Income approach to business valuation terms. Income approach to business valuation. Discount rate calculation, %

Discount rate calculation, %

Calculation of the need for own working capital

General principles of the income approach

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The choice of the amount of profit to be capitalized.

Calculation of the capitalization rate.

15.11.2019

3.1.5.2. Determination of the market value of the ownership right for a 100% share in the authorized capital of GofroPak LLC based on the income approach

To evaluate GofroPak LLC, we use the discounted method cash flows. This method objectively gives the most accurate result of the market value of the enterprise. The use of the discounted cash flow method is the most reasonable for valuation, since the company being valued is at the stage of stable economic development.

The main stages of enterprise valuation using discounted cash flows

1. Choice of cash flow model.

2. Determining the duration of the forecast period.

3. Retrospective analysis and forecast of gross proceeds from sales

4. Analysis and forecast of expenses.

5. Analysis and forecast of investments.

6. Calculation of the amount of cash flow for each year of the forecast period.

7. Determination of the discount rate.

8. Calculation of the value in the post-forecast period.

9. Calculation of the current values of future cash flows and value in the post-forecast period.

10. Introduction of final amendments.

- Choice of cash flow model. Choosing a cash flow model for equity.

- Determining the duration of the forecast period depends on the amount of information sufficient for long-term forecasts. A carefully executed forecast allows you to predict the nature of changes in cash flows for a longer period. In international practice, the average value of the forecast period is 5-10 years, in countries with economies in transition, as in Russia, a reduction in the forecast period of 3-5 years is acceptable. The high level of risk that characterizes the Russian investment market makes it unjustified to consider a long period as a forecast. As part of this assessment, a forecast period of 3 years was chosen.

Forecasting the amounts of cash flows, including reversion, requires: careful analysis based on the financial statements submitted by the customer on income and expenses in the retrospective period; forecast of income and expenses based on the reconstructed income statement.

Post-forecast valuation is based on the premise that the business is capable of generating revenue beyond the forecast period. It is assumed that after the end of the forecast period, business income will stabilize and in the remaining period there will be stable long-term growth rates or infinite uniform income.

The current value of cash flows in the post-forecast period is calculated using the present value factor at the end of the period, and the current value in the post-forecast period is calculated using the present value factor calculated at the end of the last forecast period. When applying the DCF method in valuation, it is necessary to sum up the current values of the periodic cash flows that the object of assessment brings in the forecast period, and the current value in the post-forecast period, expected in the future.

- Retrospective analysis and forecast of gross proceeds from sales and expenses of the enterprise. The dynamics of the company's revenue for 2010-2012 indicates moderate growth. Based on this, we set the following parameters of the organization's cash flow:

The sales revenue forecast is based on an average service delivery growth rate of 8%;

Revenue in the first forecast year is calculated as the amount of revenue in 2012 plus the planned growth rate: 2572670*1.08 2 =3,000,762.7 thousand rubles;

We will take the planned level of costs as an average value in the sales proceeds in the amount of 0.93;

Selling and administrative expenses make up an insignificant percentage of sales proceeds and in the construction of the forecast and post-forecast period are taken equal for 2010-2012.

- Analysis and forecast of investments. In accordance with form No. 4 "Report on the movement Money» the investment activity of the enterprise includes:

Acquisition of fixed assets, profitable investments in material assets and intangible assets;

Loans granted to other organizations;

capital construction.

Based on the business plan for the development of the enterprise in 2013-2014, the following investment costs are expected.

- Determination of the discount rate. In the economic sense, the role of the discount rate is the rate of return required by investors on invested capital in investment objects comparable in terms of risk, in other words, it is the required rate of return on available alternative investment options with a comparable level of risk as of the valuation date. The choice of the type of rate depends on what is taken as the income base for calculating the cost of capital. If it is a cash flow to equity, then the two most common approaches to calculating the discount rate can be used:

Valuation Model capital assets(САРМ - capital asset pricing model);

Cumulative construction model.

Table 32

Name of indicator				forecast period
Name of indicator
Acquisition of fixed assets, profitable investments in tangible assets and intangible assets, thousand rubles.
Acquisition of securities and other financial investments, thousand roubles.
Loans granted to other organizations, thousand rubles
Capital construction, thousand rubles
Cash flow from investment activities, thousand rubles

We select the CAPM model for further calculations.

If a cash flow forecast is made for all invested capital (including borrowed funds), then the weighted average cost of capital method is used to calculate the discount factor.

The discount rate is calculated using the CAPM method (the CAPM model is most often used in practice) and has the following form:

R = Rf +  (Rm - Rf) +S, (20)

where R is the discount rate;

Rf - rate of return on risk-free investments;

Rm - average market rate of return;  - coefficient beta (is a measure of the systematic risk associated with the macroeconomic and political processes taking place in the country);

S - risks specific to an individual company (S1 - premium for small enterprises, S2 - premium for risk specific to an individual company, S3 - country risk).

ΔR= Rm - Rf, (21)

where ΔR is the market premium for investing in a risky investment asset.

The risk-free rate is used as the base rate, to which the rest of the interest rate components are added. The Russian indicators are taken based on the rates of state loan securities or deposit rates (comparable duration and size of the amount) of banks of the highest reliability category. The risk-free rate was adopted at the level of the average OFZ yield of 7.43% (http://www.cbr.ru/hd_base/GKOOFZ_MR.asp).

The total profitability of the market is taken at the level of profitability Russian economy 16.0% (www.bm.ru/common/img/uploaded/analit/2010/file_11036.pdf).

Beta coefficient (beta factor) is an indicator calculated for a security or a portfolio of securities. It is a measure of market risk, reflecting the volatility of the return of a security (portfolio) in relation to the return of the portfolio (market) on average (average market portfolio). Beta coefficients in world practice are usually calculated by analyzing the statistical information of the stock market. Data on beta coefficients are published in a number of financial guides and in some periodicals that analyze the stock markets.

