Valuation: Methods and Models in Applied Corporate Finance

3. Financial Forecasting

3.1 Introduction

As we stated in Chapter 1, “Introduction,” the objective of this book is to develop a set of valuation frameworks that will enable a business manager to quantify the value implications of business decisions. Those business decisions can range from building a new manufacturing facility to developing a new product to acquiring a firm.

The foundation of all valuation frameworks in finance is the present value relation:

Here, E(CF₁), E(CF₂), and so on are expected future cash flows, r denotes a discount rate, and Value₀ is the value of the project that we are trying to measure. There are two key pieces of ...