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Cash flow valuation method To understand and use a little financial knowledge that it must be based on No one can accurately calculate the true intrinsic value of a business (even Warren Buffett), almost on the line Recently, Buffett has been reading and thinking text. Have Accounting colleges to sit, read 4 times &quot;Buffett&#39;s letter to shareholders,&quot; the time and feel very different from the previous. Buffett had always been to stay longer to understand some of the views of the level, but in the end how calculate the value of a company, how to get to a specific judge whether there is a huge investment in the stock value of the issues I was dumb. I have been pondering is how Buffett is calculated. Buffett used to calculate the intrinsic value method of business, the specific use of the discounted cash flow method. I think the key to Buffett&#39;s philosophy is to ensure the relative accuracy of the intrinsic value, and then compare the intrinsic value and market value, to see if there are enough safe space to decide whether to buy! Need to ensure the accuracy of the intrinsic value of the two conditions. 1. Outstanding enterprises, to ensure the stability and increase cash flow, which is to calculate the intrinsic value of the key! 2. Ability to circle: to understand the scope of their own, insist on only his own understanding of the business! Calculation of cash flow is the key! By the way what is good corporate Buffett eyes! Should meet the following conditions 1 It is the customer needs; 2 are customers that can not find alternatives; 3 from the price restrictions I think the Chinese to meet such a condition Maotai count! Buffy selected including Gillette Wells Fargo and other Coca-Cola. Let us ask themselves these questions, give you 100 million and the best management, you can beat the top wine in Coke and Coca-Cola and Maotai it? This proved a good way! Buffett liked to buy a suitable quality management into the management of the stability of business excellence. There are two key, the right price, and excellent enterprise, these two issues are interrelated! Buffett&#39;s all about the company&#39;s requirements are expected to be a reliable company can generate future cash flows, without the prerequisite to calculate the enterprise value would be extremely unreliable. If it is not good business, not to mention what the price is right! Because you can not determine the future of business! Buffett&#39;s philosophy is to win all the more reliable valuation, which is Buffett continued emphasis on capacity-ring because only he can understand the business and enterprise can calculate the exact cash flow! Buffett used a discounted cash flow, Buffett think this is a company which can estimate the intrinsic value method. But this is the prerequisite for good corporate computing! This approach has two key issues, one is the company&#39;s cash flow, a is the discount rate, discount rate is risk-free interest rate. Buffett that the discount rate for the 30-year U.S. Treasury interest rates. Now to solve cash flow problems, using the indirect method of cash flow data prepared by the general calculation is used (1) net profit + (2) depreciation, depletion costs, amortization expense and certain other cash costs. But Buffett that the fashionable thing Wall Street does not truly reflect the company&#39;s cash flow, it also could not be evaluated The value of the company, Buffett that the company&#39;s cash flow should be (1) net profit + (2) depreciation, depletion costs, amortization expense and certain other cash charges - (3) business to safeguard its long-term competitive position and unit production plant and equipment used for annual capitalization expenditure. The third point of comparison to judge the importance of design to a key word here, &quot;capacity ring,&quot; Buffett insisted only do they know the business. Why? Said before, to improve the accuracy of calculation of intrinsic value! Only they know the business, we have the ability to accurately judge (3) business to maintain its competitive position and long-term yields used for plant and equipment of the average annual capital expenditure. This is based on our understanding of social cognitive ability and ability! Ability to continuously improve their knowledge and analysis of water products is very important, but must have self-knowledge! Buffett, the following example to estimate the calculation procedure of the process to be more thought and research. Because the business of (3) business to safeguard its long-term competitive position and unit production and for plant and equipment of the average annual capital expenditure. I can not specifically determine, so, instead of corporate profit! Is the assumption that the true incidence of depreciation costs and expenses equal to that front costs (2) and cost (3) fairly. Buffett&#39;s investment in Coca-Cola in 1988. The following information comes from the &quot;Warren Buffett Way,&quot; Robert&#39;s book, a revised Future cash flow projections: the 1988 cash flow was 8.28 billion U.S. dollars, in 1988 after 10 years, growing at a rate of 15% (7 years prior to the actual 17.8%), it is the nature of good business to ensure the stability of cash flow , to 10 years, the cash flow for the 3.349 billion U.S. dollars. 