Company valuation : value, structure, risk

Abstract

This book, for a few different reasons, was focused on the DCF method, the main of the reasons being that the DCF method captures best the value of prof- itable, economically sound companies – it works for all firms which have real expertise. The main purpose of this book was to explain the inner workings of the DCF method, especially the variant in which capital structure constantly af- fects cost of equity, as it does in reality. The focus then was on the valuation model which integrates the three com- ponents that elsewhere are often treated separately: cash flows, the cost of capi- tal and the discounting process itself. The book revolved around these three is- sues. For example, it is commonly known that if the value of equity changes, the capital structure changes too. At the same time the change may affect the cost of capital, which in turn will influence the value of equity itself. The re- cursive approach to company valuation that was presented in the book relied on solving such logical loops that appeared both at each time period and along time periods. Performing the company valuation is such a way is much more complicated than assuming no links between for example the value of equity and the cost of capital, but leads to a much more reliable and methodically f law- less valuation.