When evaluating an organization from the standpoint income approach the organization itself is considered not as a property complex, but as a business, a business that can make a profit. The valuation of the organization's business using the income approach is the determination of the present value of future income that will arise as a result of the use of the organization and (or) its possible further sale. Thus, the assessment from the standpoint of the income approach largely depends on the prospects for the business of the organization being assessed. When determining market value business of an organization, only that part of its capital that can generate income in one form or another in the future is taken into account. At the same time, it is very important to know at what stage of business development the owner will begin to receive income and what risk this entails.

The greatest difficulty in evaluating the business of a particular organization from the standpoint of the income approach is the process of forecasting income and determining the discount rate (capitalization) of future income. The advantage of the income approach in business valuation is that it takes into account the prospects and future conditions of the organization's activities (pricing for goods, future capital investments, market conditions in which the organization operates, etc.).

income approach presented by two main methods of evaluation - the method of discounted cash flows and the method of capitalization of profits (see Fig. 12.1).

Estimating the value of the organization's business by the method discounted cash flows (Discounted Cash Flow, DCF)(DCF) is most widely used under the income approach. This method is based on the assumption that a potential buyer will not pay more for an organization than the present value of future earnings from the organization's business, and the owner will not sell his business for less than the present value of projected future earnings. As a result of the interaction, the parties will come to an agreement on a price equal to the present value of the organization's future income.

Evaluation of an organization using the DCF method consists of the following steps:

• - model selection cash flow;
• - determination of the duration of the forecast period;
• - retrospective analysis of sales volume and its forecast;
• - forecast and analysis of expenses;
• - forecast and analysis of investments;
• - calculation of cash flow for each forecast year;
• - determination of the discount rate;
• - calculation of the value in the post-forecast period;
• - calculation of the current values ​​of future cash flows and their value in the post-forecast period;
• - making final corrections.

The choice of cash flow model depends on whether there is a need to distinguish between equity and debt capital. The difference is that interest on debt servicing can be allocated as an expense (in the cash flow model for equity) or included in the income stream (in the model for total invested capital). Accordingly, the amount of net profit changes.

The duration of the forecast period in countries with developed market economies is usually five to ten years, and in countries with economies in transition, in conditions of instability, it is permissible to reduce the forecast period to three to five years. As a rule, the period up to a stable growth rate of the organization is taken as the forecast period, and it is also assumed that a stable growth rate takes place in the post-forecast period.

A retrospective analysis and forecast of sales volume requires consideration and consideration of a number of factors, the main ones being production volumes and commodity prices, demand, growth rates, inflation rates, investment prospects, the situation in the industry, the organization's market share and the general situation in the economy. The sales forecast should be logically consistent with the history of the organization's business.

At the stage of forecasting and analyzing expenses, it is necessary to study the structure of the organization's expenses, in particular the ratio of fixed and variable costs, evaluate inflation expectations, exclude one-time items of expenses that will not occur in the future, determine depreciation, calculate the cost of paying interest on loans, compare projected expenses with the corresponding indicators of competitors or industry averages.

The forecast and analysis of investments includes three main components: own working capital- "working capital", capital investments, financing needs.

The calculation of cash flow for each forecast year can be performed by two methods - indirect and direct. indirect method is aimed at analyzing the cash flow in the areas of activity. direct method based on the analysis of cash flow by items of income and expense, i.e. on accounting accounts.

The definition of the discount rate (the interest rate for converting future earnings into present value) depends on what type of cash flow is used as the basis. For cash flow from equity, a discount rate is applied, which is determined by the owner as the rate of return on equity. For the cash flow from 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 debt and equity in the capital structure.

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

When determining the discount rate using the cumulative method, the calculation base is the rate of return on risk-free securities, to which is added additional income associated with the risk of investing in this type valuable papers. Then adjustments are made (in the direction of increase or decrease) for the effect of quantitative and qualitative risk factors associated with the specifics of this company.

According to the capital asset valuation model (Capital Assets Pricing Model,САРМ) the discount rate is determined by the formula

where R- the rate of return on equity required by the investor;

RF- risk-free rate of return;

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

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

• 51 - award for small organizations;
• 52 - premium for the risk characteristic of an individual company;

FROM- country risk.

According to the weighted average cost of capital model, the discount rate ( Weighted Average Cost of Capital, WACC) is defined as follows:

where kd- the cost of borrowed capital;

tc- income tax rate;

wd- the share of borrowed capital in the capital structure of the organization;

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

wp- the share of preferred shares in the organization's capital structure;

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

ws- share of ordinary shares in the organization's capital structure.

