Search

In the literature, the integration of the cash and risk effects of executive compensation into company valuation is discussed only marginally. This paper addresses the question of how these effects can be integrated into corporate valuation. Several methods for solving the problem are discussed and a method free of circular references, similar to the adjusted present value approach to company valuation, is identified. Contrary to a common assumption in the literature, there is no uniform and constant cost of capital for a company that uses employee stock options. Cost of capital needs to be adjusted to the cash and risk impact of equity-based executive compensation. Making recourse to the treasury stock method, which is used to calculate diluted earnings per share, is not recommended here even though a corrected version of this method is used. I discuss different forms of equity-based executive compensation, including the resulting allocation of risk and net present value between owners and managers.

Start-up companies are businesses that are now very popular in Indonesia. To support the business moving fast, these businesses need investors by offering the company's fair value. With similar but not the same calculation, in which start-up companies have different financial indicators and financial assumptions with conventional companies, in this case, the valuation is included innovation value and disruption probability. This research is a descriptive study which is based on case studies in the research object. The object of research is PT ABC, a company engaged in the field of Financial Technology. Data collection is done by collecting secondary data from the company and observation during the internship. The analysis is done by conducting a sensitivity analysis with the DCF method using Microsoft Excel. Valuation is also very closely related to Financial Projection to predict the state of the industry pear to pear landing in the future. The data shows that the enterprise value is Rp. 46,084,735,403,742. Then, EV/Revenue is 1,748 times, and the percentage of raise is 100%. According to DCF Valuation, the author suggests investors invest in the company. Because the valuation is very good.

Real estate development has received less scrutiny than real estate investment in terms of appraisal practices and performance measurement. This is despite the inherent uncertainty and financial risks associated with development as an activity. We investigate market practices regarding performance metrics and return expectations both for residential and commercial real estate development in the UK, exploring what is considered as an appropriate return and how this varies according to type and duration of scheme, and method of appraisal used. After examining the literature and the information available on ex-post returns from development activity, results from a survey of real estate developers are reported, supplemented by findings from interviews. The results suggest that the use of traditional residual valuation techniques dominates discounted cash flow models when appraising development projects, particularly among residential developers, while profit-on-cost and profit-on-value are the most popular metrics for quantifying required returns. Unlike NPV or IRR, these metrics do not account for the timing of cash flows, raising questions about the robustness of appraisals in this sector. Such metrics might suffice if required profits are adjusted in ways that are consistent with scheme duration and risks, but it is unclear that this is currently the case.\ud \ud \ud Keywords\ud Development; Housebuilding; Profit Measures; Real Estate Appraisal; Required Returns

This chapter addresses relative valuation (i.e., market-based) methods, asset-oriented methods, real options analysis (i.e., contingent claims), and replacement cost, often used as alternatives to discounted cash flow valuation. Relative valuation methods include comparable company, comparable transactions, comparable industry techniques, and value driver-based valuation. Asset-oriented methods include tangible book value and liquidation- or breakup valuation techniques. This chapter also discusses in detail how to look at merger and acquisition (M&A) valuation in the context of real options and concludes with a summary of the strengths and weaknesses of the alternative valuation methods (including discounted cash flow) and when it is appropriate to apply each methodology.

This paper presents a study of the valuation methods used by analysts to price small and medium-sized enterprises (SMEs) and startups, characterized generally by a lack of accounting history, an absence of comparable firms, and a high growth potential, or even going through a stage of hypergrowth, despite operating in a particularly uncertain environment. According to a sample of 203 analysts’ IPO reports on Euronext Paris, it is noted that analysts are restricted to using a limited number of valuation models for startups and SMEs, despite the multitude of available assessment methods. The data strongly proved that the discounted cash flow method (DCF) is the most widely used model for startups and SMEs. The real options model, recognized by the literature as the most suitable model for these firms, has never been used. All the valuation methods tend to overestimate firms. Furthermore, the given estimates in the reports were closer to the stock price values one month after the IPO. Regressions prove that the analysts’ choice to use the comparables method depends significantly on the activity sector of the assessed firm.JEL classification: G32, G24

Many studies have focused on the relationship between companies with strong environmental, social, and governance (ESG) characteristics and corporate financial performance. However, these have often struggled to show that positive correlations—when produced—can in fact explain the behavior. The authors of this article provide a link between ESG information and the valuation and performance of companies, by examining three transmission channels within a standard discounted cash flow model—which they call the cash-flow channel, the idiosyncratic risk channel, and the valuation channel. They tested each of these transmission channels using Morgan Stanley Capital International ESG Ratings data and financial variables. This showed that companies’ ESG information was transmitted to their valuation and performance, both through their systematic risk profile (lower costs of capital and higher valuations) and their idiosyncratic risk profile (higher profitability and lower exposures to tail risk). The research suggests that changes in a company’s ESG characteristics may be a useful financial indicator. ESG ratings may also be suitable for integration into policy benchmarks and financial analyses. TOPICS: ESG investing, security analysis and valuation, risk management

