Empirical Analysis of Unlisted Companies' Valuation Using Discounted Cash Flow Methods

Abstract

Objective – This paper aims to examine the theoretical and practical aspects of the widely used discounted cash flow (DCF) valuation method. Methodology – The proposed method is probably the most widely used approach in the valuation of unlisted companies. It involves estimating the future cash flows that the company is expected to generate and discounting them to their present value using a discount rate. The study was conducted on Spanish olive oil companies between 2005 and 2020. Findings – Our results show that there are two values for valuing companies: static and dynamic values. Both values are calculated based on the sum of the updated cash value plus the remaining value. The static value provides only one value, while the dynamic value provides a range of values, resulting in a more accurate understanding of a company's value and a better comprehension of the risks associated with that value. Therefore, the company is considered a cash flow generator, and the value of the company is found by calculating the present value of these flows using an appropriate discount rate. Novelty – Despite this method being a powerful tool for evaluating companies, even in complex situations, the DCF method is subject to a significant assumption bias, and even slight changes in the underlying assumptions of the analysis can greatly alter the evaluation results. Type of Paper: Empirical JEL Classification: G12, G31, M21 Keywords: Cash flow; Unlisted companies; Valuation methods; Discounted Cash flow Reference to this paper should be made as follows: DRISSI, R. (2023). Empirical Analysis of Unlisted Companies' Valuation Using Discounted Cash Flow Methods, J. Fin. Bank. Review, 8(1), 73 – 84. https://doi.org/10.35609/jfbr.2023.8.1(4)