The Dark Side of Valuation

The factors that characterize financial services firms—assets that are marked to market, earnings that are after provisions for future losses, and the difficulty we face in defining debt and reinvestment—all have an effect on how these firms are valued. This section considers some common pitfalls in valuing financial services firms.


For much of this book, we have adopted the standard practice of forecasting cash flows after taxes and reinvestment, but before debt payments, and discounting these cash flows back at a composite cost of capital. Adopting this practice with financial services firms can have disastrous consequences for several reasons, but one of the biggest is in the computation of the cost of capital. ...

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