previous two to three years is required. The goal is to identify costs that are atypical for future activities. It is possible that the above 10 percent of material costs are the result of an unjustifiably expensive purchase, and usually they do not exceed 9 percent. Of course, such costs must be excluded from the cost price before the forecast is made and the costs must be increased by the amounts that were saved one-time, for example, in the course of two or three deliveries, it was possible to reduce transport costs by 15 percent. And that is not all. It is only reasonable to predict costs based on their share of revenue for variable costs. Therefore, in the course of the analysis, it is necessary to clearly determine which costs are variable and which are fixed. The latter in the forecast will change only under the influence of inflation. Here comes the change variable costs will occur both due to an increase (decrease) in production volumes and an inflationary component.

Own working capital. When constructing a cash flow forecast using the indirect method, it is required to determine the amount of own working capital (ROC):

Equity working capital = Current assets - (Current liabilities - Short-term loans)

To determine the amount of working capital, the following procedure can be recommended. First, make an adjustment to current assets as of the valuation date, namely:

• To reduce "accounts receivable" by the amount of bad debt;
• deduct from inventories the cost of illiquid or spoiled material values... But it is possible that the stocks according to the reporting data will have to be increased - by the amount of the excess of their market price as of the valuation date over the value at which they are recorded;
• reduce current assets by the amount of cash and short-term financial investments.

Secondly, current commitments will also have to be adjusted. Namely, to increase the amount of unaccounted short-term liabilities. And add interest and penalties for late payments to accounts payable. Thus, taking into account all adjustments, the value of own working capital will be obtained at the time of the assessment.

In order to predict RNS, you can act in at least two ways. More accurate - item-by-item planning of current assets and liabilities using indicators of their turnover. If the revenue is planned, the existing turnover indicators will not change (suppose, this assumption is made by management), it is quite simple to calculate the values ​​of the indicators used in calculating the equity working capital. Another way is to plan in aggregate, based on the indicator specific gravity in revenue. For example, calculate the ratio of current assets to revenue at the moment or based on an analysis of past periods. And then, knowing what income is planned, calculate current assets through a previously determined ratio.

Capital investments and depreciation. When planning cash flow from investment activities, it is necessary to determine the company's need for capital investments. Most often, in practice, a methodology is used that assumes that the assessed company will at least maintain the existing fixed assets (OS) in working order. Accordingly, capital investments are the costs of their replacement, which can be determined individually for each fixed asset or in aggregate.

In the first case, for each unit of non-current assets, through a period corresponding to its remaining real economic life, a full replacement investment is estimated. The amount is determined based on the current market value similar OS. It is important not to forget to take inflation into account, because assets will be available only after a while. The disadvantage of this approach to forecasting investments is the extreme laboriousness and cumbersome calculations.

The second option will give a less reliable result. The amount of investment is assumed to be equal to the real depreciation. It is calculated as the ratio of the market value of all assets to the weighted average remaining service life of the property according to RAS. And again, it is important not to forget to take inflation into account in order to get the real market value of the fixed asset in the future (or rather, for each year of the forecast period).

Important note. Everything that was said above about the investment forecast was based on the assumption that the company will not increase production capacity. This is not always the case. Therefore, the procedure for calculating the investments required for the expansion of activities is determined, as a rule, individually for each business. If we talk about some general trends, then there is the following pattern. As statistics show, the cost of creating an additional unit of capacity ranges from 68 to 93 percent in relation to the cost of the same unit of capacity for facilities that are built from scratch.

A few words about the forecast of depreciation charges. Depreciation can also be calculated individually for each inventory unit (based on the known rate and book value of the asset) until the asset is replaced. After replacement, the calculation is performed taking into account the new original cost.

Calculation of the terminal value of the company

Terminal value (or reversal) - the value of the enterprise after the forecasting period. The reversal can be simply specified, for example, when calculating the value of a business as an investment project with a predetermined cost of exit, or calculated by standard market methods assessment (comparative or income approach).

The comparative method for assessing reversion is rarely used. The fact is that it involves the use of multiples that are applied to the financial performance of the company. And since the calculations are made for a date in the distant future, you will have to predict not only financial indicators, but also multipliers, which is quite difficult. Therefore, in the overwhelming majority of cases, the income approach is used, in particular the capitalization method. All calculations are based on the assumption that after the forecast period, the company will consistently generate cash flow, changing at a constant rate:

V term
CF n- net cash flow in the last year (n) from the forecast period, rubles;
Y- discount rate, units;
g- long-term growth rates of cash flow, units.

As a rule, the growth rate of cash flow is determined taking into account the fact that in the post-forecast period it is not planned to increase the production capacity of the enterprise. It turns out that the flow will change mainly due to inflation. But the growth rate can be determined on the basis of inflation, if the production capacity at the end of the forecast period is loaded at 100 percent. Otherwise, in the indicator, apart from price changes (as in finished products and for materials and services written off to the cost price), it is necessary to take into account the possible additional loading of production to the industry average level. To determine the growth rate of cash flow, future price dynamics are taken into account, and not those inflationary indices that were laid down in the forecast period.

Business valuation

The company's value is equal to the sum of the discounted cash flows for the forecast period and the discounted terminal value:
, where

i- number of the forecast period, usually a year;
n- the duration of the forecasting period, years;
CF i- cash flow of the i-th year, rubles;
V term- terminal value of the company, rubles;
Y- discount rate, units

In assessing the value of a business, everything is simple, except for one important point that is worth paying attention to. Since the overwhelming majority of enterprises have income and expenses relatively uniform throughout the year, it is more correct to discount at the middle of the year (i-0.5). The same applies to the terminal cost. The correctness of the calculations made can be checked by comparing the discounted cash flows for the forecast period and the discounted terminal value. Typically, the latter value (discounted reversal) is less. In most cases, with a forecast period of about five years, the current terminal value is no more than 50 percent of the total business value.

Recent adjustments

After all the above calculations have been performed, you need to make sure that nothing has been overlooked.
Forgotten assets. Usually, when determining the value of a company using an income approach, only cash flows from operating activities are taken into account. But an enterprise may have assets that do not affect them in any way. Accordingly, their market value is added to the final valuation result.

Net debt. If, when evaluating a company, cash flows were calculated for all invested capital, then the result will reflect the cost of both equity and borrowed funds. To determine the value of a business for its owners, it is necessary to deduct the borrowed funds, or rather the amount net debt(loans and borrowings minus cash and short-term financial investments). Despite the seeming simplicity of calculating this indicator, difficulties may arise depending on the characteristics of a particular enterprise. For example, equity capital may be reflected in the company's balance sheet under the guise of loans, in fact, long-term loans may be recorded as short-term due to the fact that they are renewed annually, etc.

