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Company Value

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This is not investment advice, there is no implication of any guarantee. All investment is risky and you should take advice from actual advisors. EDUCATION ONLY.

Definition

A simple calculation to derive the value of a business, in simple terms.

Takeaway

The fundamental formula in determining the value of a company is fairly simple. While simple calculations make life easy, they also tend to not be very useful. If all it took to valuate a company was a simple formula, there would be little point to investing - the market would be perfect. Instead we need to look at certain formulas as a tool in a belt - they won’t show you the whole picture, but they are significant if you build on them.

Formula

  • Numerator > Denominator = Company is worth more to you.

Python

Company Value - Simple

def company_value(cashflow, DR, CFGR):
  return cashflow/(DR-CFGR)

print(company_value(100,10,4))

Company Value - Complex

Compounding exists. Cash flows are not stable year to year until a company matures. We may want to understand the value of a company today, based on what it’s worth in the future. Let’s say at the point of investment we expect the discount rate on a company to be 10% with cash flow of $100. Let’s say at the end we expect our discount rate to be 8%. We want to evaluate five periods.

Year 1
Year 2
Year 3
Year 4
Year 5
CF Growth
10%
8%
6%
4%
CF Annual
$100
!pip install numpy_financial
import numpy_financial as npf
cfgrowth = [0,.10,.08,.06,.04]
cfstart = 100

def cashflow_table(growth, start):
  annual = []
  n = 0
  for x in cfgrowth:
    n += 1
    if x == 0:
      annual.append(start)

    else:
      annual.append(annual[n-2] * growth[n-1] + annual[n-2])

  return annual

print(cashflow_table(cfgrowth,cfstart))
npvcashflows = npf.npv(.1, cashflow_table(cfgrowth,cfstart))

#[100, 110.0, 118.8, 125.928, 130.96511999999998]
# 482.2443275732531

As you can see I “cheat” by using the numpy_financial.npv function rather than programming the function myself.