A methodology for company valuation

Abstract

This thesis presents an approach for company valuation by a replication portfolio of traded assets in discrete time. The model allows us to value companies with an uncertain cash flow stream without having to revert to any discount rates including premia. Modelling of asset values can be achieved in two steps: (i) Choosing a suitable stochastic process and calibrating its parameters to fit the historical asset time series behaviour, and (ii) generating a state space transition graph to implement the stochastic process dynamics in discrete time. For company valuation, a selected number of "assets" (economic, financial, and other factors) should be captured that may reasonably be assumed to influence future cash flows of the company. Each vertex of the transition graph represents a "state of the world" and is accompanied with a corresponding cash flow caused by the sales (or other company activities) at that vertex. These possible future company cash flows can be "replicated" (without...