The method for calculating the discount rate, the classification of cash flows by type of activity, the nuances of determining the cash flow of the post-forecast period, the model for assessing the company's value in an income way in Excel can be downloaded from the link at the end of the article in electronic version of the "Financial Director" magazine.

The mechanism for managing the value of a business is based on the assumption that the value of a company is determined by its ability to generate cash flow over a long period of time. And its ability to generate cash flow (and, therefore, create value), in turn, is determined by factors such as long-term growth and the return that the company receives from its investments in excess of capital costs.

Thus, the income approach, according to the International Valuation Standards (clauses 6.7.2 of the MP6 IES), provides for the establishment of the value of a business, a share in the ownership of a business or a security by calculating the reduced the current moment the cost of the expected benefits.

The two most common methods according to the International Valuation Standards under the Income Approach are:

Capitalization of income;

Discounting cash flow or dividends.

In income capitalization methods, to convert income to value, a representative amount of income is divided by the capitalization rate or multiplied by an income multiplier. In theory, there can be a variety of definitions of income and cash flow. In discounted future cash flow and / or dividend methods, cash receipts are calculated for each of several future periods. These receipts are converted into value by applying a discount rate using present value methods. Many definitions of cash flow can be used. In practice, they usually use net cash flow (cash flow that can be distributed to shareholders) or actual dividends (especially in the case of non-controlling interests). The discount rate should be consistent with the accepted definition of cash flow. When implementing the income approach, capitalization rates and discount rates are determined from market data and expressed as a price multiplier (determined from data on openly traded businesses or transactions) or as an interest rate (determined from data on alternative investments). The expected income or benefits are converted into value through calculations that take into account the expected growth and timing of benefits, the risk associated with the flow of benefits, and the value of money over time. The expected income or benefits should be calculated taking into account capital structure and past business performance, business prospects, and industry and economic factors. In calculating the appropriate rate (capitalization or discount rate), the appraiser should consider factors such as the level of interest rates, the rates of return (rate of return) that investors expect from similar investments, and the risk inherent in the expected stream of benefits.

Cash flow discounting method.

Market valuation of a business largely depends on what its prospects are. When determining the market value of a business, only that part of its capital is taken into account that can generate income in one form or another in the future. At the same time, it is very important at what stage of business development the owner will begin to receive these incomes and with what risk it is associated. All these factors affecting the valuation of a business allow the discounted cash flow method (hereinafter - the DCF method) to be taken into account. Determining the value of a business using the DCF method is based on the assumption that a potential investor will not pay for this business an amount greater than the present value of future income from this business. The owner will not sell his business at a price lower than the present value of projected future income. As a result of interaction, the parties will come to an agreement on a market price equal to the current value of future income. This valuation method is considered the most acceptable from the point of view of investment motives, since any investor who invests in an operating enterprise ultimately buys not a set of assets consisting of buildings, structures, machinery, equipment, intangibles, etc., but a stream future income, allowing him to recoup the investment, make a profit and increase his well-being.

The DCF method can be used to assess any operating enterprise. Nevertheless, there are situations when it objectively gives the most accurate result of the market value of the enterprise. The application of this method is most justified for evaluating enterprises with a certain history. economic activity(preferably profitable) and in the stage of growth or stable economic development.

This method is less applicable to the valuation of enterprises suffering systematic losses (although a negative value of the value of the business may be a fact for making management decisions). Reasonable care should be taken when using this method to evaluate new ventures, however promising. The lack of retrospective earnings makes it difficult to objectively predict the future cash flows of the business.

The main stages of an enterprise valuation using the discounted cash flow (DP) method:

Stage 1. Choosing a cash flow model.

When evaluating a business, we can apply one of two cash flow models: DP for equity capital or DP for all invested capital. In both models, the cash flow can be calculated both on a nominal basis (at current prices) and on a real basis (taking into account the inflation factor).

Stage 2. Determination of the duration of the forecast period.

The forecast period is taken until the company's growth rates stabilize (it is assumed that there should be stable long-term growth rates or an endless stream of income in the post-forecast period). The longer the forecast period, the more mathematically justified the final value of the current value of the enterprise, but the more difficult it is to predict specific amounts of revenue, expenses, inflation rates, and cash flows. According to the practice prevailing in countries with developed market economies, the forecast period for assessing an enterprise can be, depending on the purposes of the assessment and a specific situation, from 5 to 10 years. In countries with economies in transition, in conditions of instability, where adequate long-term forecasts are especially difficult, it is permissible to reduce the forecast period to 3 years. For the accuracy of the result, it is necessary to split the forecast period into smaller units of measurement: half a year or a quarter.

Stage 3. Retrospective analysis and forecast of gross sales proceeds.

The analysis of gross proceeds and its forecast involve taking into account a number of factors: the range of products; production volumes and product prices; retrospective growth rates of the enterprise; demand for products; inflation rate; available production facilities; prospects and possible consequences of capital investments; the general situation in the economy, which determines the prospects for demand; the situation in a particular industry, taking into account the existing level of competition; the share of the evaluated company on the market and market trends; long-term growth rates in the post-forecast period; plans of the managers of the given enterprise. The general rule should be adhered to, which is that the forecast of gross revenue should be logically consistent with the retrospective performance of the enterprise and the industry as a whole.

Stage 4. Analysis and forecast of costs.

Here they first study the structure of costs, taking into account the retrospective, including the ratio of fixed and variable costs; estimate inflation expectations for each cost category; study one-time and extraordinary items of expenditure; determine depreciation charges based on the current availability of assets and from their future growth and disposal; calculate the cost of paying interest based on the projected levels of debt; comparing the projected costs with those for competitors or with similar industry averages. Costs can be classified on various grounds, but two classifications of costs are important for business valuation: 1) Classification of costs into fixed and variable; 2) Classification of costs for direct and indirect (used to classify costs for a certain type of product). From the point of view of the concept of business value management, cost analysis allows you to identify bottlenecks and reserves for their reduction, control the cost formation process, and, as a result, effectively manage costs.

Stage 5. Investment analysis and forecast.

It is necessary to conduct for the compilation of cash flows, since the activities of the enterprise in the long term, as a rule, are accompanied by various investment costs. Including can be taken into account:

Capital expenditures, which include the cost of replacing existing assets as they are depreciated or major repairs (projected based on an analysis of the remaining asset lives or equipment condition);

Acquisition or construction of assets to increase production capacity in the future according to development plans or business plans of the company;

The need to finance additional working capital requirements (based on the forecast of changes in sales and output or according to the company's development plans);

The need to attract financing (for example, through an additional issue of securities) or to repay long-term loans (the forecast is made on the basis of studying development plans, existing levels of debt and schedules for their repayment).

