Pratiques de l'évaluation

Analysts use a wide spectrum of models, ranging from the simple to the sophisticated. These models often make very different assumptions about the fundamentals that determine value, but they do share some common characteristics and can be classified in broader terms. There are several advantages to such a classification -it makes it is easier to understand where individual models fit in to the big picture, why they provide different results and when they have fundamental errors in logic.

In general terms, there are four approaches to valuation. The first, discounted cash flow valuation, relates the value of an asset to the present value of expected future cash flows on that asset. The second, liquidation and accounting valuation, is built around valuing the existing assets of a firm, with accounting estimates of value or book value often used as a starting point. The third, relative valuation, estimates the value of an asset by looking at the pricing of 'comparable' assets relative to a common variable like earnings, cash flows, book value or sales. The final approach, contingent claim valuation, uses option pricing models to measure the value of assets that share option characteristics. This is what generally falls under the rubric of real options.

Since almost everything in finance can be categorized as a subset of valuation and we run the risk of ranging far from our mission, we will keep a narrow focus in this paper. In particular, we will steer away any work done on real options, since it merits its own survey article. In addition, we will keep our focus on papers that have examined the theory and practice of valuation of companies and stocks, rather than on questions of assessing risk and estimating discount rates that have consumed a great deal of attention in the literature.

In discounted cash flows valuation, the value of an asset is the present value of the expected cash flows on the asset, discounted back at a rate that reflects the riskiness of these cash flows. This approach gets the most play in academia and comes with the best theoretical credentials. In this section, we will look at the foundations of the approach and some of the preliminary details on how we estimate its inputs.

We buy most assets because we expect them to generate cash flows for us in the future. In discounted cash flow valuation, we begin with a simple proposition. The value of an asset is not what someone perceives it to be worth but it is a function of the expected cash flows on that asset. Put simply, assets with high and predictable cash flows should have higher values than assets with low and volatile cash flows.

The notion that the value of an asset is the present value of the cash flows that you expect to generate by holding it is neither new nor revolutionary. While knowledge of compound interest goes back thousands of years1, the concrete analysts of present value was stymied for centuries by religious bans on charging interest on loans, which was treated as usury.

The development of insurance and actuarial sciences in the next few centuries provided an impetus for a more thorough study of present value. Simon Stevin, a Flemish mathematician, wrote one of the first textbooks on financial mathematics in 1582 and laid out the basis for the present value rule in an appendix.3