The beta coefficients of securities of stable companies range from 0.5 to 2 (Source: http://www.stern.nyu.edu/).

Since there are no values for service companies in the table presented by the agency, we decide to choose the Beta coefficient equal to 0.68 (real estate transactions).

Let's calculate the discount rate (Table 33).

Table 33

Indicators	Values
Rf is the rate of return on risk-free investments. The risk-free rate was adopted at the level of the average OFZ yield
Rm - average market rate of return
β - coefficient beta
S1 - small business risk premium
S2 - premiums for the risk characteristic of an individual company (accepted at the maximum level - 5/6 of the risk-free rate of return, according to: S.V. Valdaytsev)
S3 - country risk premiums
Discount rate

The premium for the risk of investing in a small business is equal to zero, since the company being assessed, according to the main criteria (revenue, number of employees), does not belong to a small business.

The country risk premium is factored into the risk-free rate of return.

Calculation of the value in the forecast and post-forecast periods.

When constructing a cash flow forecast, we determine the value of our own working capital necessary for the smooth functioning of the business.

- Analysis and adjustment of current assets and liabilities as of the valuation date. Calculation of the actual value of own working capital at the valuation date based on the difference between the adjusted value of current assets and short-term liabilities.

Calculation of the actual value of working capital as a percentage of the projected revenue for the corresponding period (Table 34).

Table 34

Index
Balance currency
current assets
% current assets from the balance sheet
Current responsibility
% Current Liabilities of the balance sheet
Own working capital

Forecasting of income and expenses of GofroPak LLC was carried out on the basis of financial statements. The cash flow was calculated at current prices without taking into account inflation factors, since the use of inflationary cash flow in the current economic conditions is extremely difficult due to the impossibility of an accurate forecast of income inflation and cost inflation. The discount rate is 19.5% (calculated above), the growth rate in the post-forecast period is 1%. In cash flow forecasting, own working capital is not taken into account, since there is an excess of it.

Post-forecast valuation is based on the premise that the business is capable of generating revenue and that at the end of the post-forecast period, the business's earnings will stabilize and the remainder of the period will have stable long-term growth rates or infinite flat returns. Depending on the prospects for business development in the post-forecast period, we choose the calculation of the cost of GofroPak LLC using the Gordon model. Under the model, post-forecast annual income is capitalized in value using a capitalization rate calculated as the difference between the discount rate and the long-term growth rate. Gordon's model is based on a forecast of stable income in the residual period and assumes that depreciation and capital investment are equal.

The calculation of the final cost in accordance with the Gordon model is made according to the formula:

V (term) = CF (t+1) / (Rd - g), (22)

where V (term) - cost in the post-forecast period;

CF (t+1) - cash flow of income for the first year of the post-forecast (residual) period;

Rd - discount rate;

g - long-term growth rate of cash flow.

The value of the business obtained in this way in the post-forecast period is converted to current cost indicators at the same discount rate that is used to discount the cash flows of the forecast period. Based on the calculated discount rate, the calculation of the discount factor is carried out according to the following formula:

Кd = 1/ (1+Rd) n , (23)

where Kd - discount factor;

Rd - discount rate;

n - forecast year.

Table 35 shows the calculation of the cash flow and market value of GofroPak LLC using the income approach.

Thus, the market value of GofroPak LLC determined by the income approach (discounted cash flow method) is 2,857,000 thousand rubles. (two billion eight hundred fifty seven million) rubles.

Studying the material of the chapter will allow the student to: know

conditions for using the income approach to business valuation;
classification of cash flows and the specifics of their use;
the essence of the concept of "discount rate" and the specifics of its use depending on the type of cash flow;

be able to

predict cash flows;
consider risks in the process of determining the current value of the business; own
discounted cash flow method;
cash flow capitalization methods;
tools for substantiating the discount rate.

The income approach allows you to determine the present value of future income that will arise from the use of the company's assets. At the same time, the duration of the period for obtaining a possible income, the degree and type of risks accompanying this process, as well as the volume of investments involved in the formation of cash flows, have the greatest influence.

The value determined by the income approach is of most interest to a potential buyer, since any investor who acquires an operating business is buying not just a set of assets, but a means of generating income. At the same time, the value of the income stream must justify the investor's expectations in terms of the rate of return on invested capital.

To determine the company's ability to generate net income in the future to its owner, the appraiser can use the following sources of information:

- current financial statements of the assessed company;
- history of all incomes, proceeds, prices;
- results of analysis of competitors' activities.

If we consider the work of innovation-oriented companies or the launch of new business lines, significant restrictions often apply to all categories of information sources. In this case, the current financial statements of the company will not be able to fully reflect how profitable the investment in the new line of business will be, since the size and dynamics of cash flows, as well as the level of risk, may vary significantly and relate to different periods of time. In this situation, a retrospective analysis of the dynamics of income and expenses will not be able to show the company's growth rates in the new conditions. In addition, if the company being evaluated produces unparalleled products using fundamentally new technological and technical solutions, it is not always possible to determine the pricing policy based on the actions of competitors, since there may be no analogues at all. Therefore, the key and almost the only source of information for evaluating an innovation-oriented company is a high-quality, deeply developed business plan for its development, containing cash flows planned quarterly for the next few years. At the same time, it should be borne in mind that the results of the assessment will be correct only if two mandatory conditions are met:

1) new products will be in demand and will take its place in the market;
2) output will invariably be accompanied by a positive cash flow.

Consider the principles of business valuation using the income approach.

Principle 1. The main criterion for evaluating a business is cash flow.

In regulatory legal documents, cash flow is defined as “the time dependence of cash receipts and payments, calculated for the entire billing period, i.e. balance of inflows and outflows.

