Net method
The net method , including equity method , referred to in the financial industry a form of discounted cash flow method for business valuation . It is the opposite of the Entity method .
As is often the case in the financial sector, the company's payments are, to put it simply, divided into payments from and to equity providers (i.e. shareholders, etc.) and from and to lenders (bank, etc.). As with any business valuation, one tries to determine the value of a company from the point of view of the equity providers (i.e. shareholders, etc.). As with any discounted cash flow method, this is done by determining the current value of future expected cash flows (i.e., incoming and outgoing payments in and out of the company) by discounting them. The interest rate used for the discounting is, in most cases and to put it simply, the best interest rates that the equity investors could achieve over the period under consideration at the bank, other companies or elsewhere with the same risk (i.e. the best market interest rate).
With the net method, as a sub-form of the discounted cash flow method, only the payments to the equity providers (i.e. dividends, etc.) are taken into account of the future cash flows. The interest rate for discounting must be adjusted accordingly: the so-called risk-adjusted return requirement is used, which is usually calculated using the capital asset pricing model . Risk-adjusted means that the risk that the payment will not be made is already taken into account. To put it simply, the return demand means the interest rate ( return ) that the equity investors (and not the lenders) demand from the company in question, since they could otherwise invest in other companies (i.e. the best market interest rate for equity investors).