80 Common and Uncommon Errors in Company Valuation
80 common and uncommon errors in company valuation
80 common and uncommon errors in company valuation
Pablo Fernández PricewaterhouseCoopers Professor of Corporate Finance IESE Business School. University of Navarra. Camino del Cerro del Aguila 3. 28023 Madrid, Spain. Telephone 34-91-357 08 09. Fax 34-91-357 29 13. e-mail: fernandezpa@iese.edu
ABSTRACT
This paper contains a collection and classification of 80 errors seen in company valuations performed by financial analysts, investment banks and financial consultants. The author had access to most of the valuations referred to in this paper in his capacity as a consultant in company acquisitions, sales and mergers , and arbitrage processes. Some of the errors are taken from published reports by financial analysts. We classify the errors in six main categories: 1) Errors in the discount rate calculation and concerning the riskiness of the company; 2) Errors when calculating or forecasting the expected cash flows; 3) Errors in the calculation of the residual value; 4) Inconsistencies and conceptual errors; 5) Errors when interpreting the valuation; and 6) Organizational errors.
Keywords: valuation, company valuation, valuation errors JEL Classification: G12 , G31, M21
November 4, 2003
1
80 common and uncommon errors in company valuation
This paper contains a classification of the 80 errors providing at least one example of each, taken from actual valuations. The sections of the paper are as follows: 1. Errors in the discount rate calculation and concerning the riskiness of the company 2. Errors when calculating or forecasting the expected cash flows 3. Errors in the calculation of the residual value 4. Inconsistencies and conceptual errors 5. Errors when interpreting the valuation 6. Organizational errors Appendix 1. List of the 80 errors Appendix 2. A valuation containing multiple errors using an ad hoc method Bibliography
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80 common and uncommon errors in company valuation
1.
80 common and uncommon errors in company valuation
Pablo Fernández PricewaterhouseCoopers Professor of Corporate Finance IESE Business School. University of Navarra. Camino del Cerro del Aguila 3. 28023 Madrid, Spain. Telephone 34-91-357 08 09. Fax 34-91-357 29 13. e-mail: fernandezpa@iese.edu
ABSTRACT
This paper contains a collection and classification of 80 errors seen in company valuations performed by financial analysts, investment banks and financial consultants. The author had access to most of the valuations referred to in this paper in his capacity as a consultant in company acquisitions, sales and mergers , and arbitrage processes. Some of the errors are taken from published reports by financial analysts. We classify the errors in six main categories: 1) Errors in the discount rate calculation and concerning the riskiness of the company; 2) Errors when calculating or forecasting the expected cash flows; 3) Errors in the calculation of the residual value; 4) Inconsistencies and conceptual errors; 5) Errors when interpreting the valuation; and 6) Organizational errors.
Keywords: valuation, company valuation, valuation errors JEL Classification: G12 , G31, M21
November 4, 2003
1
80 common and uncommon errors in company valuation
This paper contains a classification of the 80 errors providing at least one example of each, taken from actual valuations. The sections of the paper are as follows: 1. Errors in the discount rate calculation and concerning the riskiness of the company 2. Errors when calculating or forecasting the expected cash flows 3. Errors in the calculation of the residual value 4. Inconsistencies and conceptual errors 5. Errors when interpreting the valuation 6. Organizational errors Appendix 1. List of the 80 errors Appendix 2. A valuation containing multiple errors using an ad hoc method Bibliography
2
80 common and uncommon errors in company valuation
1.
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