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What is a Valuation Model?
A valuation model is a tool used to value the intrinsic worth of an asset, in this case a company. It gives investors an idea of how much they should be willing to pay for the company. A key reason that investors use valuation models is that they do not have all the information about the company needed to make an investment decision. In situations where there is little or no information available, it becomes difficult to make decisions on pricing and if money will be raised or not be raised by certain investors.
Valuation Modeling
Valuation modeling or valuation analysis refers to the process of estimating an asset’s value (e.g., stocks, bonds, real property, etc.) based on its present cash flows and compared with similar assets in its peer group for benchmarking purpose. The purpose of this analysis is to see if the asset’s price at which it has been traded in the market is equal or close to its intrinsic value (i.e., fair value).

Valuation Modeling Process

The net present value (NPV) of the cash flows is calculated to ascertain if the intrinsic value of an asset is close to its market price. The difference between the intrinsic value and market price of an asset is known as the “intrinsic value” (IV). It is computed by discounting the present values of estimated future cash flows at a discount rate which reflects the time preference of money, that is, how much one unit of currency will be worth in future.

An example of the valuation modeling process is as follows:

Stage 1: Collect Data

Stage 2: Setting up Formulas

Stage 3: Making an Analysis of the Results

The given information is used in the cash flow statement. The net present value is calculated by discounting the future monthly payments at an appropriate interest rate. If this value turns out to be positive, then it indicates that the asset’s market price is higher than its intrinsic value. On the other hand, if it turns out to be negative, then it indicates that its market price is less than its intrinsic value.

The difference between the market price and the estimated intrinsic value of the asset is known as the “intrinsic value” (IV).
If this difference is positive, it indicates that the asset’s market price is higher than its intrinsic value. On the other hand, if this difference is negative, it indicates that its market price is less than its intrinsic value. The larger this IV turns out to be, then it points towards an over-valued market price and consequently higher chances of an economic crash (over-heating).
If IV remains positive over a longer period of time (say more than six months), then you can consider buying into that specific company.

However, this method of valuing a company’s potential can be subjective. It depends on the investor’s level of confidence in the future cash flow projections made for a specific company.

Types of Valuation Modeling
There are two types of valuation modeling: one is where there is a lot of information available to you about a company and another is where there is little or no information available to you about a company. In the first scenario, you probably have access to SEC financials, your team can analyze all aspects of a company from an operational perspective and also from a macro-economic perspective. In other words, you have more data points at your fingertips when making an investment decision in the equity markets. The second scenario is where you are doing fundamental analysis on a company that you are not very familiar with.

Valuation Models in the Pricing of Options
Valuation models are also used when pricing options. An option is a financial derivative security that gives the buyer the right, but not the obligation to buy or sell stock or other assets at an agreed-upon price within a specified time. Valuation models are used when pricing options by forecasting future cash flows of securities. By using valuation models, it helps investors price stocks more efficiently based on their expected future cash flows. It gives investors an idea of how much they should be willing to pay for the company when valuing stocks based on their net present value (NPV).

Valuation models also help investors determine if a stock is undervalued or overvalued. An example of this would be the Black–Scholes model, which was developed to price European options. This model uses stochastic processes to determine the fair value of European options. The Black–Scholes model is used in pricing stocks based on their discounted cash flows. The discounted cash flow (DCF) approach is used when valuing stocks and stock options and uses a weighted average cost of capital (WACC) with a rate of return attached to each risk factor in the company’s business model.

Valuation models are useful when pricing stock options. Two main valuation models that are used are the discounted cash flow model and the Black–Scholes model. The discounted cash flow model is used for stocks with dividends, while the Black–Scholes model is used for stocks without dividends. This helps investors to determine how much they should be willing to pay for a stock based on their expected future cash flows. It helps them determine if a stock is undervalued or overvalued by comparing it to other companies in its industry or market-sector group. An example of this would be the Black-Scholes model, which was developed to price European options. This model uses stochastic processes to determine the fair value of European options. The Black–Scholes model is used in pricing stocks based on their discounted cash flows.