The cash flow more reliably reflects the actual situation in the enterprise than the indicator of accounting profit, as it has the following advantages:

- cash flows take into account exactly the real inflows and outflows of funds, including investments, payment of dividends on preferred shares, redemption, maintenance, as well as attraction of long-term borrowed funds. Thus, for an investor, it may be more clear to use the cash flow indicator: it reflects a number of parameters that are not involved in the calculation net profit companies;
- cash flow does not take into account depreciation charges as an outflow of funds, since the money that is deducted to the depreciation fund is at the disposal of the enterprise. Thus, as part of the cash flow, depreciation is taken into account as an expense when calculating income tax, but it is not an actual outflow.

The above advantages allow you to use the cash flow indicator as a tool strategic planning operating and investment activities of the company and optimize the process of managing its value.

Depending on whether cash flows are taken into account at the beginning or at the end of the period under review, a distinction is made between prenumerando and postnumerando cash flows. In this case, cash flows are concentrated on one of the boundaries of the period under consideration: the prenumerando flow is at the beginning of the period, the postnumerando flow is at the end of the period. In investment calculations, postnumerando cash flows are most common.

In addition, depending on the sequence of the nature of cash flows, ordinary and extraordinary cash flows are distinguished. Ordinary cash flows are characterized by the fact that in the initial periods there is a negative value, which is subsequently replaced by a positive one. If negative and positive cash flows constantly alternate, there is an extraordinary cash flow.

- cash flow from operating activities, which takes into account the proceeds from the sale of goods, payment wages, settlements with suppliers, interest payments on debt obligations and other current expenses;
- cash flow from investment activities, which takes into account receipts of funds and payments related to the sale, acquisition, as well as the modernization and reconstruction of fixed assets;
- cash flow from financial activities an enterprise that takes into account settlements with investors and creditors, as well as operations related to its own finances (issuance and sale of securities, payment of dividends, etc.).

However, according to some experts, such as S. V. Valdaitsva, the proposed classification is reasonable when the investment activity of an enterprise is considered as a separate business that does not use debt and equity financing and is conducted to earn distributable profits. But the investment activity of an ordinary enterprise is most often only an investment in maintaining and increasing the competitiveness of an enterprise. Therefore, it would be more logical to speak about the complete financial terms specific investment projects of the enterprise, where, for example, both short-term and long-term investments in securities (investment portfolio) are understood only as a way of accumulating funds for the enterprise's planned investments in real assets.

Depending on the method of accounting for borrowed funds, a distinction is made between full and debt-free cash flow - it is these types that are basic in the practice of business valuation.

The total cash flow (cash flow for equity) in composition and structure reflects the method of financing all investments made within the business, i.e. takes into account the attraction, servicing and repayment of borrowed funds.

Since the share and cost of borrowed funds in business financing are taken into account in the forecasted cash flow, the expected cash flows can be discounted at the discount rate for equity, the specifics of which will be discussed below. The total cash flow reflects the amount of cash that the owners of the company can claim after paying all obligations, including settlements with creditors. However, it is far from always possible to predict the conditions for attracting borrowed funds, especially when implementing projects with a long or indefinite duration, and in this case they operate with a debt-free cash flow.

Debt-free (free) cash flow does not include the movement of borrowed funds that are used to finance the business. In this case, cash flows should be discounted at a rate equal to the weighted average cost of capital of the enterprise. The amount of cash, which is the balance of the debt-free flow, is the amount that all participants in the business can claim. At the same time, situations may arise when, after repayment of obligations on loans, the owners will have nothing left. If the valuation of a business is carried out on the initiative of the owners, they are more interested in using full cash flows, which are more visible to them.

Depending on the method of accounting for price changes, nominal and real cash flows can be applied.

Planning nominal cash flows requires an assessment of changes in prices for final products manufactured within the business being assessed, as well as a forecast of the size of inflation, and in all markets where the resources necessary for the activity are presented.

This type of cash flow can provide even greater accuracy of investment calculations, however, only if the appraiser really knows the state of the markets well, knows how to track all the changes taking place on them and is able to predict future conditions well. Based on relevant marketing research, he must take into account the factors of the possible influence of future competitors, predict price changes, etc. This is due to the fact that an illiterate analysis of the situation when using a nominal cash flow can lead to significant errors in investment calculations.

Real cash flows- is the balance of receipts and payments in the prices of the base period associated with the sale of products and the purchase of resources. In the future, these prices may have a different meaning, as they depend on how much the initial price will change due to changes in the demand for products and the supply of resources.

When determining prices for products planned for release, it can be used price policy, not taking into account inflation. It may, for example, involve keeping the price level low in order to conquer its sector of the market.

Principle 2: The income approach must take into account the distribution of cash flows over time.

The procedure for discounting cash flows is associated with the need to take into account the time value of money and the trade-off between risk and return. Since it takes a considerable time from the beginning of financial planning to the moment of receipt of income, it is necessary to take into account this important factor due to three main reasons:

inflation (the purchasing power of money decreases over time);

- opportunity cost (finances could be invested in another project and receive more income from it);
- the risk of not receiving the amount of money. The more the owner risks when investing his capital in the target business, the more profitability he wants to receive, therefore it is very important to find and choose when compiling the financial part of the project optimal combination these settings.

To take into account the distribution of cash flows over time, a discounting procedure is carried out.

Discounting is the estimated reduction of future income to the current point in time. When carrying out this procedure, the appraiser must keep in mind that the first negative cash flows but again created business make a much larger negative contribution than delayed positive cash flows. Therefore, one of the most important stages of the income approach is the justification of the discount rate. According to clause 2.7 methodological recommendations the discount rate is determined by taking into account the alternative efficiency of capital use.

Principle 3. When planning cash flows, it is necessary to take into account and evaluate the risks of not receiving them.

