How Do I Create a Cash Flow Model?

Need to estimate the expected incremental cash flow and discount rate (or cost of capital) resulting from a merger, that is, a new investment by a business.

Discounted cash flow method

Cash flow method

Assess goals using discounted cash flow

The discounted cash flow method DCF (DiscountedCashFlow) is an estimate of the future of the assessed mining right over its service life

Discounted cash flow method

There are three steps to applying the discounted cash flow method:

The first step is to establish freedom

Discounted cash flow method

With the rapid development and prosperity of the socialist commodity economy, while insisting on opening to the outside world and attracting investment, domestic enterprises have also gone abroad to invest abroad and set up branches, such as branches, subsidiaries, offices Wait. Therefore, the valuation of foreign subsidiaries has become a new subject that needs to be researched and solved in the assessment community. This article only introduces and analyzes the valuation of foreign subsidiaries based on the cash flow method.

I. Preliminary work to predict the net cash flow of the subsidiary's bookkeeping currency

In order to predict the expected net cash flows of foreign subsidiaries in foreign currencies, accounting adjustments must be made. The financial statements of foreign subsidiaries are often converted by the parent company that uses Chinese accounting standards, so it is necessary to adjust them back to foreign currencies to avoid distorting cash flow forecasts. Three issues are discussed first.

One is how to perform foreign exchange conversion.

In the "Interim Provisions on Consolidated Accounting Statements", China has specified specific conversion methods for foreign currency accounting statements. According to the regulations, the following conversions shall be made.

1. Balance sheet.

(1) All assets and liabilities are converted into the reporting currency of the subsidiary based on the market exchange rate on the date of the consolidated accounting statement.

(2) Except for undistributed profits items, the owner's equity items are converted into the reporting currency of the subsidiary based on the market exchange rate at the time of occurrence.

(3) The "undistributed profit" item is listed by the amount of the item in the converted profit distribution table.

2. Income statement and profit distribution statement.

(1) All items in the income statement and the items in the profit distribution statement that reflect the amount incurred are translated into the reporting currency of the subsidiary at the average exchange rate for the accounting period.

(2) The "net profit" item in the profit distribution statement is shown by the amount of the item in the converted profit statement.

(3) The "undistributed profit at the beginning of the year" item in the profit distribution table is the amount of the "undistributed profit" item at the end of the previous year after conversion.

(4) The "undistributed profits" items in the profit distribution table are calculated and displayed according to the amount of other items in the converted profit distribution table. '

The second is to understand foreign accounting standards.

It is also necessary to be familiar with the accounting standards used by the countries where the subsidiaries are located in order to predict the cash flows in the foreign currency accounting currency, because the accounting standards adopted in different countries will make the calculation of cash flows different. For example, many countries allow periodic restatement of balance sheets at market or revalued values, which may make it difficult to calculate the total investment component of cash flows. In China's financial statements, the balance sheet figures are book values, and any changes are Is cash flow. This relationship will be disrupted if the balance sheet is remade regularly based on market value. The solution is usually to deduct the part that should be caused by the asset adjustment and cause the total investment change in order to calculate the market value.

The third is to find "hidden assets."

In some countries, there may be discrepancies between the market value and the book value of assets, such as stock investments and off-book assets that are measured using the cost method, and their market value should be understood when evaluating.

Second, forecast the net cash flow of the subsidiary's bookkeeping currency

First of all, after analyzing the composition and changes of historical operating income and costs of foreign subsidiaries for at least three years, changes in sales volume and prices of corporate products, customer categories, industry competition, and the economic environment of the host country, it can be carried out. Forecast of future cash flows of foreign subsidiaries.

Secondly, formulate business prospects that are objective and realistic for subsidiaries and their industries, and describe the development status of the subsidiaries and major events that may affect their development performance from a qualitative perspective.

Thirdly, on the basis of forecasting business prospects, establish appropriate financial forecasting models to forecast balance sheets and profit statements (detailed to subjects). Commonly used financial forecasting models include causality forecasting models, time series forecasting models, and regression analysis forecasting models. The balance sheet and income statement items are then combined to predict cash flow, return on investment, and other key value indicators. Finally, check the rationality of the forecast, especially the key value indicators.

In addition, the cash flow forecast of foreign subsidiaries should also take into account the inflation and taxation issues of the host country. The taxation of multinational companies is very complicated, and the tax rules are constantly changing. In the evaluation, the problem is analyzed from at least two perspectives: first, domestic tax rules applicable to the parent company, and second, foreign tax rules in the country where the subsidiary is located. During the assessment, you can consult relevant tax experts and consult relevant departments.

Third, the estimated foreign currency discount rate

First, estimate the target capital structure of the subsidiary. That is, the ratio of debt financing and equity financing that is maintained on an independent basis in terms of market value for a long time. If the subsidiary's accounting statements do not reflect its long-term capital structure, it can be determined from the industry situation of the country where the subsidiary is located.

Second, estimate the opportunity cost of equity financing. General capital asset pricing model:

Ks = Rf ten b [RmRf]

Of which: Ksthe opportunity cost of equity financing

Rfrisk-free rate of return

Rmmarket average expected rate of return

bthe degree of non-dispersible risk of equity financing