The observation of a share price makes it possible to measure the “average” opinion of investors on the value of a firm. Indeed, the price is the result of a transaction between two investors whose individual opinions diverge (one buys, the other sells) but who find a satisfactory middle ground by agreeing on an intermediate position.

This finding is at the origin of a method which focuses on the market and which one calls method of comparable or multiples.

But, there is a transaction only from the moment when the two parties forged their own opinion on the fundamental value of the firm. This opinion can be built from the same rationality as prevailing for the selection of investments: the value of an asset lies in its ability to generate cash flows discounted at the cost of capital.

The value of a firm appears, then, as a sequence of “free” discounted cash flows, the so-called “DCF” method.

The module describes these two complementary approaches, the rationality of which must be understood because it is used in many strategic decisions relating to the evolution of the perimeter of activity of firms.

Exercise related to the video

Once you’ve watched the video, you can do an exercise to practice what you’ve just learned and assess your understanding of company valuation.