Valuing Company Securities by DCF: 'Discounting' with Present Value Theory

Co-Sponsored by the National Association of Certified Valuators and Analysts®  (NACVA®) 

	Program Description		Who Should Attend
	How You Will Benefit		Schedule

Program Description
The current practice of discounting non-controlling private company shares based upon public market characterizations misses the mark because the analysis is not based on cash flows to the investor/security, but on cash flows to the company. Present value analysis offered here employs a security's cash flow as the main value determinant.

Because all investor benefits and costs are in the future, a cash projection with a return of capital and appreciation is the necessary valuation model. Analyzing the cash flow of the security, an appraiser can get a reliable result tied directly to a security's character. This rubric applies to common stock, membership interests, preferred stock, promissory notes, warrants, and options. To solve the appraisal problem, appraisers must select an exit date and event scenario, then project the cash to be received by the security, and apply an investor discount rate.

Problem set-up requires that ownership entitlements are strictly applied at the company level as components of company equity value. Then, the investor discount rate is seen to be driven by the risk-free rate and a company’s tendency to take additional cash from its investors, reinvest cash into the company, or distribute cash to its investors.

How You Will Benefit
After completing this course, attendees will be able to:

• Apply the concept of economic utility to a company so that its asset value and equity value are correctly distinguished
• Determine an investor/security discount rate compatible with the equity value that can be paired with the security's cash flows
• Apply the risk-free rate as the basis of the lack-of-liquidity discount rate component
• Understand the effect of a company's cash calls, reinvestment or distributions and exit costs on the discount rate
• Understand the effect of a value floor, as seen in preferred stock and real estate, on the discount rate
• Demonstrate conversion of lack-of-control data into a discount rate component
• Demonstrate modeling a security's cash flows to exit and complete a security's DCF analysis
• Explain when a company's security may have a premium instead of a discount to current equity value

Take Aways
Experienced valuers will be able to value securities with a DCF model, whether common stock, options, warrants or other interests, without theoretical black box models or special discount data.

Who Should Attend

Delivery Method Group Internet-Based Program Level Advanced Advanced Preparation None Prerequisites Previous training or research on subject matter being taught. Such persons are often at a mid-level within the organization, with operational and/or supervisory responsibilities.    Finance 1   Economics 1 Total CPE Hours   2

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