DCF Valuation of Companies: Exploring the Interrelation Between Revenue and Operating Expenditures

Abstract

This research explores some key aspects of the application of the DCF enterprise valuation model. The fundamental problems related to determining the value of companies are also discussed in a broader sense. The focus is on the analysis of the key input variables that determine the operating free cash flows. This is a particularly important part of the application of DCF valuation models because this is where the most serious prerequisites for deviating forecasts from reality are. This often leads to significant distortions in the final estimates. In this regard, a more in-depth study of the interdependence between the five main input variables, and in particular between revenues on the one hand and different groups of expenditures on the other, is needed. In this case specifically, the relationship between operating revenue and operating expenses was studied on the basis of summary data for all non-financial corporations in Bulgaria for the period 2008-2020. The results confirm the relationship between operating income dynamics and operating expenses dynamics in the medium and long term. This is a good argument that forecasting operating costs based on their historical averages as a percent of operating income is justified.