One of the investment conditions taken into account in the discount rate is the level of risk. At the same time, the following dependence is observed: the higher the risks of a business, the greater the profitability it provides. Since the most popular way to reflect risks in business valuation is to include them in the discount rate, a high level of risk contributes to its growth.

In the theory of finance, there are many different classifications of risks, however, in valuation practice, the most popular approach is their division into systematic and non-systematic.

Systematic risks are determined by the market environment in which the business being valued operates. They are also often called external risks, among which we can distinguish general systematic and sectoral. The former will determine the activities of all companies operating in a given country, regardless of their industry affiliation. Such risks, in particular, include inflation, changes in exchange rates, the political climate, etc. The latter depend on the company's industry affiliation and take into account factors such as the nature of competition among resource suppliers, the needs of buyers, the specifics of the assets used (for example, special equipment). To determine the industry affiliation of the business being assessed, it is most correct to use SIC-kojx (Standard Industrial Classification) - four-digit code, taking into account narrow specialization. Its first two digits correspond to the main group of the industrial classification, the second two determine the subgroup.

Unsystematic risks - internal factors that affect the work of a particular business, which this enterprise faces mainly due to inefficient management. It should be noted that when valuing a business, systematic risks are mainly taken into account, since they can be objectively assessed to some extent on the basis of available market information. Accounting for non-systematic risks is possible only through peer review, however, they are the main object of risk management and can be significantly reduced.

The main groups of non-systematic risks, as well as measures to minimize them, are presented in Table. 2.1.

Table 2.1

The main groups of non-systematic business risks and some ways to minimize them

Risk group	Description of key factors	Ways to minimize
R&D risks	- Negative R&D result; - low R&D efficiency; - discrepancy between R&D results production capabilities enterprises	Application of modern and most effective methods R&D; - selection of qualified personnel for R&D; - conclusion of contracts in the research field with proven contractors
Risks in the field intellectual property	- Risks of parallel patenting; - risks of unauthorized access to know-how; - risks of illegal use of intellectual property rights; - risks of patent disputes when expanding the geography of sales	- Umbrella patenting; - creation of a system of control over the use of know-how; - expansion of the geography of the patent (registration of a patent in the national patent offices of the country, on the market of which it is planned to enter); - marketing and patent monitoring
Financing risks	- The threat of lack of funding sources; - threat of deterioration financial leverage due to inadequate ratio of debt and equity capital; - the threat of the disappearance of the source of funding	- Diversification of sources of borrowed capital; - planning the optimal capital structure; - phased implementation of investments for the possibility of splitting the loan into tranches

Risk group	Description of key factors	Ways to minimize
Production risks	- Risks of increased share of fixed costs; - risks associated with the presence of special assets, causing the threat of a lack of return on investment	- Application of new resource-saving technologies; - withdrawal of non-core (surplus) assets; - optimization of the number of administrative staff; - Search options minimization of rent; - analysis of the feasibility of acquiring more versatile production assets with a possible loss of productivity, but ready for use in another business in case of failure of the target
Contract risks	- Disruption of negotiations and disclosure of information obtained during them; - refusal of counterparties from further cooperation; - changing the terms of cooperation	- Conclusion of option agreements that do not allow disclosure of the received information; - conclusion of long-term contracts with contractors; - expansion of the circle of contractors
Sales risks	- The threat of lack of sales of products; - the risk of choosing the wrong pricing policy; - the risk of failure of contracts with sales agents	- Careful analysis and segmentation of the market at the stage of product planning (even if it is unique); - measures to promote products on the market, allowing to reduce the barriers to its perception; - conclusion of preliminary supply contracts with verified and qualified sales companies

The list of non-systematic risks presented in Table. 2.1 is not complete in all cases. There are also risks in the field of management, compliance with the deadlines and stages of the project schedule, the risks of the closed nature of the company, the peculiarities of the work of small businesses and a number of others.

Principle 4. Active application the principle of the most efficient use.

Federal valuation standards oblige to apply the principle of the most effective use in investment calculations. The value of the appraisal object, including the company, should be determined as the maximum of those values that may occur under various options for using the appraisal object. Even in the case of a stable business, it is advisable to plan investments in technology improvement, equipment upgrades, product upgrades, etc. At the same time, the choice of funding sources becomes a separate area of investment planning. If you do not provide for the renewal of physically depreciating equipment, the company will begin to grow defects and increase the cost of ready-to-sale products. In any case, capitalizing on a steady or ever-decreasing income will give a very low estimate of market value.

It is obvious that the principle of the most effective use is more convenient to apply when the assessment is carried out on the basis of the investment opportunities of a particular client of the assessment. When determining the market value of a business for a potential, rather than a specific buyer, certain proposals for optimizing the business plan can significantly increase the value of the company.

Students, graduate students, young scientists who use the knowledge base in their studies and work will be very grateful to you.

This stage actually involves the choice of the period production activities, the results of which will be capitalized. Usually choose one of the following options:

1. Profit of the last reporting year.

2. Profit of the first forecast year.

3. Average profit for the last few reporting years (3-5 years).

In this case, the profit of the last reporting year is used for capitalization.

"The quality of enterprise management"

"Company Size"

"Financial structure of the enterprise"

"Commodity diversification"

"Degree of customer diversification"

"Level and predictability of profit"

Average correction value

The capitalization rate for business valuation is determined by subtracting the expected average annual earnings growth rate from the discount rate. That is, to determine the capitalization rate, you must first calculate the appropriate discount rate and make a reasonable forecast regarding the growth rate of the company's profit.

Mathematically, a discount rate is an interest rate used to convert future earnings into a single present value. In an economic sense, the discount rate is the rate of return required by investors on capital invested in investment objects comparable in terms of risk.

