How to value a seasonal company’s discounting cash flows

The correct way of valuing seasonal companies by cash flow discounting is to use monthly data. We may use annual data, but it requires some adjustments. We show that when using annual data in the context of the adjusted present value (APV), the value of the unlevered equity (Vu) and the value of the...

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Autor: Fernández, P. (Pablo)|||/items/a6e0c9a2-2906-404e-b688-e21cc34cfda0
Tipo de recurso: artículo
Fecha de publicación:2011
País:España
Institución:Universidad de Navarra
Repositorio:Dadun. Depósito Académico Digital de la Universidad de Navarra
Idioma:inglés
OAI Identifier:oai:dadun.unav.edu:10171/69399
Acceso en línea:https://hdl.handle.net/10171/69399
Access Level:acceso abierto
Palabra clave:Valuation of seasonal companies
Seasonality
Cash flow discounting
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repository_id_str
spelling How to value a seasonal company’s discounting cash flowsFernández, P. (Pablo)|||/items/a6e0c9a2-2906-404e-b688-e21cc34cfda0Valuation of seasonal companiesSeasonalityCash flow discountingThe correct way of valuing seasonal companies by cash flow discounting is to use monthly data. We may use annual data, but it requires some adjustments. We show that when using annual data in the context of the adjusted present value (APV), the value of the unlevered equity (Vu) and the value of the tax shields (VTS) calculations must be adjusted. However, the debt that we have to substract to calculate the equity value does not need to be adjusted. We derive the adjustments to be made. Errors due to using annual data without doing the adjustments are big. To adjust only by using average debt and average working capital requirements does not provide a good approximation. When the inventories are a liquid commodity such as grain or seeds, it is not correct to consider all of them as working capital requirements. The excess inventories financed with debt are equivalent to a set of futures contracts. We show that not considering it undervalues the company. This paper values a company in which the seasonality is due to the purchases of raw materials: the company buys and pays all raw materials in the moth of December. We show that the equity value calculated using annual data without doing the adjustments understates the true value in a 45% if the valuation is done at the end of December, and overstates the true value in a 38% if the valuation is done at the end of November. The error of adjusting only by using average debt and average working capital requirements ranges from –17.9% to 8.5%.University of Piraeus, International Strategic Management AssociationDadun. Depósito Académico Digital Universidad de Navarra20242024-04-2620112011-01-0120112011-01-01journal articlehttp://purl.org/coar/resource_type/c_6501info:eu-repo/semantics/articleapplication/pdfhttps://hdl.handle.net/10171/69399reponame:Dadun. Depósito Académico Digital de la Universidad de Navarrainstname:Universidad de NavarraInglésengopen accesshttp://purl.org/coar/access_right/c_abf2info:eu-repo/semantics/openAccessoai:dadun.unav.edu:10171/693992026-06-21T12:47:57Z
dc.title.none.fl_str_mv How to value a seasonal company’s discounting cash flows
title How to value a seasonal company’s discounting cash flows
spellingShingle How to value a seasonal company’s discounting cash flows
Fernández, P. (Pablo)|||/items/a6e0c9a2-2906-404e-b688-e21cc34cfda0
Valuation of seasonal companies
Seasonality
Cash flow discounting
title_short How to value a seasonal company’s discounting cash flows
title_full How to value a seasonal company’s discounting cash flows
title_fullStr How to value a seasonal company’s discounting cash flows
title_full_unstemmed How to value a seasonal company’s discounting cash flows
title_sort How to value a seasonal company’s discounting cash flows
dc.creator.none.fl_str_mv Fernández, P. (Pablo)|||/items/a6e0c9a2-2906-404e-b688-e21cc34cfda0
author Fernández, P. (Pablo)|||/items/a6e0c9a2-2906-404e-b688-e21cc34cfda0
author_facet Fernández, P. (Pablo)|||/items/a6e0c9a2-2906-404e-b688-e21cc34cfda0
author_role author
dc.contributor.none.fl_str_mv Dadun. Depósito Académico Digital Universidad de Navarra
dc.subject.none.fl_str_mv Valuation of seasonal companies
Seasonality
Cash flow discounting
topic Valuation of seasonal companies
Seasonality
Cash flow discounting
description The correct way of valuing seasonal companies by cash flow discounting is to use monthly data. We may use annual data, but it requires some adjustments. We show that when using annual data in the context of the adjusted present value (APV), the value of the unlevered equity (Vu) and the value of the tax shields (VTS) calculations must be adjusted. However, the debt that we have to substract to calculate the equity value does not need to be adjusted. We derive the adjustments to be made. Errors due to using annual data without doing the adjustments are big. To adjust only by using average debt and average working capital requirements does not provide a good approximation. When the inventories are a liquid commodity such as grain or seeds, it is not correct to consider all of them as working capital requirements. The excess inventories financed with debt are equivalent to a set of futures contracts. We show that not considering it undervalues the company. This paper values a company in which the seasonality is due to the purchases of raw materials: the company buys and pays all raw materials in the moth of December. We show that the equity value calculated using annual data without doing the adjustments understates the true value in a 45% if the valuation is done at the end of December, and overstates the true value in a 38% if the valuation is done at the end of November. The error of adjusting only by using average debt and average working capital requirements ranges from –17.9% to 8.5%.
publishDate 2011
dc.date.none.fl_str_mv 2011
2011-01-01
2011
2011-01-01
2024
2024-04-26
dc.type.none.fl_str_mv journal article
http://purl.org/coar/resource_type/c_6501
dc.type.openaire.fl_str_mv info:eu-repo/semantics/article
format article
dc.identifier.none.fl_str_mv https://hdl.handle.net/10171/69399
url https://hdl.handle.net/10171/69399
dc.language.none.fl_str_mv Inglés
eng
language_invalid_str_mv Inglés
language eng
dc.rights.none.fl_str_mv open access
http://purl.org/coar/access_right/c_abf2
dc.rights.openaire.fl_str_mv info:eu-repo/semantics/openAccess
rights_invalid_str_mv open access
http://purl.org/coar/access_right/c_abf2
eu_rights_str_mv openAccess
dc.format.none.fl_str_mv application/pdf
dc.publisher.none.fl_str_mv University of Piraeus, International Strategic Management Association
publisher.none.fl_str_mv University of Piraeus, International Strategic Management Association
dc.source.none.fl_str_mv reponame:Dadun. Depósito Académico Digital de la Universidad de Navarra
instname:Universidad de Navarra
instname_str Universidad de Navarra
reponame_str Dadun. Depósito Académico Digital de la Universidad de Navarra
collection Dadun. Depósito Académico Digital de la Universidad de Navarra
repository.name.fl_str_mv
repository.mail.fl_str_mv
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