Stage 6. Calculation of the amount of cash flow for each year of the forecast period.

There are two main methods for calculating the amount of cash flow:

1) indirect (element-by-element) analyzes the cash flow by line of business, when each component of the cash flow is predicted taking into account management plans, investment projects, identified trends, extrapolation is possible for individual elements, etc. At the same time, proceeds from the sale of products (works, services) are projected using the methods of extrapolating industry statistics (industry growth rates) and planning. For forecasting fixed costs - extrapolation, analysis of a fixed level of fixed costs, planning elements. To predict variable costs, extrapolation, analysis of the retrospective share of variable costs in sales proceeds, and planning elements are used.

2) The direct (holistic) method is based on a retrospective analysis of the cash flow, when the values ​​of the cash flow for the previous three to five years are calculated with their further extrapolation or, in agreement with the administration of the enterprise, the growth rate of the cash flow as a whole is predicted. The following variation of the holistic method is usually applied: first, the appraiser builds a trend for the entire forecasting period, then, if necessary, makes adjustments (for the purchase of equipment and the corresponding change in depreciation deductions, for income from the planned sale of unused tangible assets, the stage of the enterprise life cycle, etc.) ... The holistic method in the valuation report can be reflected as follows: “After studying the dynamics of cash flow over the past three years, the situation in the industry and discussing the plans of management, the Valuer assumed the following: the growth of the company's cash flow in the first forecast year will be 25%, in the second - 10%, by the end of the third year, this growth will slow down, amounting to 3% per year and the average annual growth rate in the post-forecast period will remain at the level of 3% per year ”.

The element-by-element method is more accurate, but also more complex.

In cases where the information for the assessment is not provided in full, the appraiser is allowed to use more simplified methods: the arithmetic mean method, the weighted average method.

7 stage. Determination of the discount rate.

From the technical point of view, i.e. mathematically, the discount rate is the interest rate used to recalculate future income streams (there may be several of them) into a single value of the current (today's) value, which is the basis for determining the market value of the business. In the economic sense, the role of the discount rate is the rate of return on capital invested in investment objects of comparable risk level required by investors. If we consider the discount rate on the part of an enterprise as an independent legal entity, separate from both the owners (shareholders) and from creditors, then we can define it as the cost of attracting capital from various sources by the enterprise.

The discount rate or the cost of raising capital should be calculated taking into account three factors: the presence of different sources of attracted capital, which require different levels of compensation; the need for investors to take into account the cost of money over time; risk factor. In this case, risk is understood as the degree of probability of receiving expected future income.

There are various methods for determining the discount rate, the most common of which are:

1) If cash flow is used for equity:

Capital asset valuation model;

Cumulative construction method;

2) If the cash flow is used for all invested capital:

Weighted average cost of capital model.

In accordance with the Capital Assets Pricing Model (CAPM - in the commonly used abbreviation for English language) the discount rate is found by the formula:

 - beta coefficient (is a measure of systematic risk associated with macroeconomic and political processes in the country);

R m is the total profitability of the market as a whole (the average market portfolio valuable papers);

S 1 - award for small businesses;

S 1 company-specific risk premium;

C - country risk.

The method of cumulative construction of the considered individual discount rate differs from the capital asset valuation model only in that, in the structure of this rate, the aggregate premium for investment risks is added to the nominal risk-free interest rate, which consists of premiums for individual “unsystematic” ones related specifically to this project, risks. ... The calculation of the discount rate by cumulative construction can be expressed by the following formula:

where R is the rate of return required by the investor (on equity);

R f - risk-free rate of return;

S 1, S 2 ... S n - premiums for the risk of investing in the assessed company, including those related to both general factors for the industry, economy, region, and the specifics of the assessed company (risk associated with the quality of general management, investment management risk , the risk of non-receipt of income, the risk of illiquidity of the object, etc.).

In this case, the risk premiums are determined by an expert method after a thorough risk analysis for each group of factors.

As a risk-free rate of return in world practice, the rate of return on long-term government debt obligations (bonds or bills) is usually used; the rate on investments characterized by the lowest level of risk (the rate on deposits of a bank with a high degree of profitability, for example, Sberbank), etc. For an investor, it represents an alternative rate of return, which is characterized by a practical absence of risk and a high degree of liquidity. The risk-free rate is used as a starting point, to which the assessment of various types of risk characterizing investments in a given enterprise is tied, on the basis of which the required rate of return is built.

For the cash flow for all invested capital, a discount rate is applied equal to the sum of the weighted rates of return on equity and borrowed funds (the rate of return on borrowed funds is the bank's interest rate on loans), where the weights are the shares of borrowed and own funds in the capital structure. This discount rate is called the Weighted Average Cost of Capital (WACC). The weighted average cost of capital is calculated using the following formula:

(1.3)

Where r j is the cost of the j-source of capital,%;

d j - the share of the j-source of capital in general structure capital.

In this case, the cost of borrowed capital is determined taking into account tax effects:

Where r is the cost of raising borrowed capital (interest rate on a loan);

t NP is the corporate income tax rate.

Attraction cost share capital(preferred shares, ordinary shares) is determined by their level of return to shareholders.

Stage 8. Calculation of the value in the post-forecast period.

Determination of value in the terminal period is based on the premise that the business is capable of generating income beyond the forecast period. With effective management of an enterprise, its life span tends to infinity. It is impractical to forecast for several tens or hundreds of years ahead, since the longer the forecasting period, the lower the forecast accuracy. It is assumed that after the end of the forecast period, business income will stabilize and in the residual period there will be stable long-term growth rates or infinite uniform income. In order to take into account the income that the business can bring outside the forecast period, the cost of the reversion is determined.

Reversal is income from a possible resale of property (enterprise) at the end of the forecast period or the value of property (enterprise) at the end of the forecast period.

Depending on the prospects for business development in the post-forecast period, one of the following methods of calculating its value at the end of the forecast period is selected:

1) At the residual value. It is applied only if the bankruptcy of the company is expected in the post-forecast period with the subsequent sale of existing assets. The costs associated with liquidation and the urgency discount in the event of urgent liquidation are included.

2) Based on the value of net assets. Can be used for stable business, the main characteristic of which are significant tangible assets (capital-intensive production), or if at the end of the forecast period the sale of the company's assets is expected at market value.

3) The method of the alleged sale. Cash flow is converted into value indicators using special ratios obtained from the analysis of historical sales data of comparable companies. In the Russian market, due to the small amount of market data, the application of the method is problematic.