There are various methods for determining the discount rate, most of which are:

1. Model for valuation of capital assets.

2. The method of cumulative construction.

3. Weighted average cost of capital model.

In this case, the Valuer has chosen the cumulative construction method for the discount rate.

This method is based on an expert assessment of the risks associated with investing in the business being valued. The discount rate is calculated by adding up all the identified risks and adding their sum to the risk-free rate of return.

For the purposes of this assessment, the risk-free rate of return was taken equal to the effective yield to maturity of Russian bonds federal loan(OFZ) with maturities comparable to the expected terms of investing funds in the company being valued. Thus, OFZs with a maturity date of September 10, 2038, as of December 30, 2017, had an effective yield to maturity of 8.09% per annum (Data source: www.cbr.ru). Thus, the risk-free rate of return at the valuation date was 8.09%.

Now we need to determine the value of the investor's premium for the risk of investing in a particular enterprise. To do this, typical risk factors are identified, for each of which an expert correction is made in the range of 0-5%, and then all the corrections are summed up.

In this case, the amendments were the following factors risk (source - Business Valuation Review, December 1992; "The Adjusted Capital Asset Pricing Model For Developing Capitalization Rates: An Extension of Build-Up Methodologies Based Upon the CAPM"):

1. Quality of enterprise management.

The quality of management of the assessed enterprise, according to experts, is average, therefore, for this factor, the average risk premium is 2.5%.

2. Company size.
The size of the company being valued roughly corresponds to a small business. Investments in are characterized by increased risk, the average adjustment for this factor is set at 5%.

3. Financial structure of the enterprise.
The financial structure of the assessed enterprise appears to be stable. The main source of financing for the enterprise is its own funds. For this factor, a minimum adjustment of 1% is made.

4. Commodity diversification of the enterprise.
Commodity diversification of the assessed enterprise, its ability to reorient itself to the provision of new services is low. The average risk premium for this factor is set at 4%.

5. Degree of customer diversification.
The degree of diversification of the clientele of the assessed enterprise is low, therefore, the average risk premium for this parameter is set at 4%.

6. The level and predictability of the profit of the assessed enterprise, according to experts, correspond to the industry average. The average risk premium for this indicator was 3%.

The average adjustments for the above risk factors were determined on the basis of a survey of independent experts, after they got acquainted with the results of the financial and economic analysis of the activity of the enterprise being assessed. Experts expressed their opinion on this subject both from the state of the enterprise itself and from the current state of the market as a whole. The results of the expert survey are summarized in the table below:

Table 1. Expert assessment of the value of the risk premium associated with investing in the enterprise being evaluated.

To determine the final value of the premium for the risk of investing in the assessed enterprise, it is necessary to sum up the obtained average values of the amendments for all identified risk factors:

Table 2. Definition of the total risk premium.

Now, summing the risk-free rate of return and the risk premium on investment in the subject enterprise, we get that the discount rate is:

Below is the profit and loss forecast for the period 2018-2020, compiled on the basis of a business plan approved by the company's management.

Actual and planned enterprises in 2015-2020 For convenience, comparisons are summarized in the following table:

Table 3. Main financial indicators of the enterprise in 2015-2020

INDEX	FACT		PLAN
INDEX
Net sales proceeds, rub.
Growth in net sales revenue compared to the previous year, %
Net profit, rub.		28 318 689
Growth in net profit compared to the previous year, %
Net profit per 1 rub. revenue, rub.

As can be seen from the table of main financial indicators enterprises for the period 2015-2020, the actual and planned growth in net sales revenue, in general, are consistent with each other. Based on the results of the analysis of the financial statements of the enterprise, it seems most likely that the growth in the net profit of the enterprise in 2018-2020 will be the average value of the forecast indicators of profit growth in the forecast period, i.e.:

17.0 + 17.8 + 11.6 = 15% per year.

Thus, the capitalization rate for the assessed enterprise will be:

29,59 - 15 = 14,59 (%)

Determination of the preliminary value of the cost.

Having determined the capitalization rate and the amount of profit that will be capitalized, you can calculate the value of the business (the results of the enterprise's activities) using the formula indicated at the very beginning of this section.

Table 4. Calculation of the preliminary value of the enterprise value.

Adjustment for non-performing assets.

The resulting value is only the preliminary value of the enterprise (the value of its business). If a company owns non-performing (not used in business) assets, it can increase the value of the enterprise as a whole, therefore, if such assets exist, their market value must be added to the value of the business.

Since no non-performing assets have been identified in the assessed enterprise, no adjustment is made for this indicator.

Adjustment for the controlling or non-controlling nature of the estimated interest.

The profit capitalization method results in the value of the entire business. If only a small share in the enterprise is estimated, then an amendment should be applied to the resulting result, taking into account the fact that shares (shares) in minority stakes are cheaper than in majority or controlling stakes.

In this case, 100% of the shares of the LLC ROMASHKA enterprise are estimated, therefore, no adjustment is made for this indicator.

Thus, the market value of 100% shares of ROMASHKA LLC, calculated using the profit capitalization method (income approach), is rounded up to 194,000,000 (one hundred and ninety-four million) rubles.

The task of assessing the value of a business at different stages of its development does not lose its relevance. The enterprise is a long-term asset that generates income and has a certain investment attractiveness, so the question of its value is of interest to many, from owners and management to government agencies.

The most commonly used method for estimating the value of a business is income method (income approach), because any investor invests money not just in buildings, equipment and other tangible and intangible assets, but in future income that can not only recoup the invested funds, but also bring profit, thereby increasing the investor's well-being. At the same time, the volume, quality and duration of the expected future income stream play a special role when choosing an investment object. Undoubtedly, the amount of expected return is relative and is subject to a huge influence of probability, depending on the level of risk of a possible investment failure, which must also be taken into account.

