How Does Value Grow? Chasing Short-Term Income Destroys Long-Term Value
On what does growth in value primarily depend? Is it the magnitude of forecast cash flow, the growth in forecast cash flow, discount rates, or some combination? This article answers these questions. Additionally, the author develops a generalized discounted cash flow (GDCF) model, in which the standard discounted cash flow becomes a special case. The GDCF consists of a single formula for valuing a business. Finally, the author provides recommendations for management of the business that will increase growth in value the most.
Contributor Notes
Jay B. Abrams, ASA, CPA, MBA, is the author of Quantitative Business Valuation: A Mathematical Approach for Today's Professionals, 2nd ed., ©2010, John Wiley & Sons, and How to Value Your Business and Increase Its Potential, ©2005, McGraw-Hill. He has finished the first draft of the manuscript of Valuing S Corporations and Pass-Through Entities and is working on the final manuscript, which he expects to publish in 2015. Mr. Abrams is the principal of Abrams Valuation Group, Inc., with offices in North Hollywood, California, San Diego, California, and New York. He was a Project Manager at Arthur D. Little Valuation, Inc. in Woodland Hills, California. Mr. Abrams has an MBA in finance from the University of Chicago, where he also took graduate courses in the Department of Economics. He received his B.S. in Business Administration from California State University, Northridge, where he received the Arthur Young (now Ernst & Young) Outstanding Accounting Student Award in 1972. jay@abramsvaluation.com.