Equivalence of the Different Discounted Cash Flow Valuation Methods. Different Alternatives for Determining the Discounted Value of Tax Shields and their Implications for the Valuation

One of the cornerstones of financial statement analysis is the discounted cash flow valuation. Despite the broad use of this valuation technique, and the economic importance of employee stock options to firm values, there is little guidance on how employee stock options should be incorporated in a valuation. This paper provides a comprehensive approach to doing so, including consideration of the income tax implications of option exercises, the simultaneity of equity and option valuation, and the use of the disclosures that were mandated recently by Statement of Financial Accounting Standards No. 123. The paper provides a comprehensive example using Microsoft's fiscal 1997 financial statements and employee stock option disclosure. This paper should be of interest to academics and practitioners involved in corporate valuation and financial statement analysis.

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A Brief Overview of the IPO Valuation Methods

International Journal of Business and Management ◽

10.5539/ijbm.v15n12p41 ◽

2020 ◽

Vol 15 (12) ◽

pp. 41

Author(s):

Olga Ferraro

Keyword(s):

Cash Flow ◽

Initial Public Offering ◽

Professional Practice ◽

Economic Value ◽

Value Added ◽

Economic Value Added ◽

Discounted Cash Flow ◽

Business Valuation ◽

Valuation Methods ◽

Public Offering

The method adopted for pricing in an Initial Public Offering is a key issue in the studies on business valuation. In particular, various researches sought to verify which valuation methodologies are preferable in the context of an initial public offering. The review of the main literature shows that Discounted Cash Flow, Market Multiples, Dividend Discount Model and, even if just to some degree, Economic Value Added are the most popular methodologies in the valuation practice. The comparison among different valuation methods, proposed in the literature and variously applied in national and international practices, reveals the necessity to pay more attention to valuation mechanisms that drive the pricing of the shares to be listed. The topic is linked to the ever more pertinent debate on the use of different methods in professional practice: financial experts and analysts tend, in fact, to compare results according to different estimates.

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