Mastering Cash Flow and Valuation Modelling

14

Alternative methods

Method

Adjusted present value

Economic profit

Summary

METHOD

Traditional analysis using discounted cash flows finds a single value but does not provide detailed information on the constituents of value or the breakdown of constituents. Figure 14.1 shows the sources of potential value in terms of:

• current market value;
• internal improvements such as cost cutting and savings;
• external improvements such as liquidations, acquisitions, disposals and strategic improvements;
• financial engineering, which includes borrowing costs, changing leverage and lowering the cost of capital.

Figure 14.1 Value gap

Since you have all the ...