Valuation engine

Corporate Valuation Engine

A complete valuation framework grounded in peer-reviewed academic finance (Damodaran, Fernández equivalence proofs, Koller/McKinsey ROIC-growth framework, Ohlson/Feltham residual income). The consistency principle governs everything: match cash flows to their correct discount rate, use market values for weights, normalize cyclical earnings, and adjust explicitly for survival probability in young or distressed firms.

Discounted Cash Flow Family

Framework	Formula
Equity valuation	Σ CF_to_equity_t / (1 + k_e)^t
Firm valuation	Σ CF_to_firm_t / (1 + WACC)^t
APV	Unlevered firm value + PV(tax shield) − expected bankruptcy costs
FCFF	EBIT(1−t) + Depreciation − CapEx − ΔWorking Capital
FCFE	Net Income − (CapEx − Depreciation) − ΔWC + (New Debt − Debt Repaid)

Fernández's equivalence proofs show all discounting variants yield identical intrinsic value when assumptions are consistent — divergent answers signal inconsistent assumptions, not model choice.

Cost of Capital

Component	Formula
CAPM	E(R_i) = R_f + β_i [E(R_m) − R_f]
WACC	k_e·E/(D+E) + k_d(1−t)·D/(D+E)
Beta unlevering	β_u = β_L / [1 + (1−t)(D/E)]
Beta relevering	β_L = β_u [1 + (1−t)(D/E)]

Growth & Terminal Value

EPS growth = Retention Ratio × ROE. EBIT growth = Reinvestment Rate × ROC. Terminal value follows Gordon Growth: TV_n = CF_{n+1} / (r − g_n). Only growth funded at ROIC > WACC creates value (McKinsey diagnostic) — growth at ROIC below WACC destroys it.

Relative Valuation (fundamentals-anchored multiples)

Multiple	Driver formula
P/E	Payout × (1+g) / (k_e − g)
P/BV	ROE × Payout × (1+g) / (k_e − g)
P/S	Net Margin × Payout × (1+g) / (k_e − g)
EV/Sales	After-tax Op Margin × (1 − Reinvestment) × (1+g) / (WACC − g)

Forward-looking multiples outperform historical ones; always adjust comparisons for the fundamental drivers above.

Distressed & Private Company Valuation

Equity as a call option (Black-Scholes): Equity = V·N(d1) − D·e^(−rt)·N(d2) — equity in a distressed firm has option value even when firm value sits below the face value of debt.

Distress-adjusted value: Going Concern Value × (1 − π_distress) + Distress Sale Value × π_distress.

Private-company adjustments (Damodaran): Total Beta = sector unlevered beta ÷ correlation with market, relevered at company D/E (owners cannot diversify firm-specific risk); synthetic credit rating from interest-coverage lookup → default spread → pre-tax k_d = R_f + default spread + country risk premium; illiquidity discount 0.25 − 0.04 × ln(Revenue in USD millions), adjusted for profitability and block size, bounded [5%, 40%]; key-person discount 0–25% based on founder dependence and succession readiness.

Output Protocol

Lead with the number that matters (enterprise or equity value, valuation gap, implied ROIC premium). Support with the structural reason. Close with the action it implies. Triangulate at least two methods, name every trade-off, and show the full calculation chain.

Resources

• knowledge/methodology.md — formula register with worked examples
• dataset/train.jsonl — instruction-tuning pairs
• eval/eval.jsonl — held-out evaluation questions