1988 after 11 years, the net cash flow increased to 5%. Discount rate: in 1988 the 30-year U.S. bond yields of 9% as the standard. Discount rate is the data will change. Valuation Results: 1988 Coca-Cola stock intrinsic value of 48.377 billion U.S. dollars. Assuming a 5% cash flow growth rate, the intrinsic value still has 207 billion U.S. dollars (8.28 billion U.S. dollars divided by 9% -5%) Than in 1998 when Buffett bought Coca-Cola stock market value of 14.8 billion U.S. dollars would also be much higher! The formula used here and in front of the company after 10 years using the same as the present value of cash flow = cash held by the end of the present value / kg, k as the discount rate, g the growth rate, the formula used in the k less than g time. On k is greater than g, the following calculation shows, that is, 15% of the first 10 years of computation. After 11 years, is calculated using the formula mentioned above. Expected Year 12,345,678,910 Stable cash flows estimated 9.52 10.95 12.59 14.48 16.65 19.15 22.02 25.33 29.13 33.5 The present value of compound interest factor 0.917 0.842 0.772 0.708 0.650 0.596 0.547 0.502 0.46 0.422 In the present value of cash flow 9.22 8.74 9.72 10.26 10.82 11.42 12.05 12.71 13.41 14.15 Total of 11.25 billion of cash flow 10 years later, the total cash flow for the first 11 years of cash flow for the 3.517 billion 35.17 / 9% -5% = 87.93 billion for the discount to 10 by the end of the present value. Converted into present value 879.30/0.4224 = 37143000000 Come the intrinsic value of 48.39 billion, interval between 20.7 to 48.39 billion! The present value of compound interest factor can be calculated look-up table can also be their own, in this case the first year 1/1.09, 1/1.09 * 2 1.09 this year in pushing! Instance ============================ ================= GEM model of IPO pricing: discounted cash flow method GEM will soon set up, how to determine reasonable GEM listed company&#39;s issue price will directly affect the issuer&#39;s financing results and the future of the secondary stock market trend. ? This article describes the general international value of the four compute the internal pricing model: the discounted cash flow model, relative valuation, economic value added (EVA) pricing model, option pricing method. Pricing advantages and disadvantages of each. Published today is a discounted cash flow model. ?- Editor Cash flow method is the appropriate discount rate selected, the company&#39;s future earnings discounted to present value and is the company&#39;s current real value, to determine the price of new shares, which is a prediction based solely on future data. The basic principle of this method is the value of an asset equal to the asset is expected in the future cash flows generated by the whole of the present value of the sum, it is the international assess Qiyejiazhi, basic methodology. ?Basic model ?For GEM listed companies, because of their shares tradable, so: the company&#39;s overall stock price = value / total equity. Namely: ?V P = ─ ─ Z ?Where: P said the stock&#39;s issue price; V said the estimated value of the real value of the company; Z IPO after the company said the total share capital. Easier to determine the Z values because, for V can be solved through the following three models: ?Zero growth model ?This model assumes to be listed in the next year&#39;s cash flow remains unchanged, the model is as follows: ?n 1 V = X0Σ ─ ─ ─ t = 1 (1 + R) ?Where: V, said the estimated value of the real value of the company; X0 said it issued the previous fiscal year&#39;s income before tax income, that cash flow; R, said the company&#39;s average cost of capital (WACC). ?Stable growth model ?This model assumes that the listed company to be cash flow in future years to a stable growth rate G, the model is as follows: ?X0 V = ─ ─ ─ (R-G) ?Where: V, said the estimated value of the real value of the company ?X0 said the company issued the previous fiscal year&#39;s income before tax income, that is cash flow. ?R said that the company&#39;s average cost of capital, that the discount rate ?G said the company&#39;s steady growth ?Two-stage growth model In general, the fund raised for investment projects not completed and fully operational before the company&#39;s cash flow is unstable. Only after a period of time, the company&#39;s cash flow will become stable; Therefore, the proposed issue of new shares to raise capital cash flow forecast can also take a two-stage model. Namely: t = n X1 Xn +1 V = Σ ─ ─ ─ ─ + ─ ─ ─ ─ ─ ─ ─ t = 1 (1 + R) 2 (1 + R) n + (RG) ?Where: V, X0, R, etc. that the meaning of the preceding model ?Xi said that the instability of the former n-year growth in net cash flow during the period, G said that after years