Valuation of loss carryforwards in the context of business valuation

Bachelor Thesis from the year 2019 in the subject Business economics - Investment and Finance, grade: 1.3, University of Hohenheim (Institut für Financial Management), language: English, abstract: This thesis concentrates on the Discounted Cash Flow (DCF) analysis. More specifically, it is worked with the Weighted-average Cost of Capital (WACC) method, the Adjusted Present Value (APV) method, and the Flow-to-Equity method . In addition, the focus is on tax loss carryforwards and the problem of how to incorporate the valuation of them into a DCF framework. Generally, two approaches are accepted for valuing loss carryforwards. One can either indirectly or directly determine the value of loss carryforwards.The thesis starts by explaining the fundamentals of business valuation and how the three DCF methods work. After that, a literature review is presented. The purpose of the literature review is to show the strategies others have developed to value loss carryforwards correctly. To show how to incorporate the valuation of loss carryforwards into a DCF framework, an example case was designed that involves two identical companies. The WACC method, the APV method, and the Flow-to-Equity method are applied and combined with the direct, as well as, the indirect method. When the results of the direct method are compared with the results of the indirect method for each one of the three DCF methods, it is concluded which of these approaches works, and gives a correct solution, and which one does not.