Chapter 11: Valuation


IN Chapter 10, we discussed the components of value. With a strong understanding of these elements and how they affect valuation, we are ready to complete the assessment of the valuation filter in the StepWise Approach to Value (SWAV). This involves applying analytical techniques to monetize (put in dollar terms) the value of the Strategic Alternative (SA). Remember that we are calculating intrinsic value, which is an estimate of the value derived from the future cash flows of an SA. Since we are dealing with estimation, the outcome of this filter should not only provide a quantification of value, but an understanding of how good the estimate is. This assessment requires the use of numerous tools depending on the level of uncertainty around the estimate.

Portfolio of Analytical Tools

Broadly speaking, the choice of which analytical tool to apply depends largely on the level of uncertainty inherent in a given Strategic Alternative. The discounted cash flow (DCF) analysis method is a bedrock analytical tool that can be applied to the evaluation of all SAs, and it provides a rather straightforward manner to determine estimated cash flows resulting from a Strategic Alternative. For instance, in assessing a food company acquisition, an analyst will be able to predict market demand for food with a relatively high degree of certainty. However, it will be useful to perform additional analyses under conditions of uncertainty. When analyzing Strategic Alternatives where you are less confident about the results, alternative methods such as financial modeling techniques can be used. In general, these techniques will help you to better understand how changes in the components of value can impact the future value of an SA. For example, this can include situations such as implementing cutting-edge technology where the cash flows are less certain. Financial modeling techniques include such methods as break-even analysis, sensitivity analysis, scenario analysis, and Monte Carlo simulation.




Translating Strategy into Shareholder Value. A Company-Wide Approach to Value Creation
Translating Strategy into Shareholder Value: A Company-Wide Approach to Value Creation
ISBN: 0814405649
EAN: 2147483647
Year: 2003
Pages: 117

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