The project is about creating a software that can determine an optimal value for a company by looking at their balance sheets records in the past to predict future cash flows. Financial analysis methods such as DCF, DDM and FCE can be implemented in this approach (only one). This system would be automated using machine learning and data analysis.
The main research for this project is coming up with a model that can predict the future cash flows of a company by looking at past trends. Regression will be one of the core Machine Learning Techniques that will be applied in this research. Some resources for this project will be “Python for Finance” Analyze Big Financial Data by O’Reilly Media.
The valuation of the company is doing using what finance people call as the time value of money adjustment. Basically, what this means is that getting $100 today is better than getting in tomorrow or anytime in the future. Thus, all future cash flows that the company generates needs to be discounted at today’s value. In order to do this, we need to figure out the discount rate. There are different approaches we can take for this. For instance, we can use the interest rate provided by the Federal Reserve or we can make our own that can reflect the real financial scenario better. The Capital Asset Pricing Model can be used in this scenario but there are things such are beta and the free interest rate that needs to be estimated. This estimation can be the second part of the research.