4) Gordon's model. The most commonly used model is based on a forecast of stable income in the residual period and assumes that the depreciation and capital expenditures are equal if the company is expected to go bankrupt in the post-forecast period with the subsequent sale of existing assets. In Gordon's model, post-forecast annual income is capitalized into values ​​using a capitalization ratio calculated as the difference between the discount rate and long-term growth rates. In the absence of growth rates, the capitalization ratio will be equal to the discount rate. Calculations are carried out according to the formula:

where FV is the expected value in the post-forecast period;

СF n +1 - cash flow of income for the first year of the post-forecast (residual) period;

DR is the discount rate;

g - long-term (conditionally constant) growth rates of monetary

flow in the residual period.

Conditions for applying the Gordon model:

1) income growth rates are stable;

2) capital investments in the post-forecast period are approximately equal to depreciation deductions;

3) the growth rate of income does not exceed the discount rate, otherwise the model estimate will give irrational results.

4) income growth rates are moderate, for example, do not exceed 3-5%, since large growth rates are impossible without additional capital investments, which this model does not take into account. In addition, consistently high income growth rates for an indefinitely long period of time are hardly realistic.

Stage 9. Calculation of the present values ​​of future cash flows and the value in the post-forecast period.

Current (present, discounted, present) value - the value of the company's cash flows and reversals, discounted at a certain discount rate to the date of valuation. The fair value calculations are the multiplication of the cash flow (CF) by the fair value of the unit (DF) factor corresponding to period n, taking into account the selected discount rate (DR). The discounting of the reversal value is always carried out at the discount rate taken at the end of the forecast period, due to the fact that the residual value (regardless of the method of its calculation) is always a value as of a specific date - the beginning of the final forecast period, i.e. the end of the last year of the forecasting period.

When applying the method of discounted cash flows in the assessment, it is necessary to summarize the present value of the periodic cash flows that the subject of valuation brings in the forecast period and the current value of the business in the post-forecast period. Thus, the preliminary value of the business value consists of two components - the present value of cash flows during the forecast period and the current value of the value in the post-forecast period:

(1.6.)

Stage 10. Final amendments

After determining the preliminary value of the enterprise value, the final amendments must be made to obtain the final market value. Among them, two stand out: an adjustment for the value of the value of non-performing assets and an adjustment for the amount of equity working capital.

As a result of the valuation of the entity using discounted cash flows, the value of the controlling liquidity shareholding is obtained. If a non-controlling stake is being evaluated, then it is necessary to make allowances for the lack of control rights.

The second method of the income approach is the PROFIT (INCOME) CAPITALIZATION METHOD- is based on the basic premise that the value of a share of ownership in an enterprise is equal to the present value of future income that this property will bring. From the position of Gryaznova A.G., Fedotova M.A. and other method of capitalization of profit is most suitable for situations in which it is expected that the company over the long term will receive approximately the same amount of profit (or the rate of its growth will be constant). Compared to the DCF method, the income capitalization method is simpler, since it does not require the preparation of medium- and long-term income forecasts, however, its application is limited to steep enterprises with relatively stable incomes, the sales market for which is well-established and no significant changes are expected in the long term. Therefore, unlike real estate appraisal, this method is rarely used in business appraisal.

The income capitalization method is implemented by capitalizing the future normalized cash flow or capitalizing the future average profit:

The income (profit) capitalization method also consists of several stages:

Stage 1. Justification of the stability (relative stability) of income generation is carried out on the basis of the analysis of normalized financial statements. Basic documents for analysis financial statements of the enterprise are the balance sheet and the statement of financial results and their use. For the purpose of evaluating an operating enterprise, it is desirable to have these documents for the last three years. Reporting normalization - adjustments for various extraordinary and non-recurring items in both the balance sheet and the income statement and their use, which were not regular in the company's past activities and are unlikely to be repeated in the future.

Stage 2. Selecting the type of income to be capitalized. In business valuation, capitalized income can be revenue or indicators that somehow take into account depreciation charges: net profit after taxes, profit before taxes, cash flow. Capitalization of profits is most suitable for situations in which it is expected that the enterprise will receive approximately the same amount of profit over the long term.

Stage 3. Determination of the amount of capitalized income (profit).

The following can be chosen as the amount of income subject to capitalization:

1) the amount of income projected one year after the date of assessment;

2) the average value of the selected type of income, calculated on the basis of retrospective (for example, for the last few reporting years 5-8 years) and, possibly, forecast data.

3) income of the last reporting year.

Determination of the size of the projected normalized income is carried out using statistical formulas for calculating a simple average, weighted average or extrapolation method.

Stage 4. Calculation of the capitalization rate.

The capitalization rate is a coefficient that converts the income of one year into the value of the object. The capitalization rate is characterized by the ratio of annual income and property value:

where R is the capitalization rate;

I - expected income for one year after the date of assessment;

PV is the cost.

The capitalization rate for an entity is usually derived from the discount rate by subtracting the expected average annual growth rate of profit or cash flow (whichever is capitalized). Accordingly, for the same enterprise, the capitalization rate is usually lower than the discount rate. If the income growth rate is assumed to be zero, the capitalization rate will be equal to the discount rate. So, in order to determine the capitalization rate, you first need to calculate the appropriate discount rate using possible methods: capital asset valuation model; the method of cumulative construction or the model of the weighted average cost of capital. With a known discount rate, the capitalization rate is generally determined using the following formula:

Where DR is the discount rate;

g - long-term growth rate of profit or cash flow.

Stage 5. Capitalization of income and determination of the preliminary value of the cost. The preliminary value of the cost is calculated using the formula:

(1.10.)

Step 6. Making adjustments for the presence of non-performing assets (if any) and for the controlling or non-controlling nature of the assessed share and for lack of liquidity (if necessary). Adjustments for non-performing assets require an assessment of their market value in accordance with accepted methods for a specific type of asset (real estate, machinery and equipment, etc.).

Market (comparative) approach tobusiness valuation

At income approach the value of a business is determined on the basis of the income that the owner may receive in the future, including proceeds from the sale of property that is unnecessary to generate these income. This “surplus” property is called surplus or non-performing assets.

The income approach is the main one for assessing the market value of existing enterprises, which are not planned to be closed after their resale to new owners.

The higher the income brought by the subject of assessment, the greater its market value. At the same time, the duration of the period for obtaining a possible income, the degree and type of risks accompanying the process of earning income, is of great importance.

Usually means net income(Income Expenses).

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Measuring income

The projected business income can be accounted for as:

• accounting profits (losses)
• cash flows

Income, expressed in terms of cash flows, allows you to more accurately predict future income and estimate the value of the enterprise. This measurement of income is called financial or investment - as opposed to accounting.

One of the main reasons for the preference for the financial measurement of income is a significant distortion of the accounting calculation of profits due to the possibility of accelerated and delayed depreciation of fixed assets, taking into account the cost of purchased resources in the cost of production using the LIFO and FIFO methods.

