DETERMINANTS OF VALUE OF ENTERPRISES AND REDUCED STOCHASTIC VALUATION MODEL
Author: Zlatin Sarastov (University of National and World Economy)
Keywords: enterprise value, free cash flows, stochastic modeling, determinants, investment decisions
The study examines the key determinants of enterprise value, emphasizing financial factors that directly influence business valuation. The primary objective is to develop a simplified model in which investment costs are not considered an independent variable but rather an endogenous result of revenues and profitability. The model employs stochastic processes to describe the dynamics of sales and operating margins, assuming that sales follow a Geometric Brownian Motion (GBM), while operating profitability is modeled using an Ornstein-Uhlenbeck (OU) process. Enterprise valuation is conducted by discounting future free cash flows generated within the model. To validate the proposed methodology, Monte Carlo simulations were conducted, demonstrating that enterprise value can be modeled as dependent on sales growth and operating profitability, while investment costs are treated as internally driven by these factors. The results exhibit a high degree of realism and support classical investment theories, including Tobin's model of marginal capital efficiency. The study presents a conceptually simplified yet practically applicable model for enterprise valuation that can be utilized across various economic and financial domains. The model is particularly useful for financial planning, valuation, and strategic analysis, providing a solid foundation for informed managerial decision-making.
