- begin with examining historical and current data and
- then making projections.
Several sets of forecasts or scenarios should be made using different assumptions concerning
- the business environment and
- the strategy of the firm.
A simple example is where only two or three scenarios are created, example,
- a business-as-usual scenario,
- an aggressive marketing or acquisition scenario, and
- an operational improvement scenario.
The value should be estimated using
- various explicit forecast horizons and
- different methods.
1. Estimating Value using Various explicit forecast horizons
There are usually two periods to forecast:
- the explicit forecast period and
- the period after that in which the challenge is to estimate the continuing value for that period.
2. Estimating Value using Different methods
There is also the choice of using these methods for estimating value:
- the free cash flow (FCF) method and
- the economic-profit method.
Both methods should be used and their results compared.
By estimating value using different explicit forecast horizons and methods,
- the robustness of the model and
- the consistency of the assumptions can be verified.