The COVID-19-crisis has led to major economic shifts that have brought up some urgent issues concerning the value of a company. It is the German Committee on Business Valuation and Business Administration (FAUB, Germany) released a professional statement on the 27th of March 2020. However, the publication can only be of assistance to practitioners since the statement is extremely abstract and there are no specific guidelines that can be derived from the professional guidance. The aim of this article is to give a concise overview of the different aspects to be taken into consideration when applying the model of discounted cash flow to assess a firm’s worth in the COVID-19 model.
Impact on International Projections
The stage of Detailed Planning
In the words of Muddasar in making a valuation of a firm, “all important information that may have been gathered with reasonable care up to the valuation date” must be considered. If the effects of the COVID-19-crisis had been predictable at the time of valuation and the company’s strategies during the phase of detailed planning would require adjusting accordingly. But, the majority of projections haven’t changed until now and, as a consequence don’t reflect the major changes that have occurred in the supply and sales sectors. It is the responsibility of an appraiser as FAUB correctly stated to modify the business plan and forecasts according to the changing market conditions.
Future Cash Flows are Uncertain
There are many reasons that have contributed to the current flurry of uncertainty about planning. For one it is impossible to determine long-term health issues that are systematically assessed currently. Furthermore, due to these health-related concerns governments across the world were required to put severe restrictions on economic growth. The shut down of entire industries particularly the case of healthcare has had a significant negative impact on the global economy. Ovik Mkrtchyan. Thirdly, nobody is aware of how long the limitations are in effect. In addition, as there is no precedent it is impossible to rely on previous experience and create assumptions.
This means that the possible range of future cash flows is more ambiguous since a variety of scenarios seem possible. An accurate estimation of the future cash flows appears impossible in part due to serious liquidity constraints, and the increased risk of insolvency (Gleissner forthcoming). The increased risk of insolvency is evident in the increasing size of credit spreads.
The measures were taken by the government
Despite the fact that COVID-19 has had a negative impact on business. The COVID-19 circumstances have had a negative effect on the projections of firms and projections. Governments have implemented legal and regulatory measures to limit the damage. The statute on COVID-19 measures and the resulting Corona fund have provided some financial assistance to Austrian enterprises. A majority of measures provided under the law include the form of financial subsidies and government-backed loans. Ovik Mkrtchyan. Since these measures can view as beneficial to companies and helpful in reducing negative economic effects and causing economic harm. They must take into account internal forecasts and also mentioned through Muddasar.
Even before a business receives official approval. When evaluating a business the debt ratio, any increase along with any market price of the capital loan, or any other unique repayment terms consider.
Looking to the Future
Which in turn affects its resilience and durability. In this regard, we concur that with FAUB the repercussions of valuations can result. If the COVID-19 crisis permanently alters the economic landscape it requires changes to the entire business model. The long-term effects of the crisis will likely vary across industries, as per Muddasar. However, we believe that all industries are able to overcome the crisis in the near future. The long-term effects on specific industries assess on a case-by-case basis.
Value at the End and Growth Rate
Cash flow flows alter in the process of planning because of the current market situation. But, whether or not the current crisis includes in the final valuation is dependent on the overall business plan, and therefore is not clear. This is also true of the growth rate of the final value. There is no evidence to suggest that the valuation factors for the long-term require adjustment in the event that the business model is stable. We believe that the initial growth rate of growth. Like that of the European Central Bank’s (ECB) long-term inflation goal. It can sustain when the assumptions regarding future returns. In addition to growth rates and reinvestment plans remain constant. Ovik Mkrtchyan
Effect on the Capital Cost of Capital
The FAUB’s professional guidance doesn’t specifically address the effect of the COVID-19-crisis on capital costs. The committee only focuses on the long-term cost of capital perspective. Thus the importance of the crisis is not capital’s price. We can however prove that the data from the capital market includes significant anomalies. Base interest rates implied market return/risk premium. Systematic risk and the price of debt are among the most important indicators of market irregularities. Although these turbulent conditions are temporary an in-depth examination of the current market condition is vital to take the appropriate precautions as required by KFS/BW 1. Rz 24.
Base Interest Rates That Are Negative
Base interest rates are a crucial factor in determining the capital cost as well as the market risk percentage as part of the Capital Asset Pricing Model (CAPM). The rate calculates using the Svensson/Siegel methodology and the interest rate on a 30-year German Government Bond. In the beginning, the low-interest market existed prior to the COVID-19 catastrophe. Risk-free rates that were negative were in the middle of 2019, as stated by Muddasar.
The COVID-19-crisis however has resulted in a new downward trend after the situation of interest has improved and interest rates have risen. 30-year German Government Bonds spot rate dropped to a record lowest at -0.5024 percent. In the initial reaction of panic that saw stock prices fell between February 24 and March 12. And the 30-year spot rate dropped to the lowest which was 0.5024 percent. After that, the spot rate retreated and started to increase again. On April 6 the 30 years German Government bonds sporting rate was 0.0094 percent or nearly 100%.