Purpose The purpose of this paper is to examine the current trends of capital budgeting practices (analysis techniques, discount rate estimations and risk assessment methods) among Pakistani listed firms and analyze the responses conditional on firms’ demographics and executive characteristics. Design/methodology/approach An online questionnaire was sent via e-mail to top 200 non-financial firms (in terms of market capitalization) listed on Pakistan Stock Exchange. Findings With a response rate of 35 percent, it is concluded that the theory–practice gap is low as Pakistani listed firms are using discounted cash flow methods of capital budgeting and preferring net present value over internal rate of return. Similarly, weighted average cost of capital is estimated using target value weights, and capital asset pricing model (with extra risk factors) is used to determine the cost of equity capital. For risk assessment, sensitivity analysis and scenario analysis are the dominant approaches; however despite the theoretical superiority, the use of real options is very low. Overall, investment decision responses significantly differ across firm’s demographics and executive characteristics. Practical implications Pakistani business schools need to address the low usage of advanced methods such as modified internal rate of return and real options among Pakistani listed firms. Originality/value This is the first comprehensive study on the topic in Pakistan and have highlighted the areas of capital budgeting where Pakistani firms’ practices deviates from finance theory.

In Japan, higher reimbursement drug prices give pharmaceutical firms stronger RD (2) by how much reimbursement drug prices can be reduced, keeping pharmaceutical firms’ RD and (3) how the magnitude of the impact changes with the degree of price risk that firms face and with the level of their risk aversion. To this end, a hypothetical new branded drug is constructed from actual data on the Japanese drug market. Assuming that a pharmaceutical firm is an expected-utility maximizer, that the firm’s instantaneous utility function is in the form of the constant-relative-risk-aversion utility function and that its R&D incentives are quantified by the standard discounted cash flow valuation, we use simulations to compute the certainty equivalent and risk premium associated with various degrees of price risk and risk aversion. Referring to the empirical literature on risk preference, we set the parameter value for the level of relative risk aversion of a pharmaceutical firm to 3.0 and that for the discount rate to 0.08. The following results emerged. (1) In the presence of a 20% price risk regarding a reimbursement price of 100 (i.e., ranging from 80 to 120), a pharmaceutical firm’s certainty equivalent is 96.0. Hence, in the presence of a 20% price risk, a risky reimbursement drug price of 100 is equivalent to a sure reimbursement drug price of 96.0. (2) In the presence of a 20% price risk regarding a reimbursement price of 100, the price premium is 4.0. Therefore, by increasing the predictability of future prices, the reimbursement price may decrease by 4.0, while the firm’s R&D incentives remain unchanged. (3) The magnitude of the impact increases at an increasing rate with the degree of price risk and increases at a decreasing rate with the level of risk aversion.

The discounted cash flow valuation methodology calculating the net present value, and derivatives of this methodology, rely on the use of discount rates to arrive at a value. Generally, a single discount rate is used over the life of the resources project. Where discounting factors using more than one discount rate are used, these factors seldom incorporate the impacts of changing debt to equity ratios, increasing capitalization of projects, equity returns trending towards the risk free rate and finally a defendable premium incorporated to reflect technical risk. This paper provides a discussion and solutions to these issues and gives the reader simple yet defendable tools to reconsider what, why and how discount rates should be used.

In calculating recoverable amount of cash generating units (CGUs) under the implementation of value in use approach, discount rate selection represents a central point in deciding the magnitude of impairment charges under Hong Kong Financial Reporting Standards (HKFRSs). The selection of discretion discount rate in the discounted cash flow model (DCF) could be used opportunistically to misstate impairment losses for the benefit of financial statement preparers and causes the transparency of the financial reports. This study is conducted to provide evidence of opportunistic behaviours relating on goodwill impairment by reporting statement preparers. By comparing independently estimated risk adjusted discount rates and those subjectively presented by large listed Hong Kong firms in the first year adoption of HKFRSs, the results showed that discount rates were presented in disarray, in which discount rates were more overstated than understated in comparison with scientifically generated ones.

The growth of any economy depends on the strong financial system. Capital market plays a significant role in channelizing the savings into an investment activity by providing the platform to the investors as well as the firms to raise money. There are various instruments available for investment activities globally. Every investor has an objective to diversify portfolio globally to minimize risk among foreign markets and companies. Investor has to acquire the necessary skills to analyze the stocks to make better investment decisions in order to create wealth maximization. Valuation of equity is pre requisite for intelligent decision making in choosing the right scrip for investment in deciding the true value or intrinsic value of a share. There are few methodologies to evaluate the valuation of stocks such as discounted cash flow method, dividend discounted model. In this backdrop, this paper made an attempt to evaluate the Skyworks Solutions, Inc. stock with free cash flow to equity (FCFE) method of valuation during the 2016 to 2019 and to determine the intrinsic value of the stock and results found to be undervalued.

