Corporate Valuation

Chapter 9Cash Flow Profiles and Valuation Procedures

9.1 FROM BUSINESS MODELS TO CASH FLOW MODELS

The aim of this chapter is to show that financial valuation methods produce reliable estimates if and only if a specific in-depth business analysis is performed. Such an analysis has to embrace not only strategic and competitive aspects, which are the basis for any valuation task, but also financial dynamics, including the debt profile over time. Such analyses allow the expert to define the most suitable cash flow valuation method to be applied in any specific case. In particular, the analyst has to decide whether to use the aggregated versus the disaggregated approach, and on the treatment of the tax advantages of debt.

Before starting the discussion, it is worth focusing on the analytical process that precedes the final stage of a valuation, that is, the application of a discounted cash flow formula. Exhibit 9.1 summarizes the different necessary steps to better understand the background of the company or project under consideration.

Exhibit 9.1 Understanding the business model and choosing a valuation procedure

1. Understand the company's operations.

2. Understand the company's cash flow dynamics.

3. Compare the firm's operations with the typical ones found in its ...