In this paper, published in 2015 in Investment Management and Financial Innovations, the authors examined multiple valuation methods for a specific data set: in this case, Slovakian mining companies. Comparing multiple valuation methods, including a discounted cash flow, economic value, and iterative approach, the authors note that the DCF yielded the lowest valuation, whereas the other methods yielded higher amounts (though the iterative method did so with much higher volatility, represented by high standard deviations).
While Delaware public appraisal arbitrage cases have focused on DCFs as the valuation method of relevance, it’s important to note that other valuation methods exist – and in fact are used in a variety of contexts. Setting aside the paper noted, other valuation techniques include the comparable company analysis and precedent transactions.
Indeed, the paper covers only a selection of potential valuation methods. Many more exist, including those mentioned, such as:
Discounted Cash Flow Analysis (DCF); Comparable transactions method; Comparable Market Multiples method; Market Valuation; Economic Value Added Approach; Free Cash Flow to Equity; Dividend Discount Model; Net Asset Valuation; Relative Valuation.
Since choice of valuation method can determine the outcome of the valuation, both investors and appraisal practitioners need to be aware of how their particular case may play out under a variety of possible valuation methods, and which one or ones may be appropriate for the specific situation.
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