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Financial Management Under Uncertainty: An Introduction Read chapter Read first chapter

2023 | OriginalPaper | Chapter

Consideration of Uncertainties in Business Valuations

Authors : Tobias Hüttche, Fabian Schmid

Published in: Finance in Crises

Publisher: Springer Nature Switzerland

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Abstract

Valuation seems to be impossible since the future is uncertain. Nevertheless, company values are necessary for many reasons, so the question arises as to how valuations can take these uncertainties into account.
Traditionally, the past is used as a basis for planning, i.e., it is more or less simply extrapolated. Given current experiences (Corona pandemic, Ukraine war, inflation, and energy crisis, to name but a few), the hope remains that these will not be perpetuated. On the other hand, however, we must also expect new and as yet unknown developments, or developments that are not considered likely or unlikely.
To produce reliable valuations as a basis for economic decisions even in times of increased uncertainty, selecting suitable procedures and the appropriate handling of risks is important.
Basically—and recurring to the mathematical model of discounting future cash flow—uncertainties or risks can be taken into account above the line (in the numerator or the cash flows) or below the line (in the denominator or the cost of capital). Double counting must be avoided, meaning that the denominator matches the numerator (equivalence principle) and that the cost of capital adequately reflects the fluctuations in cash flows.
Up to now, most valuations reflect only one path, the future developments may take. In this paper, we want to demonstrate how the traditional valuation approach can be extended by sensitivity analyses, scenario calculations, and simulations to move from pure point estimates to reliable value ranges that may reflect reality more accurately.

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previous chapter Financial Management Under Uncertainty: An Introduction
next chapter Increased Uncertainty in Times of Crises and Implications for Financial Reporting, Focusing on the Going Concern Principle
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Metadata
Title
Consideration of Uncertainties in Business Valuations
Authors
Tobias Hüttche
Fabian Schmid
Copyright Year
2023
Book
Finance in Crises

Print ISBN: 978-3-031-48070-6

Electronic ISBN: 978-3-031-48071-3

Copyright Year: 2023

DOI
https://doi.org/10.1007/978-3-031-48071-3_2