Discounted cash flow

Discounted Cash-Flow (DCF) describes an investment- theoretical process for determining the value , especially in the context of investment projects, company valuation and the determination of the market value of real estate . It builds on the financial mathematical concept of discounting ( English discounting ) of cash flows ( english cash flow ) for determining the net present value on.

Description of the individual procedures

Procedure of the DCF method

The DCF method is based on the part of a corporate planning of future financial surpluses (including cash flow, cash flow ), and discount them with the help of cost of capital to the valuation date. Taxes to be paid (e.g. corporation tax or income tax ) are included in the assessment. The present value or capital value determined in this way is the discounted cash flow. The future payment surpluses are typically divided into two phases: the first phase lasts 5–15 years, in the second phase either a separately determined residual value or a perpetual annuity is assumed. In practice, the cost of capital is very often determined with the help of a capital market model ( CAPM ). The financing effect resulting from tax deductibility is shown differently in the various DCF methods.

There are basically three problems with a DCF procedure:

• Determining the estimates for future periodic cash flows.
• The inclusion of taxes (corporate tax or income tax).
• Determining the discount rate to be used to discount the periodic cash flows.

Depending on the financing assumptions, a distinction must be made between different DCF methods that can (but do not always have to) lead to different company values. A distinction is currently made between four procedures when including corporate income tax:

• Equity method :
  • FTE approach (from flow to equity )
• Entity methods :
  • APV approach (from English adjusted present value )
  • WACC approach (from English weighted average cost of capital )
  • TCF approach (from English total cash flow )

Depending on the chosen procedure and the assumed financing policy, there is a problem of circularity . In practice it is often difficult to determine to what extent the assumptions of the DCF theory are fulfilled. In particular, the forecast of payment flows and the choice of discounting factors turn out to be levers that can sometimes give the impression of manipulating desired results.

Company valuation

Austria according to KFS BW 1

In Austria, the expert report KFS BW 1, published by the Chamber of Public Accountants , is relevant. The discounted cash flow methods described therein determine the company value by capitalizing (determining the net present value ) of cash flows .

Since equity and debt differ in terms of costs, different capital costs (interest rates) must be taken into account when capitalizing . The CAPM is usually used to determine the cost of equity . The cash flows considered are defined differently depending on the procedure.

Of the gross method ( entity method ), the WACC approach and the APV approach are used, as well as the net method ( equity method ).

• In the WACC concept, the market value of total capital is determined by capitalizing the free cash flows with the weighted average cost of capital ( WACC ).

• In the APV concept, complete self-financing is assumed in the first step , and the market value of the company is determined on this basis. This in turn is done by capitalizing the free cash flows, but at cost of equity. After taking into account the tax savings from the Tax Shield , the market value of the debt is deducted, leaving the market value of the equity.

• In the net method, the net inflows to the company owners are capitalized at cost of equity. This corresponds to the discounted earnings method taking the risk into account.

Both the discounted earnings method and the DCF method are based on the same conceptual basis: the company value is determined as the present value of future financial surpluses. These procedures lead to identical results with identical assumptions.

Germany according to IDW S1

In Germany, the company valuation standard IDW S1 is used to determine company value.

Property valuation

The DCF method is based on a capitalization of future payments in and out, so it is ultimately a determination of the present value of forecast future nominal net income.

In this context, the DCF is divided into several phases of different forecast quality, since future real estate income becomes more and more uncertain as the time horizon increases. An explicit forecast is therefore rarely made over the entire remaining useful life of a property. In a first phase, the cash flow is always shown in detail in its expected development. This forecast period is usually 10, sometimes 5, 15 or 20 years. The choice of the time horizon is u. a. depends on the intended holding period and the available forecast data. The basis of the first, detailed forecast phase is, for example, the contractually agreed rents, expected re-leases and necessary repairs or modernizations. A subsequent, not always modeled phase then works with average payments and average growth rates, thus hiding details that are no longer sensibly determinable or economically insignificant. The last phase finally summarizes all subsequent developments regarding the residual value of the property. The residual value can be understood as the last payment in terms of the sales proceeds. This assumption is based, for example, on a simple earnings multiplier or a more detailed earnings value calculation.

The DCF method is often used in international valuation to determine the market value of objects that are traded in normal business transactions under investment analysis aspects. Usually these are more complex, rented properties such as B. Office buildings and shopping centers. One advantage of the DCF method is the comparability of the most diverse investments with one another. Furthermore, it is a conveniently applicable instrument, particularly for properties with income flows that differ over time, for example single-tenant properties for which re-letting and modernization scenarios are to be mapped. The DCF is not the dominant valuation method internationally, but it is a widely used valuation instrument. It is recognized by the European (TEGoVA), British (RICS) and international (IVSC) valuation associations, as well as a possible income value method according to ImmoWertV (§ 17).

