# Glossary of valuation terms

**Adjusted Present Value (APV)**

The APV method is a derivative of the DCF method where the expected free cash flows are also discounted. The APV method distinguishes between the economic value of the operational activities (as if the company was financed exclusively with equity capital) and the economic value of the financial activities (Tax Shield) of a company. These two values added together result in the economic value of the company, known as enterprise value. If the economic value of the loan capital is deducted from the enterprise value, the economic value of the equity of the company or the shareholder value remains.

**Business valuation**

Business valuation is determining the value of a company at a certain time for a certain application in a certain context.

**Beta**

A benchmark of the systematic risk of a share; it measures the extent to which the price of a share correlates with changes in a specific index.

**Build-up method**

The build-up method is a method for determining the cost of equity based on various components.

**Capital Asset Pricing Model (CAPM)**

The CAPM is a financial investment theory to determine the yield requirement, whereby this requirement is made up of a so-called risk-free return and a risk premium in which the market risk is embedded. The CAPM is mainly applied to the valuation of listed companies.

**Capitalization**

Discounting an infinite, periodically recurring, constant flow of revenue.

**Capitalization factor**

The reciprocal of the rate of return with which a constant flow of expected revenues is expressed in the present (present) value.

**Capitalised earnings**

This value is calculated by capitalizing the expected future profits. The calculation method does not take into account the influence of the company’s capital structure. This is the case with the improved capitalized earnings method.

**Cash Flow / free cash flow **

Free cash flow is the net operating result plus depreciation of assets and minus required investments in assets and net working capital. It is the amount that can be paid annually to the providers of equity and loan capital without endangering the continuity of the enterprise.

**Cost of capital levered (kel)**

The kel is the compensation that the equity providers expect, taking into account a certain ratio between equity and debt (leverage).

**Cost of capital unlevered (kue) / cost of equity unlevered**

The kue is the compensation that the provider of equity requires in relation to the risk of the expected income (dividend, etc.). The level of this kue is determined by the risk profile of the expected free cash flows. The kue consists of two components, namely the risk-free interest rate and the risk premium (reward for risk). The risk premium depends on the valuation object.

**Cost of capital**

In business valuation, free cash flows are discounted to the valuation moment at a discount factor, for which a cost of capital is used. A number of methods use an unlevered cost of capital for this. For a number of others, a levered cost of capital or a weighted cost of capital is used (see also WACC).

**Cost of Equity**

The remuneration for the provided Equity Capital expressed as a percentage

**Debt Equity Ratio**

The ratio between equity and debt.

**Depreciation**

A depreciation is expressing the diminished value of a business asset over a certain period in accounting. Depreciations are costs that are included in the profit and loss account. Depreciation is not an actual expenditure. To determine the free cash flows, depreciation is therefore added to the NOPLAT. Depreciation is subject to a so-called tax benefit, since it is deductible for corporate income tax.

**Discounted Cash Flow method**

With the DCF method, the value is determined by discounting the expected free cash flows at the average weighted cost of capital of the company. Expected free cash flows are regarded in valuation practice as the most appropriate measure for determining the value. An advantage of this method is that free cash flows are not dependent on accounting principles. In addition, the DCF method forces the company to think about the expectations and risks of the company. This method also takes into account the time value of money.

**Discounting**

Discounting is a mathematical method whereby it is possible to express future cash flows in present value or a value at any time in the past.

**Discount factor**

Factor by which a given cash flow is multiplied to calculate its present value, and which is calculated on the basis of the (reciprocal) cost of capital linked to the relevant cash flow.

**Earnings before interest and taxes (EBIT)/ operating profit**

The operating result is the operating profit before taxes and interest.

Earnings before interest, taxes, depreciation and amortization (EBITDA)

The EBITDA is obtained by **increasing the net profit with interest, taxes, depreciation and amortizations.**

**Economic** Value Added (EVA)

EVA is a benchmark for measuring the pure value creation of a company. The economic profit is calculated by multiplying the difference between the return on invested capital (Return on Invested Capital, ROIC) and the weighted average cost of capital (WACC) by the invested capital. The method implies that value is only created if the return on invested capital is higher than the weighted average cost of total capital.

**Economic value**

The present value of expected cash flows, ergo the valuation taking into account the elements time value of money, risk, and time.

**Enterprise Value**

The enterprise value is the total of the free cash flows discounted, plus the market value of excess funds and any assets not useful for the operational activities.

**Excess funds**

Funds that are not necessary for business operations.

**Fairness Opinion**

Professional evaluation as to whether the terms of a merger, acquisition, buyback, spin-off, or privatization are fair.

**Financial risk**

The risk that arises if a company is also financed with Loan Capital (financial leverage).

**Financial cash flow**

The income and expenditure associated with raising and returning capital and the related remunerations.

**Forecast period**

The period for which a specific forecast of results, balance sheets and resulting cash flows is compiled per unit of time (year, quarter, etc.).

**Free cash flow**

The cash flow that can be paid to the providers of equity capital and loan capital after all necessary investments have been taken into account.

**Goodwill / badwill**

Accounting term that represents the difference between the economic value of equity capital in a company and the visible shareholder equity.

**Improved capitalized earnings value**

The improved capitalized earnings value is equal to the capitalized value of the expected future net profit capacity (in practice usually based on historical profits). The influence of the existing capital structure is also taken into account. There are several disadvantages to this methodology, such as the fact that investments in fixed assets or working capital are not taken into account.

**Independent fruit bearers**

Assets in a company that are not necessary for business operations and are therefore not company bound.

**Levered**

A situation in which a company is partly financed with loan capital.