Note! The underlying cost factor when using this method is the expected future income of the company, which represents certain economic benefits for the owners of the enterprise. The higher the income of the company, the greater, other things being equal, its market value.

The income method is the best way to take into account the main goal of the enterprise - making a profit. From these positions, it is most preferable for business valuation, as it reflects the prospects for the development of the enterprise, future expectations. In addition, it takes into account the economic obsolescence of objects, and also takes into account the market aspect and inflationary trends through the discount rate.

With all the undeniable advantages, this approach is not without controversial and negative points:

it is quite laborious;
it is characterized by a high level of subjectivity in forecasting income;
the proportion of probabilities and conventions is high, since various assumptions and restrictions are established;
the influence of various risk factors on the predicted income is great;
it is problematic to reliably determine the real income shown by the enterprise in the financial statements, and it is not excluded that losses are deliberately reflected for various purposes, which is associated with the lack of transparency of information of domestic enterprises;
complicated accounting of non-core and surplus assets;
incorrect assessment of unprofitable enterprises.

It is mandatory to special attention approach the ability to reliably determine the future revenue streams of the enterprise and the development of the company's activities at the expected pace. The accuracy of the forecast is also strongly affected by the stability of the external economic environment, which is relevant for the rather unstable Russian economic situation.

So, it is advisable to use the income approach to evaluate companies when:

they have a positive income;
it is possible to make a reliable forecast of income and expenses.

Calculation of the company's value using the income approach

Estimating the value of a business using an income approach begins with solving the following tasks:

1) forecast of future income of the enterprise;

2) bringing the value of the future income of the enterprise to the current moment.

The correct solution of these problems contributes to obtaining adequate final results of the evaluation work. Of great importance in the course of forecasting is the normalization of income, with the help of which one-time deviations are eliminated, which appear, in particular, as a result of one-time transactions, for example, when selling non-core and excess assets. To normalize income, statistical methods are used to calculate the average, weighted average, or an extrapolation method that represents is a continuation of existing trends.

In addition, it is necessary to take into account the factor of changes in the value of money over time - the same amount of income at the moment has a higher price than in the future. The difficult question of the most acceptable timing for forecasting the company's income and expenses needs to be resolved. It is believed that in order to reflect the inherent cyclicality of industries, a reasonable forecast should cover a period of at least 5 years. When considering this issue through a mathematical and statistical prism, there is a desire to lengthen the forecast period, assuming that a larger number of observations will give a more reasonable value of the company's market value. However, a proportional increase in the forecast period complicates the forecasting of income and expenses, inflation and cash flows. Some appraisers note that the forecast of income for 1-3 years will be the most reliable, especially when there is instability in the economic environment, since with an increase in forecast periods, the conditionality of estimates increases. But this opinion is true only for sustainable enterprises.

Important!In any case, when choosing a forecasting period, it is necessary to cover the period until the company's growth rates stabilize, and in order to achieve the greatest accuracy of the final results, the forecasting period can be divided into smaller intermediate periods of time, for example, six months.

In general terms, the value of an enterprise is determined by summing the income flows from the activities of the enterprise in the forecast period, previously adjusted to the current price level, with the addition of the value of the business in the post-forecast period (terminal value).

The two most common methods for assessing the income approach - income capitalization method and discounted cash flow method. They are based on estimated discount and capitalization rates that are used to determine the present value of future earnings. Of course, within the framework of the income approach, many more varieties of methods are used, but basically all of them are based on discounting cash flows.

The purpose of the assessment itself and the intended use of its results play an important role in the choice of assessment method. Other factors also influence, for example, the type of enterprise being assessed, the stage of its development, the rate of change in income, the availability of information and the degree of its reliability, etc.

Methodcapitalizationincome(Single-Period Capitalization Method, SPCM)

The income capitalization method is based on the assumption that the market value of an enterprise is equal to the present value of future income. It is most appropriate to apply it to those companies that have already accumulated assets, have a stable and predictable current income, and its growth rates are moderate and relatively constant, while the current state gives a known indication of long-term trends in future activities. And vice versa: at the stage of active growth of the company, in the process of restructuring or at other times when there are significant fluctuations in profits or cash flows (which is typical for many enterprises), this method undesirable for use, since there is a high probability of obtaining an incorrect result of the cost estimate.

The method of capitalization of income is based on retrospective information, while for the future period, in addition to the amount of net income, other economic indicators are extrapolated, for example, the capital structure, the rate of return, the level of risk of the company.

The valuation of an enterprise using the income capitalization method is carried out as follows:

Current market value = DP (or P net) / Capitalization rate,

where DP - cash flow;

P is clean - net profit.

Note! The reliability of the valuation result depends very much on the capitalization rate, so special attention should be paid to the accuracy of its calculation.

The capitalization rate allows you to convert the values of profit or cash flow for a specific period of time into a measure of value. As a rule, it is derived from the discount factor:

Capitalization rate =D– T r,

where D- discount rate;

T p - the growth rate of cash flow or net profit.

It is clear that the capitalization ratio is often less than the discount rate for the same company.

As can be seen from the presented formulas, depending on what value is capitalized, the expected growth rate of cash flow or net profit is taken into account. Of course, for different types of income, the capitalization rate will differ. Therefore, the primary task in the implementation of this method is to determine the indicator that will be capitalized. In this case, income can be predicted the year following the valuation date, or the average income calculated using historical data is determined. Since the net cash flow fully takes into account the operating and investment activities of the enterprise, most often it is used as the basis for capitalization.

So, the capitalization rate according to its economic essence close to the discount factor and strongly correlated with it. The discount rate is also used to bring future cash flows to the present.

