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

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.