Valuation methods and the Risk Performance Analysis

Abstract

Valuation methods are one of the most widely discussed topics in financial world. Knowing how to properly evaluate a company is of vital importance for every financial analyst. In order to get a better grasp of the intuition behind all kinds of valuation methods, this paper tried to compare four different approaches in assessing a firm’s value. Advantages and disadvantages are presented in the following sections regarding different approaches. Moreover, to test the effectiveness of valuation methods, this paper used 60 companies’ financial data to run a discounted free cash flow model. Statistical analysis like the regression analysis and correlation analysis are also used in this paper to see the relationship between the results and the actual circumstances. Several different factors that might have an impact on a company’s risk level are also tested using regression analysis. In general, this paper finds that the DFCF model did a reasonable job in predicting the overall trend of a company’s value; however, this model did not reflect the risk level of a company effectively.