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

• - calculation method according to salvage value(if in the post-forecast period the company is expected to go bankrupt with the subsequent sale of assets);
• - method of calculation based on 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 into the current value);
• - Gordon's method (income of the first post-forecast year is capitalized into value indicators using the capitalization ratio calculated as the difference between the discount rate and long-term growth rates).

Calculation of the current values ​​of future cash flows and value in the post-forecast period is made by summing up the current values ​​of income that the object will bring in the forecast period, and the current value of the object in the post-forecast period.

The introduction of final adjustments is associated with the presence of non-functional assets that do not participate in generating income, and their impact on the actual value of equity working capital. In the case of valuation of a non-controlling stake, allowance must be made for the lack of control.

The discounted future cash flow method is applicable to income-producing organizations with a certain history economic activity, with unstable income and expenditure streams. This method is less applicable to the valuation of the business of organizations suffering systematic losses. Some caution should also be exercised in the application of this method when evaluating the business of new organizations, since the lack of a retrospective of earnings makes it difficult to objectively predict future cash flows.

The application of the discounted cash flow method is a very complex and time-consuming process, but it is recognized throughout the world as the most theoretically justified. In countries with developed market economies, this method is used in 80-90% of cases when evaluating large and medium-sized organizations. Its main advantage is that it takes into account the prospects for the development of the market in general and the organization in particular, which is most in the interests of investors.

Profit capitalization method is that the estimated value of the business of the operating organization is considered equal to the ratio of net profit to the chosen capitalization rate:

where V- business value;

I- the amount of profit;

R- capitalization rate.

The earnings capitalization method is usually used when there is sufficient data to determine current cash flow and the expected growth rate is moderate or predictable. This method is most applicable to organizations that bring stable profits, the value of which varies little from year to year or its growth rate is constant. The profit capitalization method in Russia is used quite rarely and mainly for small organizations, since for most large and medium-sized organizations there are significant fluctuations in profits and cash flows over the years.

The process of business valuation using the profit capitalization method includes the following steps:

• - analysis of the organization's financial statements;
• - determination of the amount of profit to be capitalized;
• - calculation of the capitalization rate;
• - determination of the preliminary value of the organization's business value;
• - making final corrections.

Analysis of the organization's financial statements is carried out on the basis of the balance sheet and income statement. It is necessary to normalize them, make adjustments for one-time and extraordinary items that were not regular in the past activities of the organization and the likelihood of their repetition in the future is minimal. In addition, it may be necessary to transform financial statements in accordance with generally accepted standards accounting (Generally Accepted Accounting Principles, GAAP).

When determining the amount of profit to be capitalized, the time period for which the profit is calculated is selected:

• - profit of the last reporting year;
• - profit of the first forecast year;
• - average value profits over the past three to five years.

The most part is used profit of the last reporting

The calculation of the capitalization rate is usually made on the basis of the discount rate by subtracting the expected average annual growth rate of earnings. To determine the discount rate, the methods already described when considering the discounted cash flow method are most often used: the capital asset valuation model, the cumulative construction model and the weighted average cost of capital model.

If necessary, make final adjustments for non-functional assets, lack of liquidity, as well as for a controlling or non-controlling stake in the shares or shares being valued.

Business valuation using any of the known methods is characterized by a high degree of subjectivity. However, the level of subjectivity and, accordingly, the accuracy of the calculation results are not the same in relation to various objects of assessment. Thus, when evaluating real estate, machinery and production equipment, it is possible to ensure a sufficiently high degree of reliability of the calculation results. To do this, you can use such well-developed and widely used approaches to valuation, such as the calculation of the amount of costs incurred, capitalization of profits and market comparative analysis.

As a rule, the appraiser almost always has at his disposal the necessary initial data on the sales that took place on the market of comparable real estate. For example, when evaluating a land plot allocated for the location of an enterprise, it is quite likely to find a number of sites with a similar profile of use, for which a comparative analysis can be carried out based on a comparison of areas or the length of the frontal boundary. The property being valued is a tangible object.

On the contrary, the assessment of any operating enterprise, as noted above, is subjective. As for closed companies, for which there is no express open market shares, in this case the problem of reasonable valuation becomes even more complicated. Although there are detailed methods for valuing such enterprises, they are not as well known and not as widely accepted as the methods used to value real estate and industrial equipment. The process of valuation of closed companies, whose shares are not listed on the stock market, is based more on the subjective opinion of the appraiser than similar procedures used in real estate valuation.

