Firm valuation: An application on Borsa Istanbul with discounted cash flow and relative valuation approaches

Abstract

This study estimates the firm values of BIST cement industry firms between 2011 and 2019 with relative valuation and discounted cash flow (DCF) methods, and compares the valuation methods in terms of their accuracy in predicting firm value by examining the error margins in prediction. The results reveal that the DCF is the best performing valuation method followed by the Price/Earning (P/E) and the Price/Book Value (P/BV) respectively. In addition, the relationship between firm values calculated with the DCF method and firm variables used in valuation are analyzed, and the variables were found to be reliable. We also examined the effect of weighted average cost of capital (WACC) and growth rate on the firm value. The results show that firms are sensitive to the changes in the WACC and growth rate.