**Liquidation value**

Enterprise value determined by the expected net proceeds from the company’s individual assets in the event of (assumed) liquidation, after deduction of debts and liquidation costs.

**Loan capital**

Capital made available on the basis of a repayment obligation.

**Loss settlement**

Losses of a company in the past can represent a certain value. These losses can be set off against future profits by means of compensation allowances, which reduces the corporate income tax to be paid. Lower taxes result in higher free cash flows and an increased value of the company.

**Market risk premium**

The market risk premium is the return that investors require in addition to the risk-free interest rate for investing in shares in a company.

**Market value**

Market value represents a rational and unbiased estimate of the price that would come about between well-informed, voluntarily acting market parties (a price and therefore not a value).

**Mid-year convention**

A convention in the “discounted cash-flow” method based on the assumption that the expected cash flows occur on average halfway through the year and can be discounted on that basis.

**Minority discount**

A discount calculated on the “pro rata parte” value of (shares in) a company with a minority interest in the company.

**Mobach method**

The Mobach method is a method used in tax practice that is based, among other things, on a (weighted) average of recent profits and net asset value.

**Modigliani & Miller**

The Modigliani & Miller theory forms the basis for modern thinking about capital structure. The theory states that in a world without taxes the value of a company is not influenced by the way in which a company is financed.

**Multiple**

A ratio between two numbers, with which an attempt is made to express a valuation for a company, usually based on a price on the one hand and a result on the other (price/profit ratio, enterprise value / EBIT (DA)).

**Net asset value**

What is meant by net asset value is not always clear in practice. Reference is often made to the equity shown by the company per valuation moment. From an accounting point of view this is the sum of all assets, whether or not taking into account the impact of revaluations, minus liabilities. Net asset value can also be defined as the calculated Economic Value, based on an intended termination (orderly settlement) of the entity to be valued.

**Net Operating Profit Less Adjusted Taxes (Noplat)**

The net operating result or Noplat is calculated by reducing the operating result with the corporation tax due on the operating result.

**Net Present Value (NPV)**

The term net present value is often used in the financial assessment of projects. The present value is calculated by discounting future free cash flows arising from the project against a required rate of returnt. The net present value is determined by reducing the present value of the cash flows by the investment amount of the project. A positive NPV indicates that value is added economically by starting the project.

**Net Working Capital**

The net working capital is the difference between current assets (such as inventories and debtors) and current liabilities (such as creditors, taxes due). Changes in net working capital are part of the operational activities of the company and effect enterprise value.

**Non-operational assets**

Assets not useful in business operations.

**Operational cash flow**

The cash flow that is available, taking into account the desired continuity, for payment to the providers of Equity Capital and Loan Capital.

**Opportunity cost of capital**

The expected return on the best non-selected alternative with a similar risk profile.

**Present value**

Value of a specific cash flow in the present, past or future calculated at the valuation moment.

**Price**

The result of a transaction that is in principle concluded on a voluntary basis, unless a price is determined involuntarily by a judge.

**Reference date / valuation moment**

The date to which the valuation relates.

**Required return or cost of capital**

Percentage that expresses the risk profile associated with the object’s cash flows.

**Rest period**

The number of years in which there is a stable expected Free Cash Flow taking into account inflationary growth.

**Residual value**

The residual value concerns that part of the value that can be attributed to the period after the explicit forecast period (in other words, the present value of the expected free cash flows in the rest period).

**Risk**

Risk is a quantitative concept and refers to the chance that the actual outcomes deviate from the predefined expectations. Expectations regarding the future perspective of a company are subject to risk and uncertainty. When valuing a company, the risk is reflected in the cost of capital.

**Risk free rate**

Risk-free interest rate is the return that can be achieved when running no or a very limited risk. This rate is often based on the return on long-term government bonds.

**Scenario period**

The period within which a specific forecast of results, balance sheets and resulting cash flows is prepared per unit of time (year, quarter, etc.).

**Shareholder equity**

That part of the equity of a company that belongs to the owner(s) of the company.

**Shareholder value**

The shareholder value is the market value of the equity of a company. This remains after the market value of the loan capital is deducted from the enterprise value.

**Stand-alone / going concern value**

The valuation is carried out on the assumption that current exploitation will continue independently, without taking into account the synergy benefits that could be realized by a strategic buyer.

**Strategic value**

The Economic Value of an object, based on the position of a strategic buyer who assesses the company in conjunction with its current activities, taking into account the finance structure as well as the risk perception of this buyer.

**Synergy benefits**

Synergy benefits are benefits that can be realized in a takeover or collaboration process. These benefits may lie in increasing the joint income or limiting the joint costs as a result of the collaboration.

**Systematic risk**

The difference between systematic and non-systematic risk is expressed in the CAPM model. Within the model, a correlation is established between the developments of the total market (the total stock market) and the share price of a specific company. The company’s sensitivity to the development of the total market is expressed in the Beta and is therefore a measure of systematic risk. The model assumes that investors are able to compose fully diversified portfolios, so that they do not receive compensation for running non-systematic risk.

**Tax Shield**

The tax shield is the tax benefit that is obtained because interest payments are tax deductible.

**Time value of money**

The time value of money implies that money received in the future represents a lower value at this time.

**Unlevered**

A situation in which the company is entirely financed with equity capital.

**Value**

Value is by definition subjective and depends on the position of the person performing the valuation and the situation in which he finds himself. For example, it is conceivable that a party that can achieve many synergy benefits through a strategic takeover values a company differently than a starting entrepreneur.

**Weighted Average Cost of Capital (WACC)**

The weighted average cost of capital of the company. With the DCF method, the WACC is used to discount the expected free cash flows.

**Year-end convention**

With a year-end convention, it is assumed that all income and expenditure take place at the end of a year.