In addition, although one region may experience a large number of sales of the same type of companies, the factors affecting sales prices are much more difficult to measure using quantitative estimates than in the case of comparing real estate sales. The efficiency of the functioning of an enterprise to a large extent depends on the professionalism of the managers working on it, personal factors and many other intangible components. These factors are usually more difficult to account for than those that affect the value of real or movable property.

The financial strength of a company, the quality of management, the ability to change activities, intangible assets such as patents and licenses, and countless other components all require a highly individual approach. In addition, it is necessary to analyze the mutual influence of all these factors.

As a conclusion, it should be stated that there are no standard methods that could be applied to comparable data and that would guarantee a sufficiently high objectivity of the final assessment. In any case, business valuation will be subjective. The final conclusion about the value of the enterprise should be based on the sequence of judgments that the appraiser makes in the valuation process.

Valuation of large diversified companies managed by professional managers, presents a more complex problem than individual relatively small companies. When selling individual enterprises, standard valuation methods (formulas) that are widely used in market practice are usually used. This is due to the fact that such firms in most cases are small enterprises. retail or highly specialized objects of commerce. They have a significantly less complex production and management structure. In addition, they are significantly more numerous than large companies run by professional managers, and are therefore much more likely to be sold. Score over large companies, managed by managers, is much less often carried out using standard formulas.

Despite the subjective nature of the business valuation process, there are basic approaches and their composition of relevant methods that have gained recognition among professional appraisers. One such approach is the income approach to business valuation.

According to the American business valuation standard BSV-I, the following fairly successful interpretation of the concept of the income approach is given.

Income Approach to Business Valuation(income approach) is a general method for determining the value of an enterprise or its equity, within which one or more methods are used based on the recalculation of expected income (American standard BSV-VII). This assumes that the value of the business is equal to the present value of future earnings from owning the business.

To implement this method, a forecast is required regarding future cash receipts over a given number of years (forecast and post-forecast periods). The main goal that can be realized using the income approach is the need for investors to receive in the future a certain economic benefit (income, profit, dividends) from owning the acquired enterprise (business). To ensure the commensurability of multi-temporal cash flows, a discounting procedure is used. In this case, the level of risk from such ownership, which is one of the components in calculating the discount rate, must be taken into account.

The income approach is intended to establish the value of an operating enterprise as a whole or a share of ownership, or a package of securities by calculating the current value of all expected economic benefits. In other words, the income approach is based on the following principle: the value of the business being valued is equal to the current value of all future income from owning this business.

The income approach is quite well developed in theoretical terms. It has the necessary flexibility at the final stage of business valuation. It also makes it relatively easy to combine the calculation of fair market value and investment value using the equity or invested capital model for controlling or non-controlling interests, given the appropriate level of liquidity. It is advisable to use it to assess the value of a company when it generates significant income or profits as a result of its core activities.

When using the income approach, the property of the enterprise, which ensures its normal functioning, is not taken into account in the process of assessing the value of the business, since if it is sold, the income from the business will be impossible.

The income approach is designed to determine the value of a going concern based on the income that it is able to bring to its owner in the future, including proceeds from the sale of property (non-used assets) that will not be needed to generate these incomes. Future incomes (cash flows) are usually calculated taking into account the time factor of their receipt, provided by performing the discounting procedure at a certain rate (discount rate). The cash flows calculated in this way can subsequently be summed up. The added value of unused (surplus) assets is taken into account at the level of their market value.

The income approach is also considered the most acceptable in terms of investor requirements. The fact is that any buyer (investor) seeks to acquire not a set of certain assets (buildings, structures, equipment, intangible assets), but a ready-made, functioning business (with a professional labor collective, a certain reputation, trademarks, brand), which will allow him not only to return the invested funds, but to receive an acceptable net profit in the future. The composition of the main methods, usually referred to as income approach, is shown in fig. 6.1.

The use of the net cash flow discounting method is appropriate for assessing the value of objects that generate cash income that is not uniform over the years, and the net cash flow capitalization method is for objects that bring uniform and approximately equal incomes.

Rice. 6.1.

The approach under consideration is applicable only to objects that generate income, i.e. to those whose purpose of ownership is to generate income (for example, from the production and sale of products, leasing real estate, etc.).

Important characteristics when applying methods as part of the income approach are the volumes of estimated values. The cost may represent control(majority) or non-control(minority) share of the owner in the business (for example, in the form of an acquired block of shares). This circumstance necessitates an appropriate adjustment at the final stage of calculations. The procedure for its implementation will be described below.