Discounted cash flow method ( Discounted Cash-Flows, DCF )

The discounted cash flow method allows you to take into account the risks associated with obtaining the expected income. The use of this method will be justified when a significant change in future income is predicted, both up and down. In addition, in some situations only this methodis applicable, for example, expanding the operation of an enterprise if, at the time of the assessment, it is not operating at full production capacity, but intends to increase it in the near future;planned increase in output; business development in general; merger of enterprises; introduction of new production technologies, etc. InUnder such conditions, annual cash flows in future periods will not be uniform, which, of course, makes it impossible to calculate the company's market value using the income capitalization method.

For new businesses, discounted cash flow is also the only option to use, as the value of their assets at the time of valuation may not match their ability to generate income in the future.

Of course, it is desirable that the company being assessed has favorable development trends and a profitable business history. For companies that suffer systematic losses and have a negative growth rate, the discounted cash flow method is less suitable. Particular care must be taken when evaluating enterprises with a high probability of bankruptcy. In this case, the income approach is not applicable at all, including the income capitalization method.

The discounted cash flow method is more flexible becausecan be used to evaluate any operating enterprise by usingitemized forecast of future cash flows. Important it has for the management and owners of the company to understand the influence of various management decisions to its market value, that is, it can be used in the cost management process based on the resulting detailed business value model and see its susceptibility to the identified internal and external factors. This allows you to comprehend the activities of the enterprise at any stage. life cycle in future. And most importantly: this method is the most attractive for investors and meets their interests, since it is based on forecasts of future market development and inflationary processes. Although there is some difficulty in this, sincein an unstable crisis economy With predicting the flow of income for several years ahead is quite difficult.

So, the initial basis for calculating the value of a business by the methoddiscounted cash flowsis a forecast, the source of which is historical information about cash flows. The traditional formula for determining the present value of discounted future income is as follows:

Current market value = Cash flows for the periodt / (1 + D) t.

The discount rate is the interest rate required to bring future earnings to a single value of the present value of the business. For the investor, it is the required rate of return on alternative investment options with a comparable level of risk at the time of assessment.

Depending on the type of cash flow chosen (for equity or for total invested capital) used as the basis for valuation, the method for calculating the discount rate is determined. Cash flow calculation schemes forinvested and equity capital are presented in table. 12.

Table 1. Cash flow calculation for invested capital
Index	Impact on bottom line cash flow (+/-)
Net profit
Accrued depreciation
Decrease in own working capital
Increasing own working capital
Sale of assets
Capital investments
Cash flow for invested capital

Table 2. Cash flow calculation for equity
Index	Impact on bottom line cash flow (+/-)
Net profit
Accrued depreciation
Decrease in own working capital
Increasing own working capital
Sale of assets
Capital investments
Increase in long-term debt
Reducing long-term debt
Cash flow for equity

As you can see, the calculation of cash flow forequity differs only in that the result obtained by the algorithm for calculating the cash flow for invested capital is additionally adjusted for changes in long-term debt. Then the cash flow is discounted in accordance with the expected risks, which are reflected in the discount rate calculated in relation to a particular enterprise.

So, the cash flow discount rate for equity will be equal to the required rate of return on invested capital required by the owner,invested capital- the sum of the weighted rates of return on borrowed funds (that is, the bank's interest rate on loans) and on equity, while their specific gravity are determined by the shares of borrowed and own funds in the capital structure. Cash flow discount ratefor invested capitalcalled weighted average cost of capital, and the corresponding method of its calculation -weighted average cost of capital (WeightyAVerageCost ofCapital, WACC). This method of determining the discount rate is most commonly used.

Besides, to determine the cash flow discount rate for equity may apply the following are the most common ways:

capital asset pricing model ( CAPM);
modified capital asset valuation model ( MCAPM);
cumulative construction method;
excess profit model ( EVO) and etc.

Let's consider these methods in more detail.

Methodweighted average cost of capital ( WACC)

It is used to calculate both own and borrowed capital by constructing the ratio of their shares, it shows not the balance sheet, butmarket value of capital. The discount rate for this model is determined by the formula:

DWACC = C zk × (1 - N prib) × D zk + C pr × D priv + C oa × D about,

where C zk - the cost of borrowed capital;

N prib - income tax rate;

D zk - the share of borrowed capital in the capital structure of the company;

С pr - the cost of raising equity capital (preferred shares);

D priv - the share of preferred shares in the capital structure of the company;

C oa - the cost of raising equity capital (ordinary shares);

D about - the share of ordinary shares in the capital structure of the company.

The more the company attracts cheap borrowed funds instead of expensive equity capital, the smaller the value WACC. However, if you want to use as much cheap borrowed funds as possible, you should also remember about the corresponding decrease in the liquidity of the company's balance sheet, which will certainly lead to an increase in lending interest rates, since this situation is fraught with increased risks for banks, and the value WACC will, of course, grow. Thus, it would be appropriate to use the “golden mean” rule, optimally combining equity and borrowed funds based on their balance in terms of liquidity.

Methodestimatescapitalassets (Capital Asset Pricing Model, CAPM)

Based on the analysis of stock market information on changes in the yield of freely traded shares. In this case, when calculating the discount rate for equity, the following formula is used:

DCAPM = D b / r + β × (D r − D b/r ) + P 1 + P 2 + R,

where D b / r - risk-free rate of return;

β - special coefficient;

D r - total profitability of the market as a whole (average market portfolio of securities);

P 1 - premium for small enterprises;

P 2 - premium for the risk characteristic of an individual company;

R- country risk.

The risk-free rate is taken as a basis for assessing the various types of risk associated with investing in a company. Special beta coefficient ( β ) represents the amount of systematic risk associated with the economic and political processes taking place in the country, which is calculated on the basis of deviations in the total return of the shares of a particular company compared to the total return of the stock market as a whole. The overall market return is the average market return index, which is calculated by analysts based on a long-term study of statistical data.