This paper measures the predictive power of buy-sell-and-hold recommendations made by students engaged in the management of a student-managed investment fund (SMIF). In their roles as analysts and portfolio managers for the SMIF, undergraduate students were required to follow traditional security analytical techniques such as discounted cash flow analysis and comparative valuation that were taught in the introductory investment management class, which is a pre-requisite. We evaluated the stock price performance of the stocks which the students analyzed across multiple holding periods, following student recommendations to buy, sell, or hold. We also compared the recommendations of the student-analysts to the contemporaneous recommendations of sell-side equity analysts.

This chapter illustrates the valuation guidelines for normal businesses that represent a benchmark even for startups. The valuation of a startup is a key element to attract investors and to monitor value growth across time. Several appraisal approaches are used to estimate the potential fair market value, ranging from Discounted Cash Flows to market multipliers or income/asset-based methodologies. The valuation is complicated by the difficulty to estimate future earnings and cash flows, especially for startups with no track record and uncertain perspectives.

Valuation in any merger is the amount a buyer is willing to pay the seller and if the latter is willing to accept the deal amount. There are different techniques to value a company, and it depends on the industry or situation-specific. The most common techniques are: Discounted Cash Flow (DCF) Analysis, Comparable Company Analysis, Comparable Transaction Analysis, and Net Present Value (NPV) method. Other methods may be used as well. Valuation analysts may be retained to provide fairness opinions for private company M&A transactions.

Acknowledging that optimism bias and attention limitations must be considered when undertaking a valuation, and corrected by calculating risk, this chapter examines how these factors affect technology startups’ valuations. Because dream companies usually have negative cash flows, valuations be based on estimated revenues, fixed and variable expenses in the future, and the establishment of projected cash flows. Their valuations require a basic understanding of their technology and its possible impact. Each valuation is actually a valuation of its copyrights, trademarks, patents, as well as commercial viability, using the feed rate method. Assuming the success of a company’s technology, valuation methods regarding discounted cash flow can be condensed into the real option, the pipeline assessment, and the discounted cash flow methods.

SYNOPSIS We provide insights into the inputs and valuation models used by valuation specialists. We survey 172 valuation specialists and conduct several follow-up interviews covering various topics, including the valuation inputs, models, and industry information that they use, as well as how they estimate long-term growth and the cost of capital. We find that valuation specialists rely on their professional judgment to select a valuation model but prefer the discounted cash flow (DCF) model. They primarily rely on the firm's historical performance when forecasting the financial statements, but communication with management is particularly relevant for forecasting future earnings or cash flows. When estimating the cost of capital, they most commonly use the risk-free rate with subjective adjustments. The results of our study provide insights on the information use of valuation specialists that are relevant to other valuation specialists, managers, academic researchers, and regulators. JEL classification: M41; G12; G17; G32.

Valuation of a distressed company is a very tricky issue, for which many approaches and methods have been provided by the literature. Unfortunately, many of the more suitable proposals from a theoretical point of view (i.e., those based on option pricing theory, and even integrated with game theory) are very difficult to apply to real cases. To face the many contingencies emerging in a real case valuation, a scenario discounted cash flow (SDCF) model is provided here. The focus is on companies at an advanced stage of distress, where their ability to operate as a going concern is in question, and maintenance or recovery of business continuity requires significant interventions in the firm’s strategic, operational, and financial structure. In this context, SDCF, with a number of arrangements elaborated here, appears useful for valuing assets, debt, and equity – from current or potential new investors – and the interactions between them, which are particularly critical for distressed companies. At the same time, SDCF takes into account the firm’s liquidation option, not only at the valuation date but even after a restructuring plan has been launched. The going-concern value including the liquidation option should be the reference point for judging the suitability of business continuity compared to liquidation. In presenting the model, the key concepts and methodology adopted are set out following a numerical example inspired by a real case.

This paper intends to highlight a framework for valuating companies using the Discounted Cash Flow (DCF) model. This framework is a culmination of time spent at the AGSM, previous academic research on valuations and industry mentorship by various mentors/advisors in the financial services sector.

This study study started with the question "How much is my company worth?" and "How do I go about valuing my company?" The most popular approaches for valuing companies are Asset, Income, and Market based. This study seeks to identify whether Income-based Discounted Cash Flow method based on projected future income would be suitable to value international chemical distributors. 2 and 3-stage Discounted Cash Flow model will be used. The projected companies' enterprise and equity values will be compared with the existing companies's valuations. A base, bear and bull case scenario will be set up to establish the range of company's value for comparison with the existing valuation. This study adopts a single multiple-case study approach where actual financial data from three of the world's largest chemical distributors were used to establish the existing companies' valuation to demonstrate the validity and applicability of the Discoujnted Cash Flow method. Sensitivity analysis will be performed too.

Purpose The purpose of this paper is to comment upon the on-going debate about the preferred use of implicit models of valuation vs their explicit counterparts. The last few decades have seen changing complexities in UK leasing structures, and there is a suggestion that the implicit models are incapable of dealing with these complexities. This paper looks to address the issues and concerns with implicit models. Design/methodology/approach This education briefing is an overview of the pros and cons of both models and collates comments from industry to give an indication of the use of each model. Findings This paper analyses the appropriateness of implicit models of valuation and the areas in which they prove useful. Although the explicit models prove to be more useful in certain situations, the implicit models are also proved just as useful. The appropriate model needs to be used as appropriate to the property type. Practical implications Rather than seeing implicit and explicit models as “rivals”, they should be seen as two sides of the same coin. Both have advantages and disadvantages. The role of the valuer in practice is to choose the correct model for the valuation task in hand. Originality/value This is a review of existing models.

