2010Unpublished venueRequires access

Company's Valuation in an Emerging Economy - Case Study TIMANCO S.A

Ignacio Vélez–Pareja, Joseph Tham

Open publisher page 3 citations

Abstract

In this article we use a real life case from an emerging country to illustrate the valuation with discounted cash flow methods, witch include complexities such as unpaid taxes, losses carried forward, foreign exchange debt, presumptive income and inflation adjustments to the Financial Statements. These complexities pose problems regarding the determination of cash flows and cost of capital. We use market values to calculate the discount rates and solve the circularity between estimated value and discount rates. Discount rate formulas depend on the assumption on the discount rate for the tax shields. We assume that this discount rate is the unlevered cost of equity and use the set of formulas derived from that assumption. We show that using a consistent set of formulas we find a perfect matching between values calculated with different methods: Free Cash Flow and Weighted Average Cost of Capital (WACC), Cash flow for Equity and levered cost of equity and Capital Cash Flow, which is equivalent to the Adjusted Present Value when the discount rate for tax shields is the unlevered cost of equity. The relevance of this work relies on the use of general formulation different from the standard textbook formula for cost of capital which does not allow introducing these complexities. Although the complexities require a special attention to follow, the case study shows that it is possible to properly calculate value in a consistent manner.

About this research paper

What this paper is about

In this article we use a real life case from an emerging country to illustrate the valuation with discounted cash flow methods, witch include complexities such as unpaid taxes, losses carried forward, foreign exchange debt, presumptive income and inflation adjustments to the Financial Statements. These complexities pose problems regarding the determination of cash flows and cost of capital. We use market values to calculate the discount rates and solve the circularity between estimated value and discount rates. Discount rate formulas depend on the assumption on the discount rate for the tax shields. We assume that this discount rate is the unlevered cost of equity and use the set of formulas derived from that assumption. We show that using a consistent set of formulas we find a perfect matching between values calculated with different methods: Free Cash Flow and Weighted Average Cost of Capital (WACC), Cash flow for Equity and levered cost of equity and Capital Cash Flow, which is equivalent to the Adjusted Present Value when the discount rate for tax shields is the unlevered cost of equity. The relevance of this work relies on the use of general formulation different from the standard textbook formula for cost of capital which does not allow introducing these complexities. Although the complexities require a special attention to follow, the case study shows that it is possible to properly calculate value in a consistent manner.

Why it matters

OpenAlex reports 3 citations for this work. Citation counts describe recorded attention and do not establish research quality.

Key contribution

A contribution statement is not available in the OpenAlex record.

Method / approach

Method details are not available in the OpenAlex metadata.

Main findings

Findings are not separately available in the OpenAlex metadata.

Limitations

Limitations are not available in the OpenAlex metadata.

Applications

Application details are not available in the OpenAlex metadata.

Available abstract

In this article we use a real life case from an emerging country to illustrate the valuation with discounted cash flow methods, witch include complexities such as unpaid taxes, losses carried forward, foreign exchange debt, presumptive income and inflation adjustments to the Financial Statements. These complexities pose problems regarding the determination of cash flows and cost of capital. We use market values to calculate the discount rates and solve the circularity between estimated value and discount rates. Discount rate formulas depend on the assumption on the discount rate for the tax shields. We assume that this discount rate is the unlevered cost of equity and use the set of formulas derived from that assumption. We show that using a consistent set of formulas we find a perfect matching between values calculated with different methods: Free Cash Flow and Weighted Average Cost of Capital (WACC), Cash flow for Equity and levered cost of equity and Capital Cash Flow, which is equivalent to the Adjusted Present Value when the discount rate for tax shields is the unlevered cost of equity. The relevance of this work relies on the use of general formulation different from the standard textbook formula for cost of capital which does not allow introducing these complexities. Although the complexities require a special attention to follow, the case study shows that it is possible to properly calculate value in a consistent manner.

Key concepts: Weighted average cost of capital, Cost of equity, Cost of capital, Economics, Terminal value, Cash flow, Valuation (finance), Tax shield

Related papers

Back to paper searchBrowse research topicsOriginal source
Company's Valuation in an Emerging Economy - Case Study TIMANCO S.A — Research Paper | ScholarLens