Why Dynamic Cashflow Modelling Should be in a Valuator’s Toolkit
CBV Congress 2022
June 7, 2022
Abstract: Valuation is done in a dynamic business environment in which the future is a range possibilities. Value estimates using cost and market comparable methods may work in some situations but offer little insight into how uncertainty about the future influences value. A dynamic cash flow model extends the conventional static cash flow model method to recognize how uncertainty about the future interacts with the structure of a cash flow stream to influence value, operating policy, and risk.
The session will discuss the four basic components of a dynamic model – uncertainty model, cash flow description, numerical method, and risk adjustment approach – and how they are combined to estimate the value of a cash flow stream. Two case studies from private equity and the mining industry are used to illustrate the potential of dynamic cash flow models and how a valuator risks: June 7, 2022 missing important value influences by ignoring a dynamic valuation approach.
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