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The question of which method was more accurate was then asked and there emerged a strong view that the DCF method is the more accurate of the two. Even when specifically asked to compare the DCF model to the multiples model 82.36% of respondents felt that the DCF model was more accurate compared to the multiple methods.
TABLE 6: DCF COMPARED TO MULTIPLES DCF
Method the most POPULAR technique
Strongly disagree
Disagree Neutral Agree
ACCURACY of Method
Strongly agree Very accurate Accurate Neutral
Usage of technique
Not very accurate Not accurate at all Primary method
Secondary method
Both primary and secondary Do not use
5.88%
5.88% 5.88%
52.94% 29.41% 41.18% 52.94% 5.88% 0.00% 0.00%
58.82% 17.65% 23.53% 0.00%
Multiple 0.00%
23.53% 58.82% 17.65% 0.00% 0.00% 5.88%
94.12% 0.00% 0.00%
17.65% 64.71% 0.00%
17.65%
Practicalities of using DCF
In the next section of the questionnaire we asked a number of questions on the practicalities of using the discounted cash flow method. As was discussed there are a number of different variants of DCF methods. The respondents were asked how often they used these variants in valuing banks in emerging markets. The results can be seen in Table 7.
TABLE 7: VARIANTS OF DCF
Dividend discount model
Very often Often
Occasionally Seldom Never
41.18% 35.29% 17.65% 5.88% 0.00%
Equity discounted cash flow model
82.35% 5.88%
11.76% 0.00% 0.00%
Free cash flow model
0.00% 0.00% 5.88%
17.65% 76.47%
The results appear to support the literature that suggests that the equity discounted cash flow model is the most appropriate model to value banks. It is apparent that the free cash flow model is almost never used due to the shortcomings of the model as discussed in the literature section.
The next question asked what techniques the respondents used to forecast the cash flows required to value banks in emerging markets. The results showed that the majority used time series analysis while some used the scenario and Delphi techniques. This is summarised in Table 8. The terminal value was included in the value of the company by 82.35% as would be expected and the perpetuity with growth method were seen as the most popular method to calculate the terminal value as show in Table 8.
VALUING BANKS IN EMERGING MARKETS: A REVIEW OF THE LITERATURE AND SOME INITIAL FINDINGS 1023