Hire Best-in-Class valuation Modelling Experts

Whether your corporate goals are to see through a Merger and Acquisition, carry out due diligence, adequate company valuation or implement divestitures, Fintalent offers a large pool of valuation modelling consultants that can help achieve your corporate goals. Our best in class value modelling consultants bring to the table a wealth of experience gathered from the corporate world and world class institutions from across the world. Our referral system ensures that only the best of the best are made available to work with our clients thereby ensuring quality outputs at every point.

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Hire the best Valuation Modeling specialists in 2,900+ industries

Fintalent is the invite-only community for top-tier M&A consultants and Strategy talent. Hire global Valuation Modeling consultants with extensive experience in over 2,900 industries. Our platform allows you to build your team of independent Valuation Modeling specialists in 48 hours. Welcome to the future of Mergers & Acquisitions!

Why should you hire Valuation Modeling experts with Fintalent?

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Fintalents are best-in-class - and specialized in 2,900+ industries.​

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Frequently asked questions

Most frequent questions and answers

What clients usually engage your Valuation Modeling Consultants?

We work with clients from all over the world. Our clients range from enterprise and corporate clients to companies that are backed by Private Equity or Venture Capital funds. Furthermore, we work directly with Family Offices, Private Equity firms, and Asset Managers. Most of our enterprise clients have dedicated Corporate Development, M&A, and Strategy divisions which are utilizing our pool of Valuation Modeling talent to add on-demand and flexible resources, expertise, or staff to their in-house team.

How is Fintalent different?

Fintalent is not a staffing agency. We are a community of best-in-class Valuation Modeling professionals, highly specialized within their domains. We have streamlined the process of engaging the best Valuation Modeling talent and are able to provide clients with Valuation Modeling professionals within 48 hours of first engaging them. We believe that our platform provides more value for Corporates, Ventures, Private Equity and Venture Capital firms, and Family Offices.

Our Hiring Process – What do ‘Community-Approach’ and ‘Invite-to-Apply’ mean?

‘Invite-to-Apply’ is the process by which we shortlist candidates for the majority of projects on our platform. Often, due to the confidential nature of our clients’ projects, we do not release projects to our whole platform but using the matching technology and expertise of our internal team we select candidates who are the best fit for our clients’ needs. This approach also ensures engagement with our community of professionals on the Fintalent platform, and is a benefit both to our clients and independent professionals, as our freelancers have direct access to the roles best suited to their skills and are more likely to take an interest in a project if they have been sought out directly. In addition, if a member of our community is unavailable for a project but knows someone whose skill set perfectly fits the brief, they are able to invite them to apply for the role, utilizing the personal networks of each talent on our platform.

Which skills and expertise do your Fintalents have?

The Fintalents are hand-picked and vetted Valuation Modeling professionals, speak over 55 languages, and have professional experience in all geographical markets. Our Valuation Modeling consultants’ experience ranges from 3+ years as analysts at top investment banks and Strategy consultancies, to later career C-level executives. The average working experience is 6.9 years and 80% of all Fintalents range from 3-12 years into their careers.

Our Valuation Modeling consultants have experience in leading firms as well as interfacing with clients and wider corporate structures and management. What makes our Valuation Modeling talent pool stand out is the fact that they have technical backgrounds in over 2,900 industries.

How does the screening and onboarding of your Valuation Modeling talent work?

Fintalent.io is an invite-only platform and we believe in the power of referrals and a closed-loop community. Members of our community are able to invite a small number of professionals onto the platform. In addition, our team actively scouts for the best talent who have experience in investment banking or have worked at a global top management consultancy. All of our community-referred talent and scouted talent are subject to a rigorous screening process. As such, over the last 18 months totaling more than 750 hours of onboarding calls, of which only 40% have received an invite-link after the call.

What happens if I am not satisfied with my Valuation Modeling consultant’s work?

During your initial engagement with a member of our Fintalent talent pool with no risk. If you are not satisfied with the quality of your hire for any reason then we are able to find a replacement at short notice. There is no minimum commitment per project, but generally projects last at least 5 days and can last 12+ months.

Interested in our invite-only community of tier-1 Valuation Modeling experts?

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