Most important part of a valuation???
Ok everybody...I would love to get as much input on this from as many people from as many countries as possible.
I just spoke with a senior banker (remember I am in India), and he told me that in the entire valuation process significantly more importance is given to the creation of the Financial Statements etc. than to the actual valuation (i.e. finding beta, the cost of equity, CAPM, WACC and all that good stuff we learned about in school).
He says that there are certain standard assumptions which are used across the industry for things like beta, cost of equity etc. and that there is no point in making the model complex by digging into these things too much 'coz in the end they will only make a marginal difference.
I am confused....any comments regarding the veracity of these statements?
Not sure where your
Not sure where your confusion stems from but of course your assumptions for your projections (creation of financial statements) will serve as the primary driver of your valuation. The valuation will differ significantly whether you build typical banker "hockey stick projections" (outsized growth relative to historic performance)or if you assume a conservative base case (1-2% sales growth, 0-50 bps on margin, etc.)
I'd probably agree with that
I'd probably agree with that to some extent. The projections are the meat of the valuation because thats where your cash flows come from. You can usually eye ball a company and estimate roughly what your discount rate, perpetual growth, and exit multiple are come up with a valuation amount which isn't a world of a difference from the value you'd come up with if you actually do the complete valuation analysis. On the flip side a 1% WACC up/down could make a huge impact on valuation, especially with longer projections.
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The most important thing in
The most important thing in valuation is that an asset is only worth what someone is willing to pay for it. No one care what the PV of FCF's are if there is no market for an item. This is why banks were trading at .25x P/B and couldn't unload toxic assets. Always try to step out of a model and ask yourself, "is there really anyone willing to pay this amount for this asset". Don't ever get lost in academics.
Your presentation
The most important part of your valuation is your presentation. You can sell anything if you wrap it with a slick enough bow.
Not anymore you cant...all
Not anymore you cant...all flash no cash tap dancing days are over bro
Make up the numbers until it
Make up the numbers until it fits in with the MD's feeling of how much the company should be worth
The most important part is
The most important part is in the sales memorandum where you write "Positives of this stock" and make it sound sweet, and when you write your "Risks" section make everything secretly into a good thing. For example, "even though company XXX has 50% market share in YYY industry, there is a chance it could suffer from coordination issues due to its awesomeness which will result increase in administration costs..." etc.
Sales people seriously regurgitate that shit
I think what you need to
I think what you need to focus on is that he said "most important" not important vs not important. I think the issue here is if you don't have accurate statements (or as accurate as possible) then it doesn't matter how accurate your projections are for beta, the cost of equity, CAPM, WACC, etc.
Regards
"The trouble with our liberal friends is not that they're ignorant, it's just that they know so much that isn't so."
- Ronald Reagan