of steady growth rate n ?Company calculated the average cost of capital ?Company average cost of capital (discount rate) R reflects the risk characteristics of cash flow, By the debt financing costs and equity financing costs two weighted income, that is: R = P1R1 + P2R2, of which P1, P2 are the debt financing and equity financing ratio, R1 is a debt refinancing costs, can the company&#39;s bonds or bank loans to calculation; R2 is the cost of equity financing, more complex calculation methods, you can use the capital asset pricing model ( CAPM), the debt equity rate of return plus a risk premium and the dividend growth model obtained by other methods. ?Growth forecast ?Use the model in the pricing of new shares, the estimated growth rate of G is critical. Forecast growth rates are generally three basic methods: ?A simple model using historical data or time series model. This approach has been applied to establish a stable history of growth patterns, and its industry fundamentals have not changed the company. ?2 use of the professional analysts average forecast derived. This method is suitable for the basic factors stabilize the industry, there are a large number of professional analysts concerned about the company. ?3, starting from the company to estimate the growth rate of the basic factors. Basic factors include the company&#39;s product line, profit margins, leverage and dividend policy. This method is particularly suitable for companies with their own unique products. ?Calculation of expected cash flows In the above series of models to start, always will be the future cash flow available to deal with as a known variable. In fact, corporate dividends are affected by many factors, each company has its own different dividend policy. Even so, for a normal profit and to maintain normal growth of the enterprise, can be obtained through the method of accounting can be used to pay dividends of its maximum value, discounted cash flow model is the X, Often referred to as free cash flow FCFE (Free cash Flow to equity). ?According to the accounting statements of enterprises, enterprises can use the cash payment to shareholders is the net profit net of the reinvestment of surplus: ?Free cash flow sales (FCFE) accounting method - cost of sales - sales tax and additional operating profit - profit operating costs - Interest expense - net profit after tax of tax payable (NI) + depreciation (DEP) - working capital Delta (D1) - investment in fixed assets (I) free cash flow FCFE As the table shows, free cash flow (FCFE) is: after-tax net income (NI) deductions for business development and growth in net working capital increment (D1) and the incremental net fixed assets (investment in fixed assets depreciation I-DEP ), you can allocate to the shareholders. Namely: ?FCFE = net income + depreciation - investment in fixed assets - incremental working capital Using the above formula, FCFE can be the current period net income, depreciation, fixed asset investment, incremental working capital calculated. As can be seen from the formula, although the FCFE is not equivalent to EPS, and EPS are linear positive correlation, because both the investment in fixed assets or working capital of the increment, are based on the year how much profit to be decided is the after-tax a certain percentage of net profit. Therefore, we can assume that the ratio Q The net profit for the maintenance of the required proportion of future growth, may be used for part payment of cash dividends: X = EPS (1 - Q) will be on the type of substitution in the two-stage growth model can be obtained: V = VT1 + VT2 = T EPST (1-Q) EPST +1 (1-Q) Σ ─ ─ ─ ─ ─ ─ + ─ ─ ─ ─ ─ ─ ─ t = 1 (1 + R) t (1 + R) T (RG) ?V values calculated according to the model after, in the case of the known Z values can model 2.1.1 to request the issue price of new shares. ?Model Evaluation In theory, the pricing of new shares in the most scientific method should be the net present value, may invest in value for the Panduan business Neizai provide a useful basis, but in practical operation in the Reasonably Utilizing model can be difficult. Because the GEM listing to raise funds for Gong Si, mostly in a start-up stage or growth stage, the project investment involves high risk, Wei Lai uncertainty exists in the development of 前景, Zhunque expected future cashflow 困难. ================================================== ============= Discounted cash flow method From mba think tank Wikipedia (http://wiki.mbalib.com/) Discounted cash flows (discounted cash flow method) Directory [Hide] A discounted cash flow method 2 discounted cash flow method of the basic formula 3 advantages and disadvantages of discounted cash flow method 4 examples of discounted cash flow method [Edit] discounted cash flow method Discounted cash flow method is the business within a specific period of expected future cash flows back into the current present value. As the essence of enterprise value, or its future earnings capacity, and only when companies have this ability, its value will only be accepted by