Valuation of Companies: Strategies and Theories

Valuation of Companies: Strategies and Theories Part A The valuation of company assets depends a varies a great deal; attempts to find theoretical models that cover all of the aspects of a business valuation has proven difficult; as such, many of the major valuation theories have been proven to have both specific strengths and weaknesses. One of the core difficulties inherent to the great majority of theories available is the reliance on specific factors in their equations that remain subject to widespread debate as to how, precisely, they should be measured in order to attain the most accurate appraisal of a company’s given value. Many problems inherent to risk assessment and company valuation include: the weighting of future long-term assets versus short-term stock market value; the precise period from which historical data should be dated from; and how risk should be defined precisely. Of course, stock market appraisal is innately probabilistic, and the development of a coherent and foolproof theory for valuing company stock re mains very unlikely. There are, however, many strengths and weaknesses inherent to the myriad of hypotheses and models available to us. One of the most ambiguous factors inherent to theories of valuation is the prediction of future growth, known as a forecast horizon. The economic growth model, which will be described later, suggests that forecasted profit over a pre-specified horizon does not affect the value of the company as such, but affects the manner in which that value is distributed over the period of the horizon. Thus, the specific horizon period utilized can impact upon the perceived growth of the company. Of course, the horizon period can indirectly impact upon the perceived value of the company in DCF and economic growth forecasting models, especially if value is tied to changes in economic assumptions regarding the general future growth of the company and its continuing value. Of course, measuring the exact forecast period is not an exact science, but must take into account a number of factors if it is to provide us with an accurate view of the relationship between explicit free cash flow and continuing value. Firstly, the horizon period should be long enough to predict that the company’s growth period will be over at the end of it. Secondly, the horizon period shouldn’t be overly long as this will inevitably impact upon the predictive capacity of the theory. Of course, the length of the horizon period also impacts upon the Return on Invested Capital (ROIC), often because the horizon period is inappropriately equated to the competitive advantage of investment of a company. As such, ROIC is directly equated to levels of continuing value presupposed by the horizon period used in determining levels of continuing value as compared to the value of explicit cash flow. As Kollar et al. (2006) suggest, â€Å"the key value driver formula is based on incremental returns on capital, not companywide average returns. If you assume that incremental returns in the continuing-value period will just equal the cost of capital, you are not assuming that the return on total capital (old and new) will equal the cost of capital† (p. 283). Instead, original capital will continue to earn the same returns that were projected in the former period. Part