CAPMquite difficult to apply in the conditions of the underdevelopment of the Russian stock market. This is due to problems in determining the beta coefficients and the market risk premium, especially for closed enterprises, whose shares are not listed on the stock exchange. In foreign practice, the risk-free rate of return, as a rule, is the rate of return on long-term government bonds or bills, since it is believed that they have a high degree liquidity and a very low risk of insolvency (the probability of state bankruptcy is practically excluded). However, in Russia, after some historical events, government securities are not psychologically perceived as risk-free. Therefore, the average rate on long-term foreign currency deposits of the five largest Russian banks, including Sberbank of Russia, which is formed mainly under the influence of domestic market factors, can be used as a risk-free rate. As for the coefficients β , then abroad most often they use ready-made publications of these indicators in financial directories calculated by specialized firms by analyzing the statistical information of the stock market. Appraisers usually do not need to independently calculate these coefficients.

Modified capital asset valuation model ( MCAPM)

In some cases, it is better to use a modified capital asset valuation model ( MCAPM), which uses such an indicator as a risk premium, which takes into account the non-systematic risks of the enterprise being valued. Unsystematic risks (diversifiable risks)- these are risks that arise randomly in the company, which can be reduced through diversification. In contrast, systematic risk is due to the general movement of the market or its segments and is not associated with a specific security. Therefore, this indicator is more suitable for the Russian conditions for the development of the stock market with its characteristic instability:

DMCAPM = D b/r + β × (D r − D b/r ) + P risk,

where Db/r is the risk-free rate of return on Russian domestic foreign currency loans;

β - coefficient, which is a measure of market (non-diversifiable) risk and reflects the sensitivity of changes in the profitability of investments in companies in a particular industry to fluctuations in the profitability of the stock market as a whole;

D r - profitability of the market as a whole;

P risk is a risk premium that takes into account the non-systematic risks of the company being valued.

Cumulative Method

Considers different kinds risks of investment investments and involves an expert assessment of both general economic and industry-specific and specific enterprise factors that give rise to the risk of shortfall in planned income. The most important factors are the size of the company, structure finance, production and territorial diversification,quality of management, profitability, predictability of income, etc.The discount rate is determined based on the risk-free rate of return, to which is added an additional premium for the risk of investing in this company, taking into account these factors.

As you can see, the cumulative approach is somewhat similar to CAPM, since they are both based on the rate of return on risk-free securities with the addition of additional income associated with the risk of investing (it is believed that the greater the risk, the greater the return).

Olson model (Edwards - Bell - Ohlson valuation model , EVO ), or the method of excess income (profit)

Combines components of income and costly approaches, to some extent minimizing their shortcomings. The value of the company is determined by discounting the flow of excess income, that is, deviating from the industry average, and the current value of net assets. The advantage of this model is the ability to use for the calculation of available information on the value of the values available at the time of valuation. A significant share in this model is occupied by real investments, and only residual profit is required to predict, that is, that part of the cash flow that really increases the value of the company. Although this model is not without some difficulties in use, it is very useful in developing an organization's development strategy related to maximizing the value of the business.

Derivation of the final company's market value

After the preliminary value of the business is determined, a number of adjustments must be made to obtain the final market value:

on excess/lack of own working capital;
on non-core assets of the enterprise;
on deferred tax assets and liabilities;
on net debt, if any.

Since the calculation of the discounted cash flow includes the required amount of own working capital associated with the revenue forecast, then if it does not match the actual value, the excess of own working capital must be added, and the disadvantage must be subtracted from the value of the preliminary cost. The same applies to non-performing assets, since only those assets that were used in the formation of cash flow participated in the calculation. This means that if there are non-core assets that have a certain value that is not included in the cash flow, but can be realized (for example, upon sale), it is necessary to increase the preliminary value of the business by the value of the value of such assets, calculated separately. If the value of the enterprise was calculated for the invested capital, then the resulting market value refers to the entire invested capital, that is, it includes, in addition to the cost of equity, the value of the company's long-term liabilities. This means that in order to obtain the cost of equity, it is necessary to reduce the value of the established value by the amount of long-term debt.

After making all the adjustments, the value will be obtained, which is the market value of the company's equity capital.

The business is able to generate income even after the end of the forecast period. Incomes should stabilize and reach a uniform long-term growth rate. To calculate the cost inpost-forecast period, you can use one of the following discount calculation methods:

by salvage value;
by net asset value;
according to the Gordon method.

When using the Gordon model, the terminal value is defined as the ratio of cash flow for the first year of the post-forecast period to the difference between the discount rate and the long-term growth rate of cash flow. The terminal value is then reduced tocurrent cost indicators at the same discount rate that is used to discount the cash flows of the forecast period.

As a result, the total value of the business is determined as the sum of the current values of income streams in the forecast period and the value of the company in the post-forecast period.

Conclusion

In the process of estimating the value of a company using an income approach, a financial model of cash flows is created, which can serve as a basis for making informed management decisions, optimizing costs, analyzing the possibilities of increasing project capacities and diversifying the volume of products. This model will continue to be useful after the evaluation.

To choose one or another method for calculating the market value, first of all, you need to decide on the purpose of the assessment and the planned use of its results. Then you should analyze the expected change in the company's cash flows in the near future, consider the financial condition and development prospects, as well as assess the economic environment, both global and national, including the industry. When the market value of a business needs to be known due to lack of time, or to confirm the results obtained using other approaches, or when in-depth cash flow analysis is not possible or required, the capitalization method can be used to quickly obtain a relatively reliable result. In other cases, especially when the income approach is the only possible to calculate market value, the discounted cash flow method is preferred. Perhaps, in certain situations, both methods will be needed to calculate the value of a company at the same time.

And of course, do not forget that the value obtained using the income approach directly depends on the accuracy of the analyst's long-term macroeconomic and industry forecasts. However, even the use of rough forecasts in the income approach process can be useful in determining a company's estimated value.