REQUIREMENTS ON VALUATION OF FIRMS FROM AN ECONOMIC POINT OF VIEW

This paper intends to shed light on some topics concerning the valuation of firms. In this respect the paper is an overview. First, some of the more relevant valuation methods are represented and discussed It is shown that only present value methods are able to compute values useful for investors. Apart from estimating future cash flows, determining the cost of capital is a main issue of corporate valuation. Therefore, the components of the cost of capital are examined in more detail, especially the computation of the risk free rate and risk premium. Particularly the risk premium derived from historical market data is attended by several problems in theory and practice. Finally, the necessity to include taxation on the investor level in the evaluation is explained as well as how settlement/capital gains tax has an effect on cost of capital.