Business Valuation in the Frequency Domain
A Dynamical Systems Approach
X.A. van Ardenne (TU Delft - Mechanical Engineering)
M.B. Mendel – Mentor (TU Delft - Delft Center for Systems and Control)
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Abstract
Business valuation is a set of procedures used by financial market participants to determine the price they are willing to pay or receive for businesses. Valuations play a crucial role in financial reporting, capital budgeting, and investment analysis. Current approaches to business valuation rely on professional expertise, causing the valuation to be as good as the analyst's assumptions. In this thesis, the entire valuation effort is translated into a systems and control problem. Economic engineering is used to formulate signal- and energy-based analogs for valuation concepts. A bond-graph model is developed to express general business dynamics as a set of differential equations. The model's analogy with the economic theory is shown by representing the model as a complex port-Hamiltonian system, and giving all elements and signals economic interpretations. A theory is developed to perform valuations in the frequency domain. This theory extends both the existing economic-engineering framework, and the existing valuation effort. Business valuation is performed by using this theory, by using the bond-graph model for business dynamics. The developed theory goes beyond the field of business valuations, as frequency-domain valuation can be applied to any type of financial instrument.