When evaluating the economic value of a technology or business project, we need to consider the period and cost for commercialisation. Since the discounted cash flow (DCF) method has limitations in...

We examine how a target’s information uncertainty level affects an acquirer’s valuation of the target and the acquirer’s gain realized from the transaction. Based on a simple perpetual discounted cash flow model, we argue that the valuation will be lower for a target with higher information uncertainty and acquiring a target with high information uncertainty can potentially create value for an acquirer’s shareholders. The empirical findings lend support to our arguments. Specifically, we observe that a target’s valuation multiple obtained from an acquirer is negatively correlated with the target’s information uncertainty level. An acquirer’s announcement return is negatively correlated with the valuation multiple given to the target but positively correlated with the target’s information uncertainty level. The results are robust against various measurements of valuation multiples and information uncertainty.

In recent years, private sectors are encouraged to take an active part in franchising of urban infrastructure investments and operations, which promotes the rapid development of public-private partnership (PPP) in infrastructure and public service supply. Value for money (VFM) assessment has been officially proposed to provide a reference for selection of projects planning to adopt PPP. Based on the bottlenecks of VFM application in China and the uncertainties for urban infrastructure PPP projects, a discounted cash flow (DCF) model is established for VFM of infrastructure PPP projects. Then, a Monte Carlo simulation model is established on the basis of uncertainty factors for VFM. Through the analysis of Huai’an trams PPP project, coping strategies of uncertainties for VFM are put forward. Findings of the research may propel the establishment of a complete VFM evaluation system for PPP projects. Key instructional functions of VFM during the process of decision-making can be brought into full play and PPP may develop orderly.

Subject area Finance. Study level/applicability This case can be taught in the Finance area as a part of the course on “Valuation” in a postgraduate program. MBA/EMBA/MBF. Case overview Himachal Futuristic Communications Ltd. (HFCL) discontinued all of its old products and entered into manufacturing of telecom products for mobile telephony and turnkey projects. This complete change in product line was like a re-birth for the company. HFCL grew tremendously between FY 2012 and FY 2015. Its sales grew from Rs 2,638m in FY 2012 to Rs 26,129m in FY 2015, an increase of 114 per cent CAGR (compound annual growth rate). HFCL stock price increased from Rs 11.75 in March 2012 to Rs 19.90 in September 2014 because of this tremendous growth. The stock price came down to Rs 13.35 in March 2015, as the market was sceptical about HFCL sustaining this growth. In March 2015, Choudhary, an equity analyst, was wondering how to value this high growth company. If somehow he could ascertain the intrinsic value of the stock properly, he would be able to appropriately advise his clients about the HFCL stock. Expected learning outcomes The case learning objectives are as follows: to scan the competitive landscape of telecom equipment manufacturing industry and gauge the competitive advantages enjoyed by HFCL; to size the potential market of the industry and predict the level of sustained profitability for HFCL; to develop multiple scenarios based on key drivers and compile projected financial statements for each scenario; and to value the company using the scenario-based discounted cash flow technique by assigning probabilistic weights to each scenario. Supplementary Materials Teaching notes are available for educators only. Please contact your library to gain login details or email support@emeraldinsight.com to request teaching notes. Subject code CSS 1: Accounting and finance.

China's overseas oil investments uphold national energy security. Located in the complex international economic and political environment, the benefits of overseas oil projects are affected by various uncertainties. Oil companies call for a set of evaluation method dealing with these uncertainties, especially when encountering low-oil-price conditions. It is much more crucial to answer when to optimally invest rather than whether to invest. This paper analyzes the investment opportunity of an oil project in the development and production phase considering uncertainty, irreversibility and management flexibility. The decision-making process combines Discounted Cash Flow (DCF) method and the trinomial tree model of Real Option Approach (ROA). For practical purposes, tools of hurdle price, cumulative probability and decision tree are adopted. In addition, results of the case project show the economic feasibility at present and optimal start-up timing at the end of 2016. Besides, the lower cost parameters generally make it easier to meet the opportunity. The scenario analysis suggests the higher risk contributes to an earlier start-up. Furthermore, the issues of method applicability, investment signals and decision-lag effects are discussed.

