Valuation Issues

The issues we face in valuing declining companies come from their common characteristics. Most of the valuation techniques we use for businesses, whether intrinsic or relative, are built for healthy firms with positive growth. Sometimes they break down when a firm is expected to shrink over time or if distress is imminent.

Intrinsic (DCF) Valuation

A company’s intrinsic value is the present value of the company’s expected cash flows over its lifetime. Although that principle does not change with declining firms, practical problems can impede valuations.

Existing Assets

When valuing the firm’s existing assets, we estimate the expected cash flows from these assets and discount them back at a risk-adjusted discount rate. Although ...

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