Because the proceeds (the proceeds received by the business and the proceeds from the sale of the asset) are spread over time, to determine the value of the business at a particular date, all of these cash flows must be adjusted to a particular time period, i.e. discounted.

The discounting process (usually reduction to the initial time period) is based on the idea that today's ruble is worth more than tomorrow's ruble. The investor refuses current consumption in order to invest free money in the entrepreneurial business and receive income tomorrow. Discounting determines the amount that needs to be invested in the present in order to receive a certain amount of income in the future.

Business valuation method using discounted cash flows(DCF) is recommended for use when a significant change in future income is expected compared to income received from current operating (production) and other activities (for example, investment). The combination of the words "substantial change" means a significant increase or decrease in income growth against the prevailing pace. Business valuation according to this method is determined by finding net present value as the sum of discounted cash flows for all forecast periods and the capitalized cash flow of the post-forecast (terminal) period.

Besides, this method it is recommended to apply at enterprises that have a certain history of economic activity (preferably profitable) and are at the stage of growth or stable economic development. At the same time, it is not suitable for estimating the value of enterprises that systematically suffer losses (in Western terminology, receive negative profits), since in such a case there is no subject to discounting (positive cash flow). The inability to obtain retrospective estimates of income or profits makes it difficult to objectively predict future cash flows, and sometimes makes it simply impossible.

The method of discounting future cash income can be used for other purposes, in particular for calculating the cost trademark companies. This may be necessary, for example, when entering a trademark in authorized capital joint venture, as well as when using it as collateral for a loan issued by a commercial bank or financial company. The method of discounting future income has become widespread in foreign practice business valuation.

The main arguments in favor of applying the discounted cash flow method are as follows:

• practicality and applicability for any existing (successfully functioning) enterprise (32%);
• the possibility of analyzing cash flows in dynamics, as well as taking into account the time factor (20%);
• the ability to use elements of a long-term planning system (15%);
• target and strategic orientation (11%);
• ability to predict future cash flows
• (P%);
• other (11%).

The income approach includes a group of similar methods for estimating the value of a business that are associated with discounting. various kinds economic benefits. These are methods for discounting net cash flow and discounting future earnings.

A method for estimating the value of a business based on discounting future cash flows. There is a direct relationship between the market value of a company and discounted cash flow. Achieving the best value of this flow is associated with the need for long-term (systematic) attraction of economically expedient investments (capital) in terms of volume and management of this capital.

The discounted cash flow method can be used to assess the value of a business:

• with arbitrarily changing in time and unevenly incoming positive cash flows;
• if the enterprise is a large one- or multifunctional complex;
• when income and expenditure flows are seasonal.

Note that the net profit indicator only partially reflects the actual volume of cash flows, which are usually short-term. This is due to the fact that the volumes of depreciation deductions and financial flows due to the investment of free funds, usually invested in highly effective investment projects or highly profitable financial instruments (for example, securities), remain unaccounted for.

In the 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 methods for calculating the present (discounted) value. There are several formulations of the concept of "cash flow". In practice, the concepts of net cash flow (cash flow that can be distributed among shareholders) or actually paid dividends are used.

The discount rate should be adequate to the type of expected economic benefits under consideration. For example, pre-tax rates should be used to determine pre-tax economic benefits, post-tax rates should be used to identify net-tax benefit flows, and net cash flow rates to determine net cash flow benefits.

If the forecast income is expressed in nominal amounts (ie based on the use of current prices), then nominal rates should be used. If the forecasted income is presented in real amounts (taking into account changes in the price level), then real value rates should be used. Similarly, the expected long-term growth rate of income should be documented and expressed in nominal or real terms.

Calculations using the discounted future cash flow method are carried out according to the formula

where C p - the value of the enterprise (business);

D, - cash flow in the /-th period of ownership of the property;

/*/ - discount rate for the /-th period (/" =1, ..., l);

Сrev - the cost of reversion (i.e. proceeds from the sale of the business for the first year of the post-forecast period);

Greek - recapitalization rate.

Reversion cost determined by Gordon's formula:

where Dn - cash flow for the first year of the post-forecast period;

G - discount rate;

g- the company's long-term profit growth rate.

In the numerator of the Gordon formula, instead of cash flow, indicators such as next year's dividends and next year's profit can also appear.

