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Which valuation method yields the most accurate value in the valuation of companies in different stages of their life cycle?

Pettersen, Robin; Nylen, Mats
Master thesis
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URI
http://hdl.handle.net/11250/2478122
Date
2017
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  • Master of Science [1116]
Abstract
This thesis investigates how different valuation techniques - the DCF, the First

Chicago Method, and option valuation - perform on companies at different stages

in their life cycle. We compare the results of each of these valuation techniques on

three groups of companies: startups and young companies; high-growth firms; and

steady-state companies.

We have used Excel to create models for each of the valuation methods, meaning

that a number of assumptions had to be made. The assumptions include, for

instance, a benchmark for probabilities in the First Chicago Method, how to

forecast the financial statements, and how to obtain reasonable discount rate and

volatilities. Also, we compare our values to the true values, that is, the acquisition

price or the enterprise values of publicly traded companies.

By comparing the yielded values to the true values, we find that the standard

discounted cash flow method is the most accurate method when considering the

sample as a whole. However, the First Chicago Method is way more accurate than

the DCF when separating the group of startups and young companies, with an

average error of 0.95% and 18.10%, respectively. Option valuation, on the other

hand, is the least accurate for all the groups of companies. Still, we find it to yield

more accurate values when the debt ratio is low, which coincides with it

performing worst on the steady-state companies.
Description
Masteroppgave(MSc) in Master of Science in Business, Finance - Handelshøyskolen BI, 2017
Publisher
BI Norwegian Business School

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