Methods for assessing the cost of the income approach

The income approach uses two methods:

• . Based on forecasting flows from a given business, which are then discounted at a rate corresponding to the rate of return required by the investor.
• Capitalization method. The essence of the capitalization method is to determine the average annual income and the capitalization rate, on the basis of which the market value of the company is calculated.

The discounted cash flow method is used to calculate the value at the initial (forecast stage). At this stage, it is assumed that the income of the evaluated business is unstable and may change for various reasons, for example:

• Implementation of investment projects at the enterprise. In this case, it can be observed as a decrease in income with their subsequent increase due to the introduction of new production lines and a monotonous (without decrease) increase in income, if the implementation of the investment project does not lead to a reduction in existing production.
• Income growth due to more effective use available capacities.

The capitalization method is used to calculate the value of the assessed business in the terminal forecast period, when income is constant or there is a steady growth in income at a constant rate.

The total estimate of the business value is obtained by adding the cost in the forecast period and the cost in the post-forecast period. After that, a number of adjustments are taken into account.

Finally, within the framework of the income approach, the value of the assessed business is determined as follows:

Business value =

Applying other approaches to business valuation

As well as profitable approach for business valuation, it is useful to use and. In some cases, costly or comparative approaches may be more accurate or more efficient. In addition, each of the three approaches can be used to test the cost estimates obtained by the other approaches.

Valuations of any asset: direct market comparison approach, income approach and cost approach (see Diagram # 1).

Diagram # 1. Approaches to assessing the value of the company.

In Russia, appraisal activities are regulated by the Appraisal Law and Federal Appraisal Standards (FSO).

There are assessment methods in each approach. So the income approach is based on 2 methods: the capitalization method and the discounted cash flow method. The comparative approach consists of 3 methods: the capital market method, the transaction method and the industry coefficient method. The cost approach is based on 2 methods: the net assets method and the residual value method.

Income approach.

Income approach - a set of methods for assessing the value of the appraisal object, based on the determination of the expected income from the use of the appraisal object (clause 13 FSO No. 1).

In the income approach, the value of the company is determined on the basis of the expected future earnings and their reduction by discounting to the present value that the assessed company can bring.

The theory of present value was first formulated by the representative of the Salamanca school, Martin de Aspilcueta, and is one of the key principles of modern financial theory.

The discounted dividend model is fundamental to the discounted cash flow model. The discounted dividend model was first proposed by John Williams after the US crisis in the 1930s.

The DDM formula looks like this:

Where
Price - share price
Div - dividends
R - discount rate
g - growth rate of dividends

However, at the moment, it is very rare to use dividend payments to measure the fair value of share capital. Why? Because if you use dividend payments to estimate the fair value of share capital, then almost all shares in the stock markets around the world will seem overvalued to you for very simple reasons:

Thus, the DDM is more used these days to assess the fundamental value of a company's preferred stock.

Stephen Ryan, Robert Hertz and others in their article say that DCF model became the most common, since it has a direct connection with the theory of Modelyani and Miller, since free cash flow is a cash flow that is available to all holders of the company's capital, both debt holders and shareholders. Thus, with the help of DCF, both the company and the share capital can be valued. Next, we'll show you the difference.

The formula of the DCF model is identical to formula # 2, the only thing is free cash flow is used instead of dividends.

Where
FCF - Free Cash Flow.

Since we have moved on to the DCF model, let's take a closer look at the concept of cash flow. In our opinion, the most interesting classification of cash flows for assessment purposes is given by A. Damodaran.

Damodaran identifies 2 types of free cash flows that need to be discounted to determine the value of the company:

In order to move on, we already need to show the difference in company value and shareholder value. The company operates at the expense of the invested capital, and the invested capital can include both equity capital and different proportions of equity and borrowed capital. Thus, using FCFF, we determine the fundamental value of the invested capital. In the literature in English, you can find the concept of Enterprise value or the abbreviation EV. That is, the value of the company, taking into account the borrowed capital.

Formulas # 4, # 5 and # 6 show free cash flow calculations.

Where EBIT is profit before interest and income tax;

DA - depreciation;

Investments - investments.

Sometimes in the literature you can find another formula for FCFF, for example, James English uses formula No. 5, which is identical to formula No. 4.

Where
CFO - cash flow from operating activities(cash provided by operating activities);
Interest expense - interest expenses;
T is the income tax rate;
CFI - cash provided by investing activities.

Where
Net income - net profit;
DA - depreciation;
∆WCR - changes in the required working capital;
Investments - investments;
Net borrowing is the difference between received and repaid loans / borrowings

Formula # 7 shows how you can get the value of the share capital from the value of the company.

Where
EV is the value of the company;
Debt - debts;
Cash - cash equivalents and short-term investments.

It turns out that there are 2 types of valuation based on DCF cash flows depending on cash flows. Formula # 8 contains a model for assessing the company taking into account debts, and formula # 9 contains a model for assessing equity capital. To assess the fundamental value of a company or equity capital, you can use both formula # 8 and formula # 9 together with formula # 7.

Below are two-step assessment models:

Where
WACC - Weighted Average Cost of Capital

g - the rate of growth of cash flows that persist indefinitely

As you can see, instead of the abstract discount rate R, we have WACC (weighted average cost of capital) and Re (cost of equity) in equations # 11 and # 12, and this is no coincidence. As Damodaran writes, "the discount rate is a function of the expected cash flow risk." Since the risks of shareholders and the risks of creditors are different, it is necessary to take this into account in valuation models through the discount rate. Next, we will return to WACC and Re and take a closer look at them.

The problem with the two-stage model is that it makes the assumption that after a phase of rapid growth, stabilization immediately sets in, and then incomes grow slowly. Despite the fact that, according to the author's observations, in practice most analysts use two-stage models, it is more correct to use a three-stage model. The three-stage model adds a transition from rapid growth to stable income growth.

Damodaran in one of his teaching materials very well shows graphically the difference between two- and three-stage models (see Figure # 1).

Figure # 1. Two- and three-stage models.
Source: Aswath Damodaran, Closure in Valuation: Estimating Terminal Value. Presentation, slide # 17.

Below are three-stage models for assessing company value and equity:

Where
n1 - end of the initial period of rapid growth
n2 - end of the transition period

Let's go back to the discount rate. As we wrote above, for the purposes of discounting in the valuation of a company or share capital, WACC (weighted average cost of capital) and Re (cost of equity) are used.