One weakness of the DCF when determining the market value (market value) of real estate is the lack of generally recognized procedural rules (such as the ImmoWertV) that can be used in the context of determining the market value. This concerns both the approach of the capitalization and discount rate as well as the forecasts themselves. For example, if the discounted earnings method uses real estate interest rates to capitalize the income, which are publicly disclosed in the property market reports of the appraisal committees, the capitalization and discount rate of the DCF method is based heavily on the assessment of the user of the method. The Society of Property Researchers (gif) , however, published in 2006 guidelines for standardizing the DCF method, which try to limit this weakness of the DCF. Nevertheless, there is a lack of up-to-date, market-based sources for the underlying calculation parameters which the expert could use to create and objectively prove his expert opinion.

The simplified DCF procedures ( hardcore layer and term reversion ) are not based on period -specific reporting of deposits and withdrawals, but operate with flat-rate existing or market rents; Depending on the ratio to the market rent, a property can be overrented or underrented .

When using the DCF analysis, it should be noted that a discount rate must be selected for the period under consideration that differs from the property interest rate and does not contain any implicit index increases (so-called equated yield ), whereas the terminal value is the interest rate taking into account increases in the index ( equivalent yield ) is to be selected.

See also

• Capitalized earnings method
• Earned value
• Gordon Growth Model
• Long Term Asset Value Method

literature

• Jochen Drukarczyk: Company Valuation , Franz Vahlen Munich 2006, ISBN 3800625180
• Joachim Krag, Rainer Kasperzak: Principles of company valuation , Franz Vahlen Munich 2000, ISBN 3800624168
• Lutz Kruschwitz, Andreas Löffler : Discounted Cash Flow , Wiley & Sons. 2006, ISBN 978-0470870440
• Volker Oppitz, Volker Nollau: Pocket book of the economic calculation. Quantitative methods of economic analysis , Hanser Fachbuchverlag 2003, ISBN 3446224637
• Inga Braun: Discounted Cash Flow Method and the Influence of Taxes - The Company Value Taking Valuation Standards into Account , Deutscher Universitätsverlag 2005, ISBN 3824483130
• Sebastian Lobe: Company Valuation and Terminal Value. Operational planning, taxes and capital structure , Peter Lang Verlag, Frankfurt am Mail et al. 2006, ISBN 363153907X

• Property valuation
  • Wolfgang Kleiber: Determination of the market value of properties . 6th edition. Bundesanzeiger Verlag, Cologne 2010, ISBN 978-3-89817-808-2 .
  • Lorenzo Pedrazzini, Francois Micheli: The Price of Real Estate: Dynamic Investment Calculation for Real Estate Valuation. Methodology and ten case studies , Versus 2002, ISBN 3039090046
  • Frank J. Matzen: Company valuation of housing construction companies. Rudolf Müller Verlag, Cologne 2005, ISBN 3-89984-138-7 .
  • Metzner / Erndt: DCF evaluation and key figure systems in real estate controlling, Verlag Wissenschaft & Praxis, Sternenfels 2006, ISBN 978-3-8967-3251-4
  • Sprengnetter (Ed.): Real Estate Valuation - Textbook and Commentary (Volumes 5-13), Sprengnetter GmbH, loose-leaf collection, ISBN 3-937513-02-7
  • WD Fraser: Cash-Flow-Appraisal for Property Investment , Palgrave Macmillan Verlag, New York 2004, ISBN 978-0-333-94641-1

• for or by practitioners
  • Tom Copeland, Tim Koller, Jack Murrin: Company Value . Campus Verlag Frankfurt 2002, ISBN 3593357798
  • Ernst, Schneider, Thielen: Creating and Understanding Company Valuations - A Practical Guide 2nd Edition (2006), ISBN 3-8006-3292-6

• critical of DCM
  • Manfred Jürgen Matschke / Gerrit Brösel: Company valuation. Functions - Methods - Principles. 2nd Edition. Wiesbaden 2006.

Web links

• International Valuation Standards Committee ; see also International Valuation Standards Committee
• International Association of Certified Valuation Analysts-Germany eV
• Royal Institute of Chartered Surveyors
• The European Group of Valuers' Associations
• Lectures on DCF (held in English)

Individual evidence

1. ↑ Cf. Alexander Enzinger, Peter Kofler: The Roll Back Procedure for Company Valuation - Circularity-free company valuation with autonomous financing policy using the equity method . In: Assessment Practitioner No. 4, 2011, pp. 2-10.
2. ↑ KWT: Expert opinion of the specialist senate for business administration and organization ( Memento from June 20, 2018 in the Internet Archive ) (PDF; 423 kB) of the Institute for Business Administration, Tax Law and Organization of the Chamber of Public Accountants for Company Valuation , February 27, 2006