A Study Of The Company Valuation Methods Based On Free Cash Flow

The nature of the modern corporation is to create value. Company value is an important prerequisite and basis which could determine the final sale price in investment and M & A transactions. Therefore, it also plays a core role in every transaction. In the field of valuation, academics and securities analysts take more attention to the free cash flow (FCF), which is already become an important measure of corporate valuation.In this paper, a rigorous reading is used to combing the relevant theory and literature. Firstly, FCF and company value's concepts are defined and summarized. Secondly, discusses the relevance between the company value and FCF from driving ability and explanatory power. An In-depth analysis has been made on the capability of drive from FCF to company value in aspects to drivers, driven approach and the Advantage of measurement. Then, we chose the Listed Companies in China from 2009 to 2013 in Shanghai and Shenzhen A-share market as samples. There is a regression include FCF, cash dividends, residual income and traditional accounting indicators. Finally, FCF discount Model's applicable conditions and selection decisions are summarized by comparative analysis of the valuation differences and applicability of the model. Results indicated that:First, FCF for the company value has the effect of a binary cycle driven push and pull. When company has less FCF, it reflected accountability, monitoring and improving the efficiency of investment promotion effects. On the contrary, it reflected bonus incentives and increased investment in the pulling effect. Second, FCF, cash dividends, residual income on the company value have a certain degree of explanatory power (over 60%). Specifically, residual income has the highest explanatory power, while FCF and cash dividends have a similar level, which in a low level. When the company paid cash dividends, whether it is a regression or multiple regressions, FCF and the company value was a significant positive correlation. This shows that dividends could well alleviate the problem of agency costs of FCF. It also shows the significant value relevance. Not only that, traditional accounting information has a high value targets. Even when using these new indicators. FCF, cash dividends and residual income still cannot replace the traditional accounting indicators. It should also be at the same time the use of traditional accounting information as a supplement. Third, dividend discount model should be used to estimate the equity value of the company, which has a more stable dividend policy and a higher dividend payout ratio. On the contrary, FCF discount model is suitable for the company which has an instability dividend policy or a fluctuating dividend payout rate. Moreover, if FCFE is negative and unstable, FCFF discount model should be used to value the whole company value in an indirectly way. If the company's capital structure is complex and constantly changing, FCFE discounted model should be using. In addition, if the company has a debt of cash flow cannot be separated, and then the FCF discounted model is more suitable for valuation.