The concept of the weighted average cost of capital WACC was first proposed by Modelyani and Miller in the form of a formula that looks like this:

Where
Re - the cost of equity
Rd - cost of borrowed capital
E - the value of equity
D - the value of the borrowed capital
T - income tax rate

We have already said that the discount rate shows the risk of expected cash flows, therefore, in order to understand the risks associated with the company's cash flows (FCFF), it is necessary to determine the capital structure of the organization, that is, what is the share of equity in the invested capital and what share borrows equity capital in inverted capital.

If a public company is analyzed, then it is necessary to take into account the market values ​​of equity and debt capital. For non-public companies it is possible to use the balance sheet values ​​of equity and debt capital.

After the capital structure has been determined, it is necessary to determine the cost of equity capital and the cost of borrowed capital. There are many methods for determining the cost of equity (Re), but the most often used is the capital asset pricing model (CAPM), which is based on the Markowitz portfolio theory. The model was proposed independently by Sharpe and Lintner. (see Formula # 16).

Where
Rf - risk-free rate of return
b - beta coefficient
ERP - Equity Investment Risk Premium

The CAPM model says that the expected return of an investor is made up of 2 components: a risk-free rate of return (Rf) and an equity investment risk premium (ERP). The risk premium itself is adjusted for the systematic risk of the asset. Systematic risk is indicated by the beta (b). Thus, if the beta coefficient is greater than 1, this means that the asset appears to be more risky than the market, and thus the investor's expected return will be higher. Well, if the beta coefficient is less than 1, this means that the asset appears to be less risky than the market and thus the investor's expected return will be lower.

Determining the cost of borrowed capital (Rd) does not seem to be a problem, if the company has bonds, their current yield can be a good guideline at what rate the company can attract borrowed capital.

However, as you know, companies are not always financed by financial markets, so A. Damodaran proposed a method that allows you to more accurately determine the current cost of borrowed capital. This method is often called synthetic. Below is the formula for determining the cost of borrowed capital using the synthetic method:

Where
COD - cost of borrowed capital
Company default spread - the spread of the company's default.

The synthetic method is based on the following logic. The coverage ratio of the company is determined and compared to publicly traded companies and the default spread (the difference between the current bond yield and the yield on government bonds) of comparable companies is determined. Next, the birzisk rate of return is taken and the found spread is added.

To value the company using free cash flows on equity (FCFE), the cost of equity (Re) is used as the discount rate.

So, we have described a theoretical approach to assessing the value of a company based on cash flows. As you can see, the value of the company depends on future free cash flows, discount rate and terminal growth rates.

Comparative approach

Comparative approach - a set of methods for appraising the value of the appraisal object based on a comparison of the appraisal object with objects - analogues of the appraisal object for which there is information on prices. An object - an analogue of the object of appraisal for the purpose of appraisal is an object that is similar to the object of appraisal in terms of the main economic, material, technical and other characteristics that determine its value (clause 14, FSO No. 1).

The company is evaluated on the basis of a comparative approach by the following algorithm:

1. Collection of information about the companies sold or their shareholdings;
2. Selection of analogous companies according to the criteria:
   • Industry similarities
   • Similar products
   • Company size
   • Growth prospects
   • Management quality
3. Carrying out financial analysis and comparison of the appraised company and similar companies in order to identify the closest analogues of the appraised company;
4. Selection and calculation of value (price) multipliers;
5. Formation of the final value.

A cost multiplier is a ratio that shows the ratio of the cost of invested capital (EV) or equity (P) to a company's financial or non-financial performance.

The most common multipliers are:

• P / E ( market capitalization to net profit)
• EV / Sales (company value to company revenue)
• EV / EBITDA (company value to EBITDA)
• P / B (market capitalization to book value of equity).

In the comparative approach, it is customary to distinguish three assessment methods:

• Capital market method;
• Method of transactions;
• Industry ratio method.

The capital market method relies on the use of stock market counterparts. The method has the advantage of using factual information. What is important, this method allows you to find prices for comparable companies on almost any day, due to the fact that securities are traded almost every day. However, it should be emphasized that using this method we estimate the value of a business at the level of a non-controlling stake, since controlling stakes are not sold on the stock market.

The transaction method is a special case of the capital market method. The main difference from the capital market method is that in this method the level of the controlling stake is determined, since the analogs of the companies are selected from the corporate control market.

The Industry Ratio Method is based on recommended ratios between price and specific financial performance... Industry ratios are calculated based on long-term statistical data. Due to the lack of sufficient data, this method is practically not used in the Russian Federation.

As mentioned above, using the capital market method, the value of a freely realizable minority stake is determined. Therefore, if an appraiser needs to obtain a value at the level of a controlling stake and information is available only for public companies, then it is necessary to add a control premium to the value calculated by the capital market method. Conversely, to determine the value of the minority stake from the value of the controlling stake that was found using the transaction method, it is necessary to deduct the non-controlling interest discount.

Cost approach

The cost approach is a set of methods for assessing the value of the appraisal object based on determining the costs necessary for reproduction or replacement of the appraisal object, taking into account wear and tear and obsolescence. The costs of reproduction of the appraisal object are the costs necessary to create an exact copy of the appraisal object using the materials and technologies used to create the appraisal object. The costs of replacing the appraisal object are the costs required to create a similar object using materials and technologies used on the date of appraisal (clause 15, FSO No. 1).

I would like to immediately note that the value of the enterprise based on the residual value method does not correspond to the value of the residual value. The liquidation value of the appraisal item based on clause 9 of the Federal Security Service No. 2 reflects the most probable price at which this appraisal item can be alienated during the exposure period of the appraisal item, which is less than the typical exposure period for market conditions, in conditions when the seller is forced to make a property transfer transaction. When determining the liquidation value, in contrast to the determination of the market value, the influence of extraordinary circumstances forcing the seller to sell the appraisal object on terms that do not correspond to market conditions is taken into account.

Used Books

1. Lintner, John. (1965), Security Prices, Risk and Maximal Gains from Diversification, Journal of Finance, December 1965, 20 (4), pp. 587-615.
2. M. J. Gordon, Dividends, Earnings, and Stock Prices. The Review of Economics and Statistics
3. Marjorie Grice-Hutchinson,
4. Sharpe, William F. (1964), Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk, The Journal of Finance, Vol. 19, No. 3 (Sep., 1964), pp. 425-442.
5. Stephen G. Ryan, Chair; Robert H. Herz; Teresa E. Iannaconi; Laureen A. Maines; Krishna Palepu; Katherine Schipper; Catherine M. Schrand; Douglas J. Skinner; Linda Vincent, American Accounting Association's Financial Accounting Standards Committee Response to FASB Request to Comment on Goodwill Impairment Testing using the Residual Income Valuation Model. The Financial Accounting Standards Committee of the American Accounting Association, 2000.,
6. Vol. 41, No. 2, Part 1 (May, 1959), pp. 99-105 (article consists of 7 pages)
7. I.V. Kosorukova, S.A. Sekachev, M.A. Shuklina, Valuation of Securities and Business. MFPA, 2011.
8. I. V. Kosorukova Lecture notes. Business value appraisal. IFRU, 2012.
9. Richard Brailey, Stuart Myers, Principles corporate finance... Library "Troika Dialog". Olymp-Business Publishing House, 2007.
10. William F. Sharp, Gordon J. Alexander, Jeffrey W. Bailey, Investments. Infra-M Publishing House, Moscow, 2009.

