The Chepakovich valuation model is a specialized discounted cash flow valuation model, originally designed for the valuation of “

growth stock In finance, a growth stock is a stock of a company that generates substantial and sustainable positive cash flow and whose revenues and earnings are expected to increase at a faster rate than the average company within the same industry. A growth c ...

s” (ordinary/common shares of companies experiencing high revenue growth rates), and subsequently applied to the valuation of high-tech companies - even those that are (currently) unprofitable. Relatedly, it is a general valuation model and can also be applied to no-growth or negative growth companies. In fact, in the limiting case of no growth in revenues, the model yields similar (but not identical) results to a regular discounted cash flow to equity model. The model was developed by Alexander Chepakovich in 2000 and enhanced in subsequent years.

Features and assumptions

The key distinguishing feature of the Chepakovich valuation model is separate forecasting of fixed (or quasi-fixed) and variable

expenses An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition is a ...

for the valuated company Unlike other methods of valuation of loss-making companies, which rely primarily on use of comparable valuation ratios, and, therefore, provide only relative valuation, the Chepakovich valuation model estimates intrinsic (i.e. fundamental) value. The model assumes that fixed expenses will only change at the rate of

inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...

or other predetermined rate of escalation, while variable expenses are set to be a fixed percentage of revenues (subject to efficiency improvement/degradation in the future – when this can be foreseen). Chepakovich suggested that the ratio of variable expenses to total expenses, which he denoted as variable cost ratio, is equal to the ratio of total expenses growth rate to revenue growth rate. Other features of the model: * Variable discount rate (depends on time in the future from which cash flow is discounted to the present) to reflect investor's required rate of return (it is constant for a particular investor) and risk of investment (it is a function of time and riskiness of investment). * Long-term convergence of company's revenue growth rate to that of

GDP Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...

.Peter J. Sander, Janet Haley, "Value Investing For Dummies", 2008, , p. 214.

References

{{Reflist Fundamental analysis Valuation (finance) Financial models

Features and assumptions

See also

References