Valuation
Valuation errors rarely surface as wrong arithmetic. They surface as the wrong framework applied confidently, a yield where a recovery is required, a levered beta against unlevered cash flows, a perpetuity that quietly assumes the impossible. The output stays quantitatively coherent and survives a citation review; the framework underneath it is the failure.
DCF & free-cash-flow construction
MechanismSBC is a real economic cost; adding it back to free cash flow requires the offsetting dilution be carried into the per-share bridge.
ConsequenceOverstates equity value per share and understates dilution — the DCF reads cheaper than it is.
MechanismUnder IFRS 16 / ASC 842 the right-of-use amortization is non-cash, but the cash lease payment is a real outflow that must be deducted in FCF or debt-treated consistently in EV.
ConsequenceDouble-counts the lease benefit and inflates unlevered free cash flow.
Distressed & special situations
MechanismOnce default has occurred or is imminent, scheduled coupons are not the expected cash flows; price is a probability-weighted recovery and workout value, not a YTM.
ConsequenceReturns a quantitatively coherent yield that systematically misprices the security in a workout.
MechanismRecovery cash flows carry workout and illiquidity risk and should be discounted at a rate reflecting that, not the instrument's contractual coupon.
ConsequenceOverstates recovery value and the implied price.
Comparable companies & multiples
MechanismEnterprise-value multiples are capital-structure neutral; equity multiples are not, so mixing them conflates leverage effects.
ConsequenceA levered company reads as mispriced against an unlevered peer set.
MechanismPost-IFRS-16 EBITDA is not comparable to pre-standard or US-GAAP operating-lease EBITDA unless normalized.
ConsequenceCross-jurisdiction comps drift by the capitalized lease amount.
Cost of capital (WACC)
MechanismUnlevered FCF must be discounted at WACC or an unlevered cost of equity; the levered beta double-counts financial risk absent from unlevered cash flows.
ConsequenceUnderstates enterprise value for a levered firm.
MechanismWACC weights are market-value weights; book weights ignore the premium of equity to book.
ConsequenceMisweights the capital structure, usually overweighting debt.
Terminal value & growth
MechanismGordon growth requires g below r; the formula breaks down otherwise.
ConsequenceProduces an explosive or negative terminal value that dominates the valuation.
MechanismThe terminal year must represent a steady state; a multiple on a peak- or trough-cycle metric embeds the cycle into perpetuity.
ConsequenceCarries a transient margin into perpetuity.
The full bank contains additional items not published here. The taxonomy is a living artifact, derived from practice — versioned, dated, and never claimed to be exhaustive.