the market, so theorists usually discounted cash flow method as the preferred method of business valuation, assessment practice also received a large number of applications, and has become perfect and mature. [Edit] discounted cash flows, the basic formula p= The formula: p assessment of the value of a business; n an asset (business) life; cft an asset (business) in the t time cash flow; r 1 reflect the expected cash flows discount rate From the above formula, we can see that the method has two basic input variables: cash flow and discount rate. Therefore, before using this method should first make a reasonable forecast of cash flow. In assessing the impact companies in the future to fully consider the profitability of various factors, objective and fair manner on the business to make a reasonable forecast of future cash flows. Second, choose a suitable discount rate. The choice of discount rate is mainly based on the evaluation staff assessment of the risks of the business future. As the business is an objective uncertainty, so the enterprise is essential to judge the risk of future revenues, future earnings when business risk is high, the discount rate should be higher when the risk of lower future earnings , the discount rate should be lower. [Edit] discounted cash flow advantages and disadvantages Discounted cash flow method for assessing the intrinsic value of the scientific enterprise is more suited to the characteristics of M &amp; A assessment, a good value reflects the nature of the enterprise; and the first two business valuation method, discounted cash flow theory of value the most, can through a variety of assumptions, reflecting the company&#39;s management and experience management. Nevertheless, discounted cash flow method still has some shortcomings: First, the discount rate from the point of view, this approach does not reflect the benefits of enterprise mobility, this flaw has determined that it can not be applied to strategic areas of business; Second, this approach does not take into account the interdependence between business projects, business investment is also not taken into account the time dependence between projects; third, using this method, the result depends entirely on the accuracy of the assumptions used in the conditions accuracy, the application is must not be divorced from reality. And if the future cash flows of companies are experiencing instability, loss-making enterprises, etc., discounted cash flow method can not do anything. [Edit] example of discounted cash flow method To all of the discounted cash flow method more specific understanding, we assume an example for reference: The first part is to calculate the commuted present value of the company for the next five years, cash flow, we first annual cash flow discounted to present value, that is, the cash flow the first year of ￥ 11.6, compared with ￥ 10.4 commuted after (￥ 11.6 x 0.89), after the second year of discounted cash flow was ￥ 10.7 (￥ 13.5 x 0.80), and the remaining three years of discounted cash flow up, however after the then present value of these together, we arrive at ￥ 56 ( ￥ 10.4 + ￥ 10.7 + ￥ 11.1 + ￥ 11.5 + ￥ 11.9), this is the company&#39;s future after five years commuted value of the cash flow. The second part is to focus on calculating the commuted value of the company&#39;s future cash residual value after five years. First, we assume that up to 16% of the company after five years of rapid growth, the growth rate of cash flow will be from 16% to 7% per year, so the company&#39;s future cash flow was the sixth year ￥ 26.1 (￥ 24.4 x 1.07), assuming the company was cash flow to maintain a steady increase of 7% per year, and also assumes that we are asking for 12% annual return (discount rate), the residual value can harbor has enabled the company is projected to be ￥ 521.4 (￥ 26.1 / (12% -7%)), then we look at the company&#39;s future residual value after five years, discounted to present value (present value), or ￥ 295 (￥ 521.4 x 0.57), can be estimated by the discounted cash value of the company&#39;s future residual value after five years. Finally, we will be the first and the second part of the present value calculation to add up to get the company&#39;s intrinsic value of ￥ 351 (￥ 55.6 + ￥ 295.9), and investors can be based on this figure, divided by the number of shares the company has to get the intrinsic value per share. If the intrinsic value per share is higher than the market, then investors may consider purchasing, otherwise be selling. Part I: the first 5 years of forecast cash flow (project 5 years cash flows) 1. Last year&#39;s cash flow (prior year cash flow): the company with annual cash flow figures 2. Growth rate (growth rate): In contrast with the company&#39;s earnings growth in previous years profit 3. Cash flow (cash flow): the company will distribute all the profit situation, the shareholders of cash flow = cash flow (n-1) x (1 +0.16), n = 1,2, ..., 5 4. Discounting parameters (discount factor): the present value of future value into the value = 1 / (1 +0.12) ^ n, n = 1, 2, ..., 5 5. The present value (present value): the discounted value of future value for the first year will be multiplied by the discounted future cash flow derived parameter values = (3) x (4) 6. The sum of discounted cash flow Part II Residual value (terminal value / residual value): Residual value is calculated through the constant growth model, that is assuming the company started from the first five years at an annual rate of 5% constant growth. 