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One of the important factors this research tries to determine is how the valuation techniques are used in practice by practitioners and to compare that with the theories. It was found that most respondents used a 4-10 year explicit forecast period to forecast cash flows. This would also appear to be an appropriate amount of time from a theoretical point of view as it is not so long as to make forecasting specific cash flows into the future difficult and not so short that medium term forecasts need not be made.
TABLE 8: PRACTICAL ISSUES IN DCF
Technique used to forecast cash flows
Delphi Technique Scenario Technique
Time series analysis (e.g. extrapolation, averages, simple growth)
Usage of Terminal value Method to compute terminal value
Yes No
Perpetuity with growth Perpetuity without growth Multiples
Length of explicit forecast period
Use of the same discount rates for explicit and terminal value
Liquidation value No answer 1-3 years 4-10 years 10+ years Yes No
17.65% 23.53% 58.82%
5.88%
82.35% 17.65% 76.47% 11.76% 5.88%
11.76% 5.88%
18.75% 69.49% 11.76% 17.65% 82.35%
The last aspect of the practical application of the DCF method by practitioners was whether they use the same discount rate to discount cash flows for both the explicit forecast period and terminal value or not. It was clear that most analysts do not use the same discount rate. This is interesting and will be further analysed in the next rounds of Delphi that does not form part of this paper.
Practical aspects of using multiple valuations
Similar to the questions asked in the previous section on the practical implementation of DCF techniques questions were asked regarding the use of multiple valuation techniques. The first section asked which multiples were used more often.
TABLE 9: FREQUENCY OF USE OF MULTIPLES VALUATION TECHNIQUES Price to book value
Price earnings ratio
Very often Often
Occasionally Seldom Never
No answer
47.06% 29.41% 23.53% 0.00% 0.00% 0.00%
23.53% 64.71% 11.76% 0.00% 0.00% 0.00%
Price to cash flow
0.00% 0.00% 0.00%
11.76% 70.59% 17.65%
VALUING BANKS IN EMERGING MARKETS: A REVIEW OF THE LITERATURE AND SOME INITIAL FINDINGS 1024