This research aimed to estimate fair value per share of PT Pembangunan Perumahan Properti Tbk. as a comparison value to the offered price, set at the time of Initial Public Offering (IPO). This research also aimed to determine whether the price offered at the time of IPO was undervalued or overvalued. Information used in this research was in the form of secondary data of PT Pembangunan Perumahan Properti, financial report of comparable companies, and stock prices of comparable companies. The analyzing tools used to determine the fair value per share were discounted cash flow method and relative valuation method. The discounted cash flow method was performed through: projection of the financial statements i.e. the balance sheet and income statement, projection of Free Cash Flow to Equity (FCFE), determination of the discount rate, determination of terminal value, and determining the estimated value of the equity. The relative valuation method was established by searching, choosing and determining the appropriate multiple of comparable companies in similar bussines. Multiples used were: Price Earnings Ratio (PER), Price to Book Value (PBV), and Price to Sales Ratio (P/S). Penelitian ini bertujuan untuk mengestimasi nilai wajar per lembar saham PT Pembangunan Perumahan Properti sebagai nilai pembanding bagi harga penawaran yang telah ditetapkan pada saat Initial Public Offering (IPO). Penelitian ini juga dimaksudkan untuk mengetahui apakah harga penawaran yang ditetapkan pada saat IPO berada dalam kondisi undervalued atau overvalued. Informasi yang digunakan dalam penelitian ini berasal dari data sekunder berupa laporan keuangan PT Pembangunan Perumahan Properti, laporan keuangan perusahaan pembanding, dan data harga saham perusahaan pembanding. Metoda analisis yang digunakan untuk menentukan nilai wajar per lembar saham adalah Discounted Cash Flow dan Relative Valuation. Analisis metoda Discounted Cash Flow dilakukan dengan cara: proyeksi laporan keuangan yaitu neraca dan laporan laba rugi, proyeksi Free Cash Flow to Equity (FCFE), penentuan tingkat diskonto, penentuan Terminal Value, dan estimasi nilai wajar ekuitas. Analisis Relative Valuation dimulai dengan mencari perusahaan pembanding dalam bidang usaha yang sama, memilih dan menetapkan multiple yang sesuai dari perusahaan pembanding. Multiple yang digunakan adalah: Price Earnings Ratio (PER), Price to Book Value (PBV), dan Price to Sales Ratio (P/S).

Small modular nuclear reactors have the advantage of flexibility in deployment and shorter construction time compared with large reactors. Investment appraisals in the energy sector are traditionally based on discounted cash flow, but this tends to underestimate the value of management flexibility during the decision-making process. The ‘real options’ valuation method can better support an investment appraisal. This paper, leveraging the real options approach, gives an account of two key strategic aspects to support the decision-making process in building small modular reactors: the time to market with the relative stage-gate process and the effect of a new plant on the existing portfolio. This paper assesses small modular reactors against other base-load power plants and, once applied to the UK scenario, it shows the superior performance of small modular reactors.

The protagonist in this case is an analyst attempting to value Netflix, Inc., and check whether her recent buy recommendation at a price of $20.00 per share was still valid. Recent bad news had caused the price to drop and she needed to do her best to figure out what was the future for Netflix, and was it undervalued at $17 per share? Intended for MBA students, this case contains her discounted cash flow valuation and a set of assumptions (revenues per customer, retention rates, etc.) students can use to perform a valuation of the existing Netflix customer base as another approach toward judging the $17 stock price. There are two student spreadsheets available for this case (UVA-F-1592X1 and UVA-F-1592X2).

Intended for MBAs, this case concerns the valuation of Netflix, Inc., which was the largest U.S. online movie rental subscription service in early 2009. After reviewing Netflix's historical financial and customer relationship performance, this case presents three approaches for valuing the firm in early 2009. The first is a company-level discounted cash flow analysis based on pro forma projections of revenues, earnings, and cash flow. The second approach attempts to judge whether Netflix's prevailing market value was reasonable by comparing selected company ratios with those of comparable companies. The final approach is based on the assumption that Netflix's enterprise value (EV) was the sum of its current and future subscribers' values (discounted present values, to be exact). There is also a spreadsheet available for students (UVA-F-1610X).

This case is designed as an introductory exercise to familiarize students with several methods used to value early-stage companies. The value of a young biotech company is compared under the venture capital (VC), discounted cash flow (DCF), and real option methods of valuation. Students are asked to value the firm under the VC and DCF methods and then compare those values to the value obtained under the real option method. It is suggested that the student spreadsheet (UVA-F-1584X) be assigned in advance of the class with instructions to have students value the firm under the VC and DCF methods. A separate worksheet in the file (which can be hidden at the instructor's discretion) provides the option valuation for later discussion purposes. A technical note, “Valuing the Early-Stage Company” (UVA-F-1471), covering the basics of the VC and DCF methods of valuation can be assigned with the case.

