The value of a “living” company is derived from the after-tax capitalized earnings value that the company is expected to represent for the buyer. The capitalized earnings value is therefore the sum of all future expected earnings that accrue to the shareholders from the company (inflow principle).
The process of calculating the capitalized earnings value is extensive. In order to estimate future earnings, you need to take a close look at the company’s past performance, its potential and market developments. A key component of the determination of the capitalized earnings value is the determination of an appropriate discount rate.