The methods to evaluate the value of a company are numerous and diverse. In this assignment the theoretical framework of company evaluation is described and the popular approaches depending on discounted cash flows or multipliers are explained and used on the example of the Daimler AG. The different value results are discussed in the concluding part.
Table of Contents
1 Introduction
1.1 Problem Definition
1.2 Objectives
1.3 Methodology
2 Theoretical basis of a Corporate Evaluation
2.1 Evaluation Reasons
2.2 Purpose and Function
2.3 Investment Theoretical Approach
2.4 Methods
2.5 Empirical references and other frameworks
3 Company Profile of the Daimler AG
4 Discounted Cash Flow Methods on use on the Daimler AG
4.1 Entity Approach
4.1.1 Weighted Average Cost of Capital
4.1.2 Free Cash Flow (FCF)
4.1.3 Underlying assumptions
4.1.4 Calculation of the FCF
4.1.5 Calculation of the equity capital value
4.2 Equity Approach
4.2.1 Flow to Equity (FtE)
4.2.2 Calculation of the equity capital value
5 Multiplier Method
5.1 Calculation of the multipliers
5.2 Calculation of the equity capital value
6 Evaluation and Critical Consideration
6.1 DCF Method
6.2 Multiplier Method
7 Conclusion
Objectives & Core Topics
The primary objective of this assignment is to conduct a corporate evaluation of Daimler AG by applying and comparing two distinct financial methodologies—the Discounted Cash Flow (DCF) approach and the Multiplier approach—to highlight the inherent subjectivity and potential divergence in valuation results.
- Theoretical framework and purpose of corporate evaluation
- Application of Entity and Equity DCF valuation models
- Execution of a Multiplier approach using peer group benchmarks
- Comparative analysis of valuation outcomes for Daimler AG
- Critical discussion on methodological limitations and assumptions
Excerpt from the Book
2.3 Investment Theoretical Approach
If the company evaluation is caused by a buying interest the company is treated as an investment. The main question relevant in this case is: How high is the benefit of the invested capital, or, how much is the yield? This means the evaluation founded on the future benefit flows for the buyer or investor. This, itself, includes the calculation of the expected inflow of funds and the expected costs. Whereas the costs for an investment in bonds or capital equipment are known, they have to be determinate for every company in individual case (Thommen & Achleitner 2012, p. 691).
Already at this point the above-mentioned objectivity problem becomes visible. In general all of these costs are plausible to calculate, but each of the determination approaches, which will be described, contains a significant subjectivity factor, as it will be shown. An objective company value is, as already mentioned, not determinable, and the scientific evidence of a value-price-divergence is underlying this fact (Frère & Schyra 2011, p. 6). A detailed consideration of this divergence is at least causing a philosophical, tautological problematic nature and is therefor not object of this assignment. It should be noted just that much, that reasoned in the nature of economics itself the price of a market object can never be reflecting its value for everyone, because value itself is a subjective idea. Evaluations in this case are always founded on subjective determinations and decisions (Thommen & Achleitner 2012, p. 693). If a company value is for example determinate for argumentative function, it is always influenced by the position of the evaluator (Thommen & Achleitner 2012, p. 693), what itself is no problem, if it serves the function of the evaluation. But, thinking further on, this circumstances lead to the insight, that an objective evaluation is not realistic, even if it is functional for mediation and therefor impartial.
Summary of Chapters
1 Introduction: This chapter outlines the fundamental task of corporate valuation, introduces the structure of the assignment, and defines the methodological constraints and objectives regarding the valuation of Daimler AG.
2 Theoretical basis of a Corporate Evaluation: This chapter establishes the theoretical framework, discussing reasons and purposes for evaluations, investment-oriented perspectives, and providing a survey of various evaluation methods.
3 Company Profile of the Daimler AG: This chapter provides a brief overview of Daimler AG, detailing its core business divisions, global presence, and market segments as of 2011.
4 Discounted Cash Flow Methods on use on the Daimler AG: This chapter provides a detailed application of Entity and Equity DCF models, including the calculation of WACC, free cash flows, and the resulting equity capital values.
5 Multiplier Method: This chapter demonstrates the market-based valuation approach by calculating and applying various industry-specific multipliers to the financial data of Daimler AG.
6 Evaluation and Critical Consideration: This chapter critically analyzes the reliability of the used DCF and Multiplier methods, highlighting the impact of assumptions and market variables on the final valuation.
7 Conclusion: This final chapter synthesizes the results obtained from the different valuation methods and discusses the inevitable estimation character inherent in all forecast-based evaluations.
Keywords
Corporate Evaluation, Daimler AG, Discounted Cash Flow, Multiplier Method, WACC, Entity Approach, Equity Approach, Market Capitalization, Financial Management, Business Valuation, CAPM, Investment Theory, Peer Group, Company Value, Enterprise Value.
Frequently Asked Questions
What is the core focus of this assignment?
The assignment focuses on the practical application of company valuation methods, specifically analyzing Daimler AG through the lens of Discounted Cash Flow (DCF) models and the Multiplier approach.
What are the primary valuation methods explored?
The study investigates the Entity approach and Equity approach within the DCF framework, as well as various market-based multipliers like P/E, P/S, and P/B ratios.
What is the ultimate goal of the research?
The goal is to calculate the value of Daimler AG and demonstrate how different methodological choices and underlying assumptions can lead to significantly different valuation results, illustrating the subjective nature of corporate evaluation.
Which methodology is used to evaluate Daimler AG?
The authors rely on German reference literature and financial data from the 2011 annual report of Daimler AG to perform a comparative study of standard valuation techniques.
What does the main body of the paper cover?
It covers the theoretical basis of evaluations, a profile of the company, step-by-step calculations for both DCF and Multiplier methods, and a critical discussion of the results.
Which keywords best characterize this work?
The work is characterized by terms such as Corporate Evaluation, DCF, Multiplier Method, WACC, and Equity Capital Value.
Why is the "circular reference" problem mentioned in the DCF calculation?
The circular reference occurs because the equity capital value is both a necessary input for calculating the weighted average cost of capital (WACC) and the final output of the evaluation, necessitating an iterative solution.
How is the "peer group" selected for the Multiplier method?
The peer group is assembled based on the world ranking of automotive manufacturers concerning EBIT and the requirement that the companies must be publicly listed on a stock exchange.
What conclusion do the authors draw regarding "objective" valuation?
The authors conclude that an entirely objective evaluation is not realistic, as all forecast-based models are inherently dependent on subjective assumptions and market estimates.
- Quote paper
- Dipl. Päd. Thilo Ketschau (Author), Andreas Förster (Author), 2013, The Problematic of Corporate Evaluation on the example of the Daimler AG, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/210903