In April 2012 Bill Nichols, a financial analyst at the real estate investment firm Koenig Capital, was about to enter a unique lease renegotiation. One of Koenig's tenants, Hasperat Inc., had sixteen years left on its long-term lease of the Kelley Building, a 165,000-square-foot office building in downtown Cleveland. The lease contained a clause giving Hasperat the option to buy the Kelley Building from Koenig. When Nichols tried to place a mortgage on the property to take advantage of low interest rates, he learned that the existence of this option in the lease contract prevented lenders from offering Koenig their lowest rates. As a result, Nichols had been tasked with renegotiating the lease to remove the option clause. This unexpected event offered Nichols the opportunity to use his financial skills. He needed to calculate the fair value of the purchase option to be able to justify to his superiors by how much they should compensate Hasperat. Students will step into the role of Bill Nichols and apply real options modeling techniques to value the purchase option in Hasperat's lease.After reading and analyzing the case, students will be able to: Apply real options theory to the valuation of a purchase option in a commercial real estate lease Identify the common mistakes in applying traditional discounted cash flow (DCF) analysis to financial problems with option components

This case asks the student to take a stance on whether an portfolio manager should take a long or short position in the equity of Universal Display Corporation (PANL). The stock is polarizing, in that reasonable arguments could be made for both long and short positions. The case suggests a number of steps that an analyst might follow when valuing a companyDiscounted cash flow valuation, comparables valuation, short selling. After students have analyzed the case they will be able to value the equity of a publicly traded company and take a position on whether a portfolio manager should buy or sell the stock.

Purpose The economic effects resulting from the commitment to ISO 9001 certification is a controversial issue. Many authors have concluded about the positive economic effects resulting from the establishment of quality systems in accordance with the requirements established in the ISO 9001 standard, but other authors have not appreciated this positive relationship. The purpose of this paper is to provide a model that facilitates the valuation of the ISO 9001 quality system. Design/methodology/approach In the process of developing a valuation model, given the uncertainty this process involves, the use of fuzzy math is very useful. First, as for an internal valuation method, the authors highlight the discounted cash flow in a fuzzy environment. The internal valuation will be completed by external expert opinions. To improve the information supplied by experts, the paper makes use of the experton theory. In this context, the authors propose the aggregation of the experts’ opinion by using basic defuzzification distribution (BADD)-fuzzy induced ordered weighted averaging. Finally, the results undergo contra-expertise. After presenting the theoretical model, the authors proceed with its application by using a case study. Findings The paper develops a new method for the economic evaluation of the ISO 9001 certification. Originality/value The authors propose the valuation of ISO 9001 quality management system, and they do it using some interesting tools which fuzzy logic offers. In this way, it is possible to eliminate subjectivity and improve the final results.

By their nature, corporate valuations are partially built on analysts’ opinions, and not only on objective facts. However, it is of primary importance for equity research to be grounded on sound economic theory and existing methodological conventions. Otherwise, an inherent element of subjectivity may degrade into the complete arbitrariness of the assumptions underlying the valuation model. This paper covers conceptual mistakes which may appear in the calculation of the residual value in discounted cash flow valuation models prepared by sell-side equity analysts. In particular, we have analysed some of the essential postulates underlying the estimation of the perpetual growth rate. Our study covering 100 randomly selected investment recommendations prepared by equity research analysts in Poland, shows that these postulates are not adhered to in most cases. Flawed input data translate into the implied company’s fundamentals devoid of economic sense. Unrealistic assumptions underlying valuation models question the credibility of investment recommendations and prompt the discussion over the factors shaping the investment decisions of the market participants.

This study aims to empirically examine the valuation models used by UAE investment analysts. A questionnaire and interviews were used to answer its research questions. Thirty-five investment analysts, in cooperation with the CFA Society Emirates, participated in the questionnaire. The sample covered most of the analysts who have professional qualifications such as CFA and CAIA (coupled with an academic degree such as the MBA) and have an average of more than eight years of experience in the relevant sectors. Descriptive and comparative analysis was employed in this study. The results reveal that discounted cash flow and P/E ratios are the most preferred valuation methods used by these analysts. For the accounting variables used in this study, the analysts perceived free cash flow and operating cash flow to be the most important variables. The results also show that the analysts perceive the solvency ratios (i.e., gearing ratio and interest cover) and liquidity ratio to be the most important ratios. The study concludes that the analysts in the UAE use both sophisticated valuation models and unsophisticated valuations models, with a preference for cash flow models.

Este trabalho é dedicado ao processo de avaliações de empresas, suas principais abordagens, assim como o detalhamento por etapas do modelo utilizado com o objetivo de encontrar o valor intrínseco da ação da empresa Tesla. Baseando-se na premissa de que, o valor de uma empresa corresponde ao valor de seus fluxos de caixa no futuro, usaremos o método do fluxo de caixa descontado para calcular o valor presente dos fluxos de caixa livre futuros ao acionista descontados por uma taxa encontrada através do modelo de precificação de ativos de capital (CAPM). Nesta pesquisa, são utilizados os trabalhos do professor Aswath Damodaran, os relatórios divulgados pela Tesla em seu site oficial e artigos online.

Deterministic discounted cash flow (DCF) analysis is a well-accepted technique in engineering appraisals. Common practice is to incorporate all uncertainty influences within a single variable—namely, the discount rate—which also represents the time value of money. Commentary already exists in the literature that such a practice is expedient but not rational and has shortcomings. This article examines the error involved in this practice and provides guidelines and precautions for using blanket or constant discount rates in dealing with uncertainties. It shows the adjustments necessary for any given investment scenario. This is done through establishing equivalence of the expected utility of deterministic and probabilistic present worth, allowing a rate adjustment to be calculated. Numerical studies look at the relationship or trends of this rate adjustment to the key analysis variables. Generally, it is found that the rate adjustment should be decreased as the timing of a cash flow's occurrence inc...