The factors most commonly considered in determining growth rates (g) are:

• general economic conditions;
• the expected growth rate of the industry in which the company operates, including consideration of the expected growth rates of industries where the company's products are sold;
• synergistic benefits that become achievable through the acquisition procedure;
• retrospective growth rates of the company;
• management's expectations regarding future business growth in relation to the company's competitiveness, including the most cost-effective changes in technology, product mix, target market, pricing, sales and marketing methods.

When evaluating the factors listed above, it must be borne in mind that the method of capitalizing the results of one period ( SPCM) and terminal (post-forecast) cost in MPDM(the method of discounting the results of several periods) are focused on the use of the so-called infinite models. These models are based on the assumption that profits can be made indefinitely.

Example 6.2. It is known that the forecast period is 5 years, and the cash flow of the sixth year is 150 million rubles, the discount rate is 24%, the long-term growth rate is 2%. Determine the cost of the reversion.

Solution

Payment "G" in the case of a cash flow determined for the invested capital, it is performed according to the formula

where /* с - equity discount rate;

У с - share (share) of own capital;

/z - the discount rate of borrowed capital;

Y 3 - the share of borrowed capital.

Since enterprises are usually financed by both debt and equity, the costs of each must be determined. Borrowed capital is usually less expensive than own capital. This is due to the fact that it tends to remain less risky, and the cost of paying interest on obligations (debts) is usually deductible from taxes. Equity capital (for example, in the form of ordinary shares) is more risky than borrowed capital. In addition, it is rather difficult to accurately assess it, since ordinary shares do not have a fixed income, and their market (market) value can change significantly over time in the stock market.

A comparative assessment of the characteristics inherent in borrowed and equity capital is given in Table. 6.3.

The above differences in the rights and associated risks of providers of capital lead to corresponding differences in the costs of each of these sources of capital use.

The calculation of the value of a business can be carried out within two time periods: a certain forecast period and the post-forecast (terminal) period following it. For this case, the generalized formula is used:

where C p - the value of the enterprise (the value of the business);

DP pr - discounted value of the cash flow, typical for the forecast period;

DPPpr - the discounted value of the cash flow, typical for the post-forecast period.

The value received after the completion of a specific projected life of a business is also called extended cost(Dppr). To determine it, it is recommended to use a simplified formula:

where P h - net operating cost minus adjusted taxes;

WACC- weighted average cost of capital.

Comparative characteristics of debt and equity*

Table 6.3

The income method is the best way to determine the value of most companies. However, when determining the value of the enterprise on the basis of future income, it is important to take into account some nuances. In particular, determine the timing of the cash flow forecast, choose the cash flow calculation method, and determine the company's terminal value. After the calculations, it is worth checking if something was missed.

The essence of the income approach is that the value of the 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 with information about the upcoming business income: discounting and capitalization of cash flows. Let us dwell on discounting in more detail, it is more often used in practice to evaluate an existing enterprise. When using it, the procedure will be as follows:

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

Alexander Matyushin, Deputy Director of the Valuation Department of FBK Grant Thornton, tells more about what the income approach is.

Now let's talk about everything in order and pay special attention to the nuances of estimating the value of a business using the discounted cash flow method.

Determining the forecast period

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

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

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 accounting data. Turnovers on the relevant 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 for in cash. The method is accurate, but incredibly time-consuming and insufficiently informative - it does not allow to trace the transformation of net profit into cash flow. So the indirect method cash flow calculation preferred. We will talk about it further.

Classification of cash flows. 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 assuming that all funds invested in the company, including loans, are treated as equity. Hence, interest payments are not treated as a cash diversion. In the case of the cash flow forecast for equity money spent on servicing loans is taken into account as usual (see table).

table Scheme for calculating the cash flow by the indirect method

Which approach to take depends on how the company's current capital structure matches industry funding trends. In general, it is customary to use the cash flow calculation model for invested capital to estimate the value. If the company being valued is fundamentally different in terms of its ability to raise borrowed money from similar companies or works only on own funds, then it is more correct to predict the cash flow for equity. Such a rarity, so next we will talk about the forecast of cash flows for invested capital.

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

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

As for the cost, if we do not take into account the most time-consuming and reliable method of cost forecasting based on the shop cost (when there is a forecast for revenue in kind, it is possible to predict the cost based on volume), there are two more options that allow you 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 raw materials costs are 10 percent of revenue and the company is performing well, you can assume that the ratio will remain the same throughout the forecast period.