Proposed New International Valuation Standards. Exposure Draft. International Valuation Standard Council, 2010.

Marjorie Grice-Hutchinson, The School of Salamanca Reading in Spanish Monetary Theory 1544-1605. Oxford University Press, 1952.

John Burr Williams, the Theory of Investment Value. Harvard University Press 1938; 1997 reprint, Fraser Publishing.

Capitalization Apple on 4/11/2011.

Stephen G. Ryan, Chair; Robert H. Herz; Teresa E. Iannaconi; Laureen A. Maines; Krishna Palepu; Katherine Schipper; Catherine M. Schrand; Douglas J. Skinner; Linda Vincent, American Accounting Association's Financial Accounting Standards Committee Response to FASB Request to Comment on Goodwill Impairment Testing using the Residual Income Valuation Model. The Financial Accounting Standards Committee of the American Accounting Association, 2000.

Asvat Damodaran, Investment Appraisal. Tools and methods for evaluating any assets. Alpina Publisher, 2010

Damodaran in his work uses the term firm, which is identical to our term company.

James English, Applied Equity Analysis. Stock Valuation Techniques for Wall Street Professionals. McGraw-Hill, 2001.

If the company has a minority interest, then the minority interest must also be deducted from the company's value in order to obtain the value of the share capital.

Z. Christopher Mercer and Travis W. Harms, edited by V.M. Ruthauser, Integrated Business Valuation Theory. Publishing house Maroseyka, 2008.

M. J. Gordon, Dividends, Earnings, and Stock Prices. The Review of Economics and Statistics Vol. 41, No. 2, Part 1 (May, 1959), pp. 99-105 (article consists of 7 pages)

Z. Christopher Mercer and Travis W. Harms, edited by V.M. Ruthauser, Integrated Business Valuation Theory. Publishing house Maroseyka, 2008.

Modigliani F., Miller M. H. The cost of capital, corporation finance and the theory of investment. American Economic Review, Vol. 48, pp. 261-297, 1958.

The income approach is considered the most acceptable from the point of view of investment motives, since any investor who invests in an operating enterprise ultimately buys not a set of assets, consisting of buildings, structures, machinery, equipment, intangible values, etc., but a stream of future income, allowing him to recoup the investment, make a profit and increase his well-being. From this point of view, all enterprises, no matter what sectors of the economy they belong to, produce only one type of marketable product - money.

The income approach is a set of methods for appraising the value of the appraisal item, based on the determination of the expected income from the appraisal item. business profitable international

The expediency of using the income approach is determined by the fact that the summation of the market values ​​of the company's assets does not allow reflecting the real value of the enterprise, since it does not take into account the interaction of these assets and the economic environment of the business.

The income approach provides for the establishment of the value of a business (enterprise), an asset or a share (contribution) in equity capital, including charter capital, or a security by calculating the expected income adjusted to the date of assessment. This approach is used when it is possible to reasonably determine the future cash income of the appraised company.

The methods of the income approach to business valuation are based on determining the present value of future income. The main methods are:

• - income capitalization method;
• - the method of discounting cash flows.

When assessing the income capitalization method, the level of income for the first forecast year is determined and it is assumed that the income will be the same in the subsequent forecast years (if the discounted cash flow method is used, the level of income is determined for each year of the forecast period).

The method is used when evaluating companies that have accumulated assets that generate a stable income.

If it is assumed that future income will change over the years of the forecast period, when the enterprises implement an investment project that affects cash flows or are young, the discounted cash flow method is used. Determining the value of a business using this method is based on separate discounting of variable cash flows at different times.

It is assumed that a potential investor will not pay for this business an amount greater than the present value of future income from this business, and the owner will not sell his business at a price that is lower than the present value of the projected future income. As a result of interaction, the parties will come to an agreement on a market price equal to the current value of future income.

Cash flows are a series of expected recurring cash flows from the activities of an enterprise, rather than a one-time receipt of the entire amount.

Market valuation of a business largely depends on its prospects. It is the perspectives that make it possible to take into account the method of discounting cash flows. This assessment method is considered the most acceptable from the point of view of investment motives and can be used to assess any operating enterprise. There are situations when it objectively gives the most accurate result of assessing the market value of an enterprise.

The results of the profitable approach allow business leaders to identify problems that inhibit business development; make decisions aimed at increasing income.

Consider practical use method of capitalization of profit by stages:

• - analysis of the financial statements of the enterprise;
• - determination of the amount of profit that will be capitalized;
• - calculation of the capitalization rate;
• - determination of the preliminary value of the value of the business of the enterprise;
• - making final amendments.

The analysis of the financial statements of the enterprise is carried out on the basis of the balance sheet of the enterprise and the statement of financial results. It is desirable to have these documents at least for the last three years. When analyzing the financial documentation of an enterprise, it is necessary to normalize it, i.e. to make adjustments for non-recurring and extraordinary items, both in the balance sheet and in the income statement, which were not regular in the company's past activities and are unlikely to be repeated in the future. In addition, if the need arises, you can transform the financial statements of the enterprise, i.e. present it in accordance with generally accepted accounting standards.

Determining the amount of profit that will be capitalized is actually the choice of the period of time for which the profit is calculated:

• - profit of the last reporting year;
• - profit of the first forecast year;
• - the average profit for the last 3-5 years.

In most cases, the profit of the last reporting year is used.

The calculation of the capitalization rate is usually based on the discount rate by deducting the expected average annual growth rate of profit. To determine the discount rate, the following methods are most often used:

• - capital asset valuation model;
• - model of cumulative construction;
• - the model of the weighted average cost of capital.

Determination of the preliminary value of the value of the business of the enterprise is carried out according to a simple formula:

V is the cost;

I is the amount of profit;

R is the capitalization rate.

Final adjustments (if necessary) are made for non-functional assets (those assets that do not participate in generating income), for lack of liquidity, for a controlling or non-controlling interest in the assessed shares or interests.

The profit capitalization method when evaluating an enterprise's business is usually used when there is sufficient data to determine the normalized cash flow, the current cash flow is approximately equal to future cash flows, and the expected growth rate is moderate or predictable. This method is most applicable to enterprises that bring stable profits, the value of which changes insignificantly from year to year (or the rate of profit growth is constant). Unlike real estate appraisal, this method is used quite rarely in business appraisal of enterprises and mainly for small enterprises, due to significant fluctuations in the magnitude of profits or cash flows from year to year, which is typical for most large and medium-sized enterprises.

The valuation of the company's business using the discounted cash flow method is based on the assumption that the potential buyer will not pay for this enterprise an amount greater than the present value of future income from the business of this enterprise. The owner is unlikely to sell his business for less than the present value of the projected future income. As a result of interaction, the parties will come to an agreement on a price equal to the present value of the company's future income.

Valuation of an enterprise using the discounted cash flow method consists of the following stages:

• 1. choice of a cash flow model;
• 2. determination of the duration of the forecast period;
• 3. retrospective analysis and forecast of gross revenue;
• 4. forecast and analysis of costs;
• 5. forecast and analysis of investments;
• 6. calculation of cash flow for each forecast year;
• 7. determination of the discount rate;
• 8. Calculation of the value of the cost in the post-forecast period.
• 9. calculation of the current values ​​of future cash flows and value in the post-forecast period;
• 10. making final amendments.

The choice of a cash flow model depends on whether it is necessary to distinguish between equity and debt capital or not. The difference is that interest on servicing borrowed capital can be allocated as an expense (in the cash flow model for equity capital) or taken into account in the income stream (in the model for all invested capital), and the amount of net profit changes accordingly.

The duration of the forecast period in countries with developed market economy usually it is 5 - 10 years, and in countries with economies in transition, in conditions of instability, it is permissible to reduce the forecast period to 3 - 5 years. As a rule, the forecast period is taken as long as the growth rate of the enterprise stabilizes (it is assumed that there is a stable growth rate in the post-forecast period).

Retrospective analysis and forecast of gross revenue requires consideration and consideration of a number of factors, the main ones of which are production volumes and product prices, demand for products, retrospective growth rates, inflation rates, investment prospects, the situation in the industry, the company's market share and total the situation in the economy. The forecast of gross revenue should be logically consistent with the historical indicators of the business of the enterprise.

Forecast and analysis of costs. On this stage the appraiser must study the structure of the enterprise's expenses, in particular the ratio of fixed and variable costs, assess inflation expectations, exclude one-time items of expenses that will not occur in the future, determine depreciation charges, calculate the cost of paying interest on borrowed funds, compare the projected costs with the corresponding indicators for competitors or the industry average.

Investment forecast and analysis includes three main components: own working capital ("working capital"), capital investments, financing needs and is carried out, respectively, based on the forecast of individual components of own working capital, based on the estimated remaining useful life of the assets, based on the funding needs of existing debt levels and debt repayment schedules.

The calculation of cash flow for each forecast year can be done in two ways - indirect and direct. The indirect method analyzes the cash flow by line of business. The direct method is based on the analysis of cash flows by items of income and expense, i.e. on accounting accounts.

The definition of the discount rate (the interest rate for converting future income into present value) depends on what type of cash flow is used as the basis. For the cash flow for equity, a discount rate is applied equal to the owner's required rate of return on equity; for the cash flow for all invested capital, a discount rate is applied equal to the sum of the weighted rates of return on equity and borrowed funds, where the weights are the shares of borrowed and equity in the capital structure.

For cash flow for equity, the most common methods for determining the discount rate are the cumulative construction method and the capital asset pricing model. For the cash flow for all invested capital, the weighted average cost of capital model is usually used.

When determining the discount rate by the cumulative method, the rate of return on risk-free securities is taken as the basis of calculations, to which is added additional income associated with the risk of investing in given view valuable papers. Then corrections are made (up or down) for the effect of quantitative and qualitative risk factors associated with the specifics of the given company.

In accordance with the capital asset valuation model, the discount rate is determined by the formula:

R = Rf + in (Rm - Rf) + S1 + S2 + C

R is the rate of return on equity required by the investor;

Rf is the risk-free rate of return;

Rm is the total profitability of the market as a whole (the average market portfolio of securities);

c - beta coefficient (a measure of systematic risk associated with macroeconomic and political processes in the country);

S1 - award for small businesses;

S2 is the risk premium for an individual company;

С - country risk.

According to the weighted average cost of capital model, the discount rate is determined as follows:

WACC = kd x (1 - tc) x wd + kpwp + ksws,

kd is the cost of the borrowed capital;

tc - income tax rate;

wd is the share of borrowed capital in the capital structure of the enterprise;

kp is the cost of raising equity capital (preferred shares);

wp is the share of preferred shares in the capital structure of the enterprise;

ks is the cost of raising equity capital (ordinary shares);

ws - the share of ordinary shares in the capital structure of the company.

The calculation of the value in the post-forecast period is carried out depending on the prospects for business development in the post-forecast period, using the following methods:

• - the method of calculating the liquidation value (if the bankruptcy of the company with the subsequent sale of assets is expected in the post-forecast period);
• - method of calculating the value of net assets (for a stable business with significant tangible assets);
• - the method of the proposed sale (recalculation of the projected cash flow from the sale to the current value);
• - the Gordon method (the income of the first final forecast year is capitalized into cost indicators using the capitalization ratio, calculated as the difference between the discount rate and long-term growth rates).

The calculation of the current values ​​of future cash flows and the value in the post-forecast period is made by summing the current values ​​of income that the object brings in the forecast period and the current value of the object in the post-forecast period.

Making the final adjustments - usually, these are adjustments for non-functional assets (assets that do not participate in generating income) and for the actual amount of equity working capital. If a non-controlling stake is being valued, then allowance must be made for the lack of control.

The discounted future cash flow method is used when the entity's future cash flows are expected to differ materially from current cash flows, when future cash flows can be reasonably determined, projected future cash flows are positive for most of the forecast years, and cash flows are expected to be in the most recent the year of the forecast period will be a significant positive value. In other words, this method is more applicable to income-generating enterprises with a certain history of economic activity, with unstable streams of income and expenses.

The discounted cash flow method is less applicable to the valuation of the business of enterprises suffering systematic losses (although a negative value of the value of the business can be an argument for making a decision). Some caution should also be exercised in applying this method when evaluating the business of new ventures, since the absence of a retrospective profit makes it difficult to objectively forecast future cash flows.

The discounted cash flow method is very complex and laborious process, however, all over the world it is recognized as the most theoretically substantiated method of evaluating the business of operating enterprises. In countries with developed market economies, when evaluating large and medium-sized enterprises, this method is used in 80 - 90% of cases. The main advantage of the method is that it is the only known valuation method that is based on the prospects for the development of the market in general and the enterprise in particular, and this is in the best interests of investors.

 

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