Valuation : Question 8
I want to value a telecoms start-up company that has never made a profit or paid a dividend. I was wondering what methods I should use, since many of the methods described in the Vernimmen are based on the payment of a dividend.

Your company must have a business plan which, through provision for investments and the gradual growth of the business, will lead to profits.

The most appropriate method for this type of situation is the discounted cash flows method, which differs substantially from the dividends approach. In practice, we project specific cash flows over a certain number of years. This period is called the explicit forecast period. This length of this period varies depending on the sector. For the years beyond the explicit forecast period, we establish a terminal value.

Free cash flow measures the cash flow generated by operating assets. It is calculated as follows:

EBITDA
- Change in working capital
- Capital expenditure
- (Theoretical) tax on operating profit

In this case, the terminal value is based on cash flow in the last year of the explicit forecast period. This may be a terminal value calculated on the basis of key profit indicators – this measure can be, among other things, sales, EBITDA or EBIT. The most frequently used terminal value, which is based on growth to infinity of the last flow (Gordon-Shapiro formula) can also be used. The discount rate to be used is the weighted average cost of capital, which is the minimum rate of return required by the company’s sources of funding, i.e. shareholders and lenders, for financing a company’s projects. It is the overall cost of financing a company’s activities.

Chapter 40 of the Vernimmen covers business valuation.