Val is modelled after Professor Aswath Damodaran's spreadsheet. Val streamlines the process of valuing a company by acquiring the data required automatically, allowing you to focus on what truly matters in valuation - the forecasting.
the model
Val uses the Discounted Cash Flow model which models the expected cash flows of the company discounted by some discount rate.
Cost of Capital
The discount rate is determined by the Cost of Capital which represents the return the investment is required to generate to justify the initial investment. It is a weighted average of the Cost of Equity and Cost of Debt. The Cost of Capital is decayed along with time as matured companies tend to approach an average discount rate.
The Cost of Capital composes the Risk-Free Rate, Beta and the Equity Risk Premium. The Risk Free Rate represents the opportunity cost as opposed to the certain expected rate of return. Beta represents the relative volatility of the investment. Val uses the bottom-up approach levering the Beta from the Unlevered Beta. Lastly, the Equity Risk Premium is the premium that stocks have historically earned over riskless securities. It also includes a country risk premium which represents the default spread of countries where the company does business in.
The Cost of Debt is the rate a company can borrow money long term today, reflecting both default risk and level of interest rates. Following Professor Damodaran's approach, Val computes synthetic ratings of companies using the Interest Coverage Ratio (EBIT / Interest Expenses).
Growth
Val gathers consensus growth estimates from various sources, however you are still encouraged to input your personal forecasts.
A common pitfall of these types of valuation approaches is unjustified growth. Val handles this by ensuring that any growth by a company has to be earned via reinvestment. Concretely, the Growth Rate is a function of both Reinvestment * Return on Invested Capital and the Growth Rate from improved efficiency.
Lastly, to ensure that the growth is sensible (i.e the company does not grow to be larger than the economy in perpetuity), the Growth Rate is decayed to the Risk Free Rate.
The final value of the firm is the total present value of future cash flows and the terminal value adjusted by any probability of failure, removing debt, minority interest, employee options and adding back cash and any non-operating assets.
the inputs
Revenues: Current year operating revenues of the company. You should only adjust this if the company has wrongly classified something as operating revenue or revenues from a particular business segment was missed out.
Next Year Revenue Growth, Operating Margin and Compounded Annual Revenue Growth: The main inputs that should be altered. They represent the growth forecast of the company.
Target Pre-tax Operating Margin: This represents the expected efficiency growth of the company. It is typically set to the industry average.
Year of Convergence for Margin: The time required to meet the target operating margin.
Discount Rate: Input any arbitrary discount rate if computed with any other approach
Years of High Growth: How many years before the company reaches mature status where the growth rate begins to drop.
Sales/Capital: This represents the efficiency of growth. By default, it is set to industry averages.
Probability of Failure: The probability that the company collapses. By default, it is calculated using the synthetic rating. Val assumes that only half of the book value is salvageable in the event of failure.
Value of Options: Any employee options that should be accounted for in the final valuation.
Adjust R&D Expense: Following Professor Damodaran, Research and Development expenses should be capitalized as an asset instead of an expense. For more information see here.