Objective Function Using a Valuation Method

While the more common objectives used are maximum profit and minimum cost, the finance community has been making financial business decisions for years by taking into account other indicators such as market to book value, liquidity ratios, leverage, capital structure ratios, return on equity, sales margin, turnover ratios and stock security ratios, among others. 

Nevertheless, nowadays the maximization of the shareholder s value (SHV) seems to be the main priority of the firms and what really drives their decisions. The use of SHV as the objective to be maximized is mainly motivated by the fact that it reflects in a rather accurate way the capacity that the company has to create value. The SHV of the firm can bee indeed improved by maximizing its CV. According to Weissenrieder (1998), the market value of a company is a function of four factors (i) investment, (ii) cash flows, (iii) economic life, and (iv) capital cost. Specifically, this model applies the discounted-free-cash-flow method (DFCF) to compute the CV of a company. 

1 The Discounted-Free-Cash-Flow Method (DFCF) 

This method has recently become the most preferred approach for the valuation of companies given its capacity of properly assessing the four main factors that contribute to create the market value of a firm. In fact, the DFCF method is well entrenched in finance theory, and its use is gaining wider acceptance in industrial scenarios. The DFCF method values a project or an entire company by determining the present value of its future cash flows and discounting them taking into account the 

According to financial theory, the enterprise market value of a firm is given by the difference between the discounted stream of future cash flows during the planning horizon and the net total debt at the beginning of its life time (NetDebto), as it is stated by constraint (2.46). The initial total debt includes both, the short and the long-term debt and also the available cash (Eq. (2.47)). 

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