But in order to use both the trend method and the detailed method of estimating 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 10 percent of material costs mentioned above is the result of an unreasonably expensive purchase, and usually they do not exceed 9 percent. Of course, such costs should be excluded from the prime cost before the forecast is made and the costs should be increased by those amounts that were saved one-time, for example, in the course of two or three deliveries, it was possible to reduce transportation costs by 15 percent. And that is not all. Forecasting costs based on their share of revenue is justified only in relation to 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. But the change in variable costs will occur both due to the growth (decrease) in output volumes, and the inflation 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 (SOC):

Working Capital Equity = 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:

• "Accounts receivable" to reduce the amount of bad debts;
• deduct the cost of illiquid or damaged material assets from stocks. But it is possible that according to the reporting data, the reserves will have to be increased - by the amount of the excess of their market price on the valuation date over the cost at which they are recorded;
• reduce current assets by the amount of cash and short-term financial investments.

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

In order to predict the SOC, one can act in at least two ways. More accurate - itemized planning of current assets and liabilities using indicators of their turnover. If the revenue is planned, the existing turnover indicators will not change (assuming such an assumption is made by management), it is quite simple to calculate the values ​​​​of the indicators used in the calculation of own working capital. Another way is to plan big, 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 the 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 company being valued will at least maintain existing fixed assets (PE) in working condition. Accordingly, capital investments are the costs of their replacement, which can be determined individually for each fixed assets object or in aggregate.

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

The second option will give a less reliable result. The amount of investment is taken equal to the real depreciation. It is calculated as the ratio of the market value of all assets to the weighted average remaining life of the property according to RAS. And again, it is important to remember to take into account inflation in order to get the real market value of the fixed assets in the future (more precisely, for each year of the forecast period).

Important note. Everything that was said above about the investment forecast was built on the assumption that the company will not increase production capacity. And this is not always the case. Therefore, the procedure for calculating the investments required to expand activities is usually determined 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 is from 68 to 93 percent in relation to the cost of the same unit of capacity of facilities that are being built from scratch.

A few words about the forecast of depreciation. Depreciation can also be calculated individually for each inventory unit (based on the known rate and book value of fixed assets) until the moment of replacement of the fixed asset. After replacement, the calculation is carried out already taking into account the new initial cost.

Calculation of the terminal value of the company

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

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

V term
CF n– net cash flow in the last year (n) from the forecasting period, rub.;
Y– discount rate, units;
g– long-term growth rate 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 based on inflation, if the production capacity at the end of the forecast period is 100 percent loaded. Otherwise, in the indicator, in addition to price changes (as in finished products, and for materials and services written off to cost) 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 inflation indices that are included in the forecast period.

Business valuation

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

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

In estimating the value of a business, everything is simple, except for one thing. important point which is worth paying attention to. Since the vast majority of enterprises have relatively uniform income and expenses throughout the year, it is more correct to discount for 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. As a rule, the last value (discounted reversion) is less. In most cases, with a forecasting period of about five years, the current terminal value is no more than 50 percent of the total business value.

Latest adjustments

After all the above calculations have been completed, you need to make sure that nothing has been missed.
Forgotten assets. Usually, when determining the value of a company using the income approach, only cash flows from the main 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.

Pure debt. If the valuation of the company calculated cash flows 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 subtract borrowed funds, or rather the amount of net debt (credits and loans minus cash and short-term financial investments). Despite the apparent 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 listed as short-term loans due to the fact that they are renewed annually, etc.

The methodology 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 value of a company in a profitable way in Excel can be downloaded from the link at the end of the article in electronic version magazine "Financial Director".

Estimates of any asset: comparative (direct market comparison approach), profitable (income approach) and costly (cost approach) (see Diagram No. 1).

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

In Russia, valuation activities are regulated by the Law on appraisal activities And Federal Standards Ratings (FSO).

In each approach there are evaluation methods. 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 relies on 2 methods: the net asset method and the salvage value method.

income approach.

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

In the income approach, the value of a company is determined on the basis of expected future income and discounted to the current value that the company being valued can bring.

The present value theory was first formulated by Martin de Azpilcueta, a representative of the Salamanca school, 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 of the 1930s.

The DDM formula looks like this:

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

However, dividend payments are currently very rarely used to measure the fair value of equity. Why? Because if you use dividend payouts to estimate the fair value of equity, then almost all stocks in the stock markets around the world will appear overpriced to you for very simple reasons:

Thus, the DDM model is now more used to estimate the fundamental value of a company's preferred shares.