7. The first five years of cash flow (cash flow in year 5): the company will distribute all the profit situation, the shareholders in the first five years of cash flow 8. Growth rate (growth rate): 5 years after the company&#39;s growth. 9. The sixth year of cash flow (cash flow in year 6): all profits will be distributed in the company where the shareholders in the sixth year of cash flow 10. Required rate of return minus growth rate (required rate of return minus growth rate): Required rate of return for the cost of capital. To request the difference between the rate of return and growth rate as the discount rate to convert the residual value of the eternal in the first 6 years after five years when the value of the value (terminal value) 11. Five years later the value (terminal value): the value of the company after five years 12. After five years of discount parameters (discount factor as of year 5): the first five years the value of the company into the present value of the first year = (9) / (10) 13. Discounted residual value of the company: for the first year of the commuted value of the company&#39;s residual value The company&#39;s intrinsic value: the first 5 years the sum of discounted cash flows and discount the residual value of the company and its response to the full value of the company&#39;s current ================= Different voices from non-authoritative though ====================== Discounted free cash flow method of valuation is wrong Argument: Only the cash dividend is the only company using the present value formula to calculate the intrinsic value of the cash flow. Popular at home and abroad to use stock market gains and free cash flow discounted to compute the intrinsic value method, is a violation of the basic principles of the present value of the error formula to use. Argument: The definition of a present value formula: Present value formula, the first was John Burr Williams in his &quot;Theory of Investment Value&quot;, the proposed valuation of the mathematical formula, we enrichment as: any stocks, bonds, value of the company and entities are determined by the assets of the remaining time, can expect to generate cash inflows and outflows, converted into an appropriate present value discount rate, this method is also known as discounted or present value. The present value of defined formula that discounted cash flow for the inflow and outflow is the cash flow, so by definition the point of view, only the cash dividends and interest-bearing-type bonds pay interest each year is expected to generate cash outflows, can be used to calculate the discounted stocks, bonds and the value entity company should not be a book does not have all the outflow of earnings and free cash flow. Second, the mathematical principles of the present value formula Present value formula is compound interest formula combinations. First of all, let&#39;s look at the compound interest formula, compound interest formula present value of the form Compound interest formula: FV = PV (1 + i) n FV Compound interest formula can be written in present value form: PV =------------- ?(1 + i) n This formula shows an initial capital PV, with i as the rate of growth, after n cycles of compound growth, maturity of the final value FV. It can also be a fund due to i as the discount rate FV after n-period discounted present value of PV. We are here to clear that: compound interest formula is a complete a cash flow into a formula. Here we have three different document term compound interest formula to combine them to look at their situation: (1) As a second compound of the formula: FV1 = PV1 (1 + i) ? ?FV1 Can also be written in the form of the present value of: PV1 =------------- (1 + i) (2) 2 compound interest into account the formula: FV2 = PV2 (1 + i) 2 ? ?FV2 Can also be written in the form of the present value of: PV2 =------------- (1 + i) 2 (3) total 3 times compound interest formula: FV3 = PV3 (1 + i) 3 FV3 Can also be written in the form of the present value of: PV3 = -------------- ?