Purpose The purpose of this paper is twofold: primary, to argue that the profits method, specifically a discounted cash flow (DCF)-based profits method, should be the preferred method of valuation when valuing specialised property. Secondary, to make technical recommendations in the application of the method. Design/methodology/approach Literature was reviewed on the theory of the profits method as well as physical valuations performed in practice. Improvements for the profits method are suggested from the review of six valuations conducted in South Africa in the specialised property sectors. A qualitative approach is followed in the research as broad principles are extracted from the valuation reports as implications and improvements for the profits method. Findings The profits method is more flexible and sophisticated than the cost approach in taking into account systematic and unsystematic risk. The profits method is more accurate than the cost approach in delivering a true reflection of the value of specialised property for any purpose but specifically for mortgage lending purposes and reduces the credit exposure risk of financial institutions. It also decreases pricing inefficiencies to be exploited by buyers and sellers. Practical implications Three improvements to the profits method are suggested. First, revenue could be forecasted based on a probability-weighted approach. Second, a modified capitalisation rate is suggested to the capitalisation rate formula in the calculation of G. Third, a market rental aggregation anchoring and judgement-based approach is suggested as rationale for determining the hypothetical rental split. Originality/value There seems to be a general lack in literature on the profits method of valuation and its application to specialised properties, specifically a DCF-based approach, with this paper being a technical contribution to the body of knowledge on this topic.

In this article, we develop an enhanced corporate valuation model based on the implied cost of equity capital (ICC). We argue that the enhanced method extends the standard market multiples and discounted cash flow (DCF) methods to corporate valuation. Specifically, it incorporates positive aspects of the market comparables and DCF methods while mitigating the shortcomings of both. Unlike the traditional market comparables method, the enhanced method takes account of the full-term structure of earnings forecasts. Unlike the DCF method, it does not require estimation of the cost of equity capital. While other applications of the ICC, such as using it to estimate the cost of equity capital, are reported in the literature, our approach differs in that we do not treat the ICC as a discount rate, but rather as an enhanced multiple that allows estimation of equity value for a company based on publicly available information on projections and market prices for comparable companies and publicly available projectio...

Purpose The purpose of this paper is to investigate and clarify “irrationality” problem through the maritime industry practices and leading incentives behind common investors. Design/methodology/approach This paper includes a review of broader business and economics literature; review of shipping business practices and detection of institutional pathways and misleading mechanisms behind the irrational preferences; investigation of data (for some arguments); and introduction of a theoretical approach. Findings There are several industry practices and norms well established and followed by decision makers, which may cause and initiate illogical and irrational (long-run) preferences. Short-termism is an erroneous habit of common shipping investors, which is embedded and forced through traditional financial math (i.e. discounted cash flow), financial system (e.g. initial public offerings with high-frequency transactions, interest rate governance and asset valuation mechanism) or flawed contracting tradition (i.e. commission bias). Practical implications Both shipping business and financial institutions need to redesign their working mechanisms, evaluation systems, risk detection and assessment procedures. As discussed in Section 4.7, commission-based (float) services must be converted to regular flat rate payments with long-term contracts to protect investors from rational choices of intermediaries in the short-run which encourages investor’s irrationality. Having a long-term service contract will also improve sustainability of intermediaries and lower their business risk (win-win). Originality/value The impact of this paper is two-fold. First, it raises critical questions about professional decay and drawbacks of some traditional instruments in the shipping business. For the first time, this paper emphasises on various challenges which deteriorate credibility of the industry and causes ill-defined investments. Some arguments have extreme priority for strengthening the foundations of the industry. Second, this paper establishes a new stream of scholarly research highlighting weaknesses of conventional economic approach and demand for outsourcing other schools of economics (e.g. institutional and behavioural) into the shipping business.

This paper presents the valuation of real options and the capital budgeting models within shadow costs of incomplete Information and short sales. Shadow costs are sunk costs in the spirit of Merton's (1987) model of capital market equilibrium with incomplete information. The shadow cost includes two components. The first component is the product of pure information cost due to imperfect knowledge and heterogeneous expectations. The second component represents the additional cost caused by the short-selling constraint. Information costs are linked to Merton's (1987) model of capital market equilibrium with incomplete information, CAPMI. This model is extended by Wu, Li and Wei (1996) who propose an incomplete-information capital market equilibrium with heterogeneous expectations and short sale restrictions, GCAPM. This model is used in our paper to provide for the first time in the literature analytic solutions for derivatives in the presence of both shadow costs of incomplete information and short sales. Shadow costs are used in standard discounted cash flow techniques and real options. The justification of shadow costs in real projects is based on the observation that R&D needs to be done before investment decisions. The main results regarding real options and shadow costs of incomplete information and short sales are proposed by extending the analysis in Bellalah (1999 , 2000) and Bellalah and Wu (2009). Our results have important implications in terms of pricing derivative assets and different types of real options. In particular, this framework can be easily implemented in investment decisions and the valuation of flexibility embedded in real projects. In fact, several investment decisions under uncertainty can be reformulated and their results can be implemented in the presence of incomplete information and investment constraints.

This article gives a cash flow view of real options in distinction from the majority of the literature on real options. Via a cash flow view, the article shows that real options can fit within conventional engineering investment analysis, in particular the usual discounted cash flow analysis familiar to most engineers, and there is no need to go looking for answers to real options problems in other disciplines. No mathematical sophistication is needed in order to understand the approach. All real options problems can be reduced to one plain option approach or, in the case of compound options, to a collection of plain options. There is no need to distinguish option type; for example, between expand or contract.

Purpose This paper aims to determine the optimal date for an employee to initiate the pension payments from the New Zealand Government Superannuation Fund (GSF), through retirement or job shifting. Design/methodology/approach The paper uses discounted cash flow methods in conjunction with mortality tables, inflation estimates and a range of values for the yield on inflation-adjusted bonds in New Zealand. Findings The paper finds that, if job shifting is costless, then the optimal exit date is between 60 and 65. If job switching is costly, then this paper determines the effective salary reduction arising from continuing to work at the GSF-associated job beyond the optimal job switching age under costless job switching, arising from the adverse impact on the present value of the pension benefits, so as to assist in deciding when to switch jobs or retire. These effective salary reductions are small below 65 but rapidly rise after that, thereby significantly discouraging work much beyond age 65. Originality/value This paper assists GSF members to determine when to switch jobs or retire.

Cash flows generated from mining projects are typically highly volatile and significantly influenced by a number of exogenous factors including commodity price as one of the most influential uncertainties. In addition, mining projects are complex and many of their executed investment decisions are irreversible. Therefore, management needs to address this potential risk exposure before making an investment decision. Due to the deterioration and fluctuation of mineral commodity prices for a successful mining project acquisition or development, an important and appropriate investment strategy should include a hedging strategy for reducing potential losses suffered by a company. The discounted cash flow methods, which are commonly used to calculate mining project values, often fail to respond to this identified economic uncertainty and also to incorporate de-risking hedging strategies. Therefore, this study approximates the numerical value or value ranges of a mining project considering the combination of a mean reverting commodity price and hedging strategies using continuous time modeling. A novel time-dependent partial differential equation has been proposed using a continuous time, mean reverting model, and hedging strategy to approximate the mining project value. Application of a new real options valuation technique demonstrated its superiority by providing the advantage of mitigating financial losses and procuring financial gains. In this study, some key results are deferral option and expansion option enhanced the maximum values of the project which are, respectively, 2.51 % and 4.4 % compared to the base case. Furthermore, the country risk has a great impact on project values, as when we considered the country risk premium is zero in our model, the project value increases up to 0.97 %.

This paper presents a first approach towards the development of a dynamics decision-making tool (DDMT) for open pit mine planning projects. In this paper, a decision framework, the so-called real option decision framework (RODF), is developed based on a real-options approach with practical applicability to a mining investment project. Four strategic operating options namely, deferral options, maintain options, expand options, and shutdown options, are assumed for mining operations. We illustrated the proposed framework and developed methods for a hypothetical gold mine. The standard discounted cash flow (DCF) method was carried out to analyze the project values without options. The real option valuation (ROV) approach was calculated for the deferral and expand options. We used a system dynamics (SD) modeling method to solve real options problems and the discrete-event simulations were used to simulate the potential values of the projects. The findings are that investors are prone to lose an opportunity to invest if relying on traditional DCF-NPV rules as they suggest accepting the project if and only if NPV is greater than zero. However, results obtained from real options suggest that the project has a value to an investor across different time horizons. The insight is that it is of paramount importance to find an optimal time to exercise a strategic option. It is indicated that strategic options such as the deferral option may yield a higher value than the base case (DCF-NPV) mine option because project risks can be hedged, whereas the expand option may also offer additional value to mine operators. However, such extra-additional values can only be captured through managerial flexibility.

Precise valuation of the economic efficiency of risky investment projects in the mineral sector has a direct impact on the range of future investments. Since the mid-90s, a number of enterprises have also been giving increased attention to the valuation of managerial flexibility that cannot normally be estimated with classical discounted cash flow (DCF) analysis. This has been the result of a development in the real options analysis (ROA) and the simplification of its algorithms, most of which have been achieved through: ♦ incorporating lattice models, ♦ introducing a single uncertain project parameter (gross present value, PV) as an underlying instrument, ♦ assuming that the underlying asset follows the multiplicative stochastic process, ♦ introducing the ‘marketed asset disclaimer’ (MAD) assumption. Unfortunately, in most cases, models constructed on the abovementioned assumptions and modifications are not consistent with real projects. Some analysts recognize that project PVs might not follow the multiplicative process, which could have a direct impact on the project’s value. In order to improve the MAD approach, the paper proposes a modified model where the multiplicative tree is replaced with an additive one. In addition, methods of ‘additive volatility’ calculation and ‘dividend’ adjustments were suggested.