IRC 409A Common Stock Valuation
This free, guided checker walks your team through the key decision points for IRC 409A Common Stock Valuation. Answer a few questions to see the likely approach and the evidence to document.
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Income Approach: Discounted Cash Flow
This free, guided checker walks your team through the key decision points for Income Approach: Discounted Cash Flow. Answer a few questions to see the likely approach and the evidence to document.
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This tool is a high-level valuation screening aid for general information only and is not a valuation, appraisal, accounting, tax or legal opinion. A defensible conclusion of value requires a qualified valuation specialist applying professional standards to entity-specific evidence.
The questions this tool walks you through
Here is what the checker asks and why each step matters. Prefer to talk it through? Contact us and we will help directly.
Is there supportable prospective financial information (a multi-year forecast with a documented basis) to discount?
Prospective financial information is the engine of a discounted cash flow; without a supportable forecast the method produces false precision. Test whether the projection has documented revenue drivers, margins, working capital, and capital expenditure, and be wary of forecasts that jump straight to management's desired answer without support.
Without a supportable forecast the income approach is not appropriate; consider a market or asset approach under IVS 105.
Official guidance: International Valuation Standards
Does the enterprise have an indefinite going-concern life rather than a fixed or finite economic life?
The question here is whether cash flows continue indefinitely or end. A going concern warrants a terminal value; a fixed-term contract, wasting asset, or defined-life project does not. The common trap is bolting a perpetuity onto cash flows that will demonstrably stop, which overstates the indication.
Model a finite-horizon DCF over the defined economic life with no going-concern terminal value under ASC 820-10-55.
Official guidance: International Valuation Standards
How is the discount rate being developed?
Match the discount rate to the cash flow: WACC for invested-capital (firm) cash flows, cost of equity for equity cash flows. Build the equity return with CAPM or the build-up method, and support every component - risk-free rate, equity risk premium, beta or industry factor, size premium, and any company-specific premium - with published empirical data rather than judgement alone.
Discount invested-capital cash flows at an after-tax WACC under ASC 820-10-55. Develop the cost of equity by CAPM for equity cash flows under IVS 105. Develop the cost of equity by the build-up method with a size and company-specific premium. Develop and support the discount rate before relying on the indication under Rev. Rul. 59-60, Section 4.
Official guidance: International Valuation Standards
Which terminal value method captures the value beyond the explicit forecast period?
Terminal value often drives most of the indication, so its assumptions deserve the most scrutiny. Whether you use Gordon growth or an exit multiple, confirm the terminal year is normalized and that perpetual growth stays below the discount rate and below long-run GDP or inflation. The trap is a terminal growth rate that quietly exceeds a sustainable economy-wide rate.
Capitalize normalized terminal cash flow at the discount rate less a sustainable growth rate. Apply a market-derived exit multiple to a normalized terminal-year metric under ASC 820-10-55. Fade growth to a steady state before applying the perpetuity under IVS 105.
Official guidance: International Valuation Standards
Is a mid-year discounting convention being used because cash flows are received through the year rather than only at year end?
The discounting convention reflects when cash is actually received. A mid-year convention assumes cash flows arrive evenly and discounts at the half-year point; a year-end convention assumes receipt at period end. Apply the convention consistently to both the explicit-period cash flows and the terminal value, and document it, because the choice can move the indication by several percent.
Use the interactive tool above to see how this applies to your situation.
Official guidance: International Valuation Standards
Has the indication been reconciled to implied multiples and an implied terminal growth rate that are reasonable against market evidence?
A disciplined DCF is reconciled back to the market: convert the indication into implied multiples and an implied terminal growth rate and test them against guideline companies and transactions. If the terminal value is an outsized share of the total and its implied exit multiple is unsupportable, the indication is not yet reliable and the inputs must be revisited.
Reconcile the implied multiples and terminal value before relying on the indication under Rev. Rul. 59-60, Section 4.
Official guidance: International Valuation Standards
Which level of cash flow is being discounted, and therefore what does the present value represent?
The cash flow level determines what the present value represents. Firm-level cash flows discounted at WACC give enterprise value, which must be bridged to equity by removing debt and adding non-operating assets; equity-level cash flows or dividends discounted at the cost of equity give equity value directly. Mixing the cash flow level and the discount rate is a common and material error.
Discounting FCFF at WACC yields enterprise value; bridge to equity by removing debt and adding non-operating assets under IVS 105. Discounting FCFE at the cost of equity yields a direct equity-value indication under IVS 105. Discounting expected dividends at the cost of equity yields a direct equity-value indication under Rev. Rul. 59-60, Section 4.
Official guidance: International Valuation Standards
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