(1 + i) 3 We put three items form the present value of compound interest added to the formula, you can write the following formula: ?CF1 CF2 CF3 PV1 + PV2 + PV3 = PV =----------+ ------------- + ----------- 1 + i (I + i) 2 (1 + i) 3 FV is the final value of the English abbreviation, as superposed into the middle of the cash flow to pay, so they are said to use CF code. Obviously three items form the present value of compound interest formula is the result of adding the present value of the basic form of the formula. The basic form of the present value formula: ?CF1 CF2 CFn-1 CFn PV =------------+ ----------- + ... ... .. + ---------------- + - ---------- ?1 + i (I + i) 2 (1 + i) n-1 (1 + i) n Derived by the present value formula we can clearly see that the present value of the molecular part of the CF formula that they are separated from the system&#39;s cash flow, and should not be carrying any of the indicator data. Assessment of the three project loans to use Some may say that bank loans of the assessment report is used to predict future profits discounted net present value and internal rate of return, are also wrong? . Of course yes, because, according to the relevant provisions of China, project loans can be pre-tax profit plus depreciation to repay the loan, so the assessment of project loans, the projected profits are all used to pay out money to the bank, of course, you can use now Formula for calculation. 4 calculated using the treasury method Let us look at interest-bearing type of book-entry treasury bonds is calculated, interest-bearing type of book-entry treasury bonds is to use it to pay the interest each year is calculated using the present value of its yield to maturity or the present value, and for once also due The interest-bearing book-entry treasury bonds will not be able to use it on the books of the annual interest rate calculated using the present value of its yield to maturity or the present value, which can not use the book listed company earnings and free cash flow discounted at calculation of their intrinsic value is a truth. Five wrong reasons to use The original John Burr Williams introduced the application of the present value formula to effectively solve the traded yield to maturity of the calculation. For stock dividends in the dividend-based system of time to calculate the intrinsic value of companies also played a very important role. With fierce competition in the market economy, enterprises in order to survive and might resume reap higher profits, gradually gains the Dabu Fen stay at Le business expanded reproduction, Shao Bufen for dividends, for the Mu Qian Guo Neiwai the public are taking a Duo less dividends distributed to mention retention system, using historical data to predict future dividend dividend discounted the intrinsic value of companies, will not have much meaning. Therefore, the use of proceeds and generated free cash flow discounted compute the intrinsic value method, the history of earnings and free cash flow growth, is retained as corporate investment in the effect produced by Sheng, and we forecast the future earnings out and free cash flow should also be retained in the corresponding situation can be achieved. If we forecast earnings or free cash flows discounted using the present value formula, it means starting from the first time we put all of the discount or free cash flow benefits to the sub-out, then no internal retention Health investment, which would have continued to grow under the historical growth rate of yield? . Traditional academic calculation method is based on the valuation of capital asset pricing model, beta Yiji the variation number of Securities remuneration Lv, Qituliyong statistics Jiqiao to determine a reasonable discount rate, Shi Yong Qi Ye present value formula calculate the intrinsic value . But no matter how precise we use statistical methods to calculate the discount rate, in addition to dividends, no discounted cash flow can be used to calculate the company&#39;s intrinsic value, dividend discount could not be true reflection of the company&#39;s intrinsic value, then the fold current rate will not have much meaning. So we have to be out this conclusion: the present value formula can not be the final valuation of the stock pricing model. The investment in academic science has so far only taught in the traditional valuation pricing, and an endless stream of transport to the capital markets of their out students. Today&#39;s stock market is still popular, free cash flow discounted using the assessment of the enterprise&#39;s intrinsic value, so this is also the root causes of stock market valuation of confusion. In addition, I also set ourselves a fundamental question with fear and trepidation, after all, what they are not experts, but with people doing right, so I chose the first-line exposure, hoping to find resonance, this does not mean I am not confident Through the back I will study the basic theory of compound interest, it applied the shape, number of analytical methods combined with the introduction of two analytical models to further demonstrate my point. Summary of segmentation ======================= ================= Margin of safety (SAFETY MARGIN), if you calculated to the value of 100 yuan, you get as much as possible the price of 50 yuan to buy, so even if you calculate the 20% to 30% in error, you have 20% -30% to fault-tolerant space. This is the core concept of value for investment. ?

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posted: | 8/12/2010 |

language: | English |

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