Stephen Ryan, Robert Hertz and others in their article say that the DCF model has become the most common, as it has a direct connection with the theory of Modeliani and Miller, since free cash flow is a cash flow that is available to all holders of the capital of the company, as holders of debts and equity holders. Thus, with the help of DCF, both the company and the share capital can be valued. Next, we will show what the difference is.

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

Where
FCF is free cash flow.

Since we have moved 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 evaluation purposes is given by A. Damodaran.

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

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

Formulas No. 4, No. 5 and No. 6 present free cash flow calculations.

Where EBIT is earnings 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 #5, which is identical to formula #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 flow from investment activities (cash provided by investing activities).

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

Formula #7 shows how you can get the cost of equity 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 the cash flows. In formula No. 8, the company's valuation model, taking into account debts, and in formula No. 9, the equity valuation model. To assess the fundamental value of a company or equity, you can use both formula No. 8 and formula No. 9 together with formula No. 7.

Below are two-stage evaluation models:

Where
WACC - weighted average cost of capital

g - the growth rate of cash flows that persists indefinitely

As you can see, we have WACC (weighted average cost of capital) and Re (cost of equity) instead of the abstract discount rate R in equations #11 and #12, and this is no coincidence. As Damodaran writes, “the discount rate is a function of the risk of expected cash flows.” Since the risks of shareholders and 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 assumes that after a phase of rapid growth, stabilization immediately occurs 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 transitional stage from rapid growth to stable income growth.

Damodaran in one of his training 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 the value of the company and equity:

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

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

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

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

We have already said that the discount rate shows the risk of expected cash flows, so 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 share of equity in invested capital and what share occupies borrowed capital in inverted capital.

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

After the capital structure is determined, it is necessary to determine the cost of equity capital and the cost of borrowed capital. To determine the cost of equity (Re), there are many methods, but the most commonly used is the CAPM (capital asset pricing model), which is based on the Markowitz portfolio theory. The model was proposed independently by Sharpe and Lintner. (see Formula No. 16).

Where
Rf is the risk-free rate of return
b - beta coefficient
ERP - equity risk premium

The CAPM model says that the expected return of an investor consists of 2 components: the risk-free rate of return (Rf) and equity risk premiums (ERP). The risk premium itself is adjusted for the systematic risk of the asset. Systematic risk is denoted by beta (b). Thus, if the beta is greater than 1, this means that the asset appears to be riskier than the market, and thus the investor's expected return will be higher. Well, if the beta is less than 1, this means that the asset is 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 referred to as synthetic. Below is the formula for determining the cost of borrowed capital by the synthetic method:

Where
COD - cost of borrowed capital
Company default spread – company default spread.

The synthetic method is based on the following logic. The coverage ratio of the company is determined and compared with 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 bersie rate of return is taken and the found spread is added.

To value a company using free cash flows to 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 company's value depends on future free cash flows, discount rate and post-forecast growth rates.

Comparative approach

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

The assessment of a company based on a comparative approach is carried out by the following algorithm:

1. Collection of information about sold companies or their blocks of shares;
2. Selection of peer companies according to the criteria:
   • Industry similarity
   • Related Products
   • Company size
   • Growth prospects
   • Management quality
3. Conducting financial analysis and comparison of the company being valued and peer companies in order to identify the closest analogues of the company being valued;
4. Selection and calculation of cost (price) multipliers;
5. Formation of the final value.

The value multiplier is a ratio showing the ratio of the value of invested capital (EV) or equity (P) to financial or non-financial indicator companies.

The most common multipliers are:

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

In a comparative approach, it is customary to distinguish three methods of evaluation:

• Capital market method;
• Transaction method;
• Method of branch coefficients.

The capital market method relies on the use of stock market analogue companies. The advantage of the method lies in the use of 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 with the help of this method, we evaluate the value of the 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 this method determines the level of the cost of the controlling stake, as the company's analogues are selected from the corporate control market.

The method of industry coefficients is based on the recommended ratios between the price and certain financial performance. The calculation of industry coefficients is based on statistical data for a long period. Due to the lack of sufficient data, this method is practically not used in the Russian Federation.

As mentioned above, the capital market method determines the value of a freely realizable minority interest. Therefore, if an appraiser needs to obtain a value at the level of a controlling interest 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 a minority stake, the discount for non-controlling nature must be deducted from the value of a controlling interest that was found using the transaction method.

Cost approach

Cost approach - a set of methods for estimating the value of the object of assessment, based on the determination of the costs necessary for the reproduction or replacement of the object of assessment, taking into account wear and tear and obsolescence. The costs of reproducing 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 cost of replacing the object of assessment are the costs necessary to create a similar object using materials and technologies in use at the date of assessment (clause 15, FSO No. 1).

I would like to immediately note that the value of the enterprise based on the liquidation value method does not correspond to the value of the liquidation value. The liquidation value of the appraised object on the basis of paragraph 9 of FSO No. 2 reflects the most probable price at which this appraised object can be alienated for the exposure period of the appraised object, which is less than the typical exposure period for market conditions, in conditions when the seller is forced to make a transaction for the alienation of property. When determining the liquidation value, in contrast to determining the market value, the influence of extraordinary circumstances is taken into account, forcing the seller to sell the appraised object on conditions that do not correspond to market ones.

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; Lauren 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. Kosorukova I.V. Lecture summary. Business valuation. IFRU, 2012.
9. Richard Braley, Stuart Myers, Principles of Corporate Finance. Troika Dialog Library. Olymp-Business Publishing House, 2007.
10. William F. Sharp, Gordon J. Alexander, Geoffrey W. Bailey, Investments. Publishing house Infra-M, 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 of Apple on 4/11/2011.

Stephen G. Ryan, Chair; Robert H. Herz; Teresa E. Iannaconi; Lauren 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.

Aswat Damodaran, Investment appraisal. Tools and methods for valuation of any assets. Alpina Publisher, 2010

Damodaran uses the term firm in his work, 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 subtracted from the value of the company to arrive at the cost of equity.

Z. Christopher Mercer and Travis W. Harms, scientific editors V.M. Ruthauser, Integrated Theory of Business Valuation. 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, scientific editors V.M. Ruthauser, Integrated Theory of Business Valuation. 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 based on the principle that a potential investor will not pay for this business an amount greater than the present value of future income from this business, i.e. the principle of expectation (foresight).

This approach to valuation is considered the most appropriate from the point of view of investment motives, since any investor who invests money in an operating enterprise, in the end, does not buy a set of assets, but a stream of future income that allows him to recoup the invested funds, make a profit and increase his well-being.

There are two methods for converting net income to present value: the capitalization of earnings method and the discounted future cash flow method.

Income capitalization method is used when future net incomes are expected to be approximately equal to current ones or their growth rates will be moderate and predictable. Moreover, incomes are quite significant positive values, i.e. business will grow steadily.

Discounted future cash flow method used when future cash flow levels are expected to be significantly different from current levels, future cash flows can be reasonably estimated, future cash flows are projected to be positive for most of the forecast years, cash flow in the last year of the forecast period is expected to be a significant positive .

Depending on the nature of the enterprise being valued, the share of shareholders in its capital or securities, as well as other factors, the Appraiser may consider net cash flow, dividends, various forms of profit as expected income.

When using the capitalization method, the representative amount of income is divided by the capitalization ratio to convert the income of the enterprise into its value. The capitalization ratio can be calculated based on the discount rate (subtracting the expected average annual growth rate of cash flow from the discount rate). The method of capitalization of income is most useful in a stable economic situation, characterized by constant uniform rates of income growth.

When it is not possible to make an assumption about the stability of income and / or their constant uniform growth rates, discounted cash flow methods are used, which are based on an estimate of income in the future for each of several time periods. These returns are then converted to value using a discount rate and the fair value technique.

A feature of the discounted cash flow method and its main advantage is that it allows you to take into account non-systematic changes in the income stream that cannot be described by any mathematical model. This circumstance makes it attractive to use the discounted cash flow method in the conditions of the Russian economy, which is characterized by strong volatility in prices for finished products, raw materials, materials and other components that significantly affect the value of the enterprise being valued.

Another argument in favor of using the discounted cash flow method is the availability of information to justify the income model ( financial statements enterprise, retrospective analysis of the enterprise being assessed, data marketing research communication services market, company development plans).

When preparing the initial data for evaluation using the income approach, the financial analysis of the enterprise is used, since it can be used to assess the features of the development of the enterprise, including:

Rates of growth;

Costs, profitability;

The required amount of own working capital;

The amount of debt;

Discount rate.

Discounted cash flow method

In general, the procedure for determining the value of a business based on the discounted cash flow method usually includes the following steps:

1. choice of the duration of the forecast period;

2. selection of the type of cash flow that will be used for the calculation;

3. performing an analysis of the gross income of enterprises and preparing a forecast of gross income in the future, taking into account the development plans of the organization being assessed;

4. performing an analysis of the enterprise's expenses and preparing a forecast of expenses in the future, taking into account the development plans of the organization being assessed;