The Valuation Handbook: Valuation Techniques from Today's Top Practitioners

CHAPTER 11

The LifeCycle Returns Valuation System

 

Rawley Thomas

President, LifeCycle Returns, Inc.

 

Robert J. Atra

Chair of the Finance Department, Lewis University

 

 

“It’s simple,” exclaimed an academic at a recent conference. “The value of a firm is the present value of the firm’s cash flows.” Practitioners, however, understand that valuing a firm is anything but simple. Though most would agree with the soundness of valuing a firm by a discounted cash flow (DCF) methodology, the details of the process become a source of much debate. Consider, for instance, the issue of computing what cash flows to discount. Ask a dozen valuation experts what the firm’s future cash flows are and those experts will likely reveal a dozen different answers.

This chapter presents an overview of the LifeCycle Returns system for computing valuations. We say “system” for several reasons. First, system refers to the process by which a builder develops and improves a model. We do not expound on that process since Chapter 3 presents that procedure in detail.

Second, system also refers to the way LifeCycle considers theory and practice to interact.¹ Traditionally, theories are developed and then tested. When theories fail empirically, theoreticians develop substitute theories and the testing process begins once again. LifeCycle’s research system treats observations of actual data as the starting point of the system, not the initiation of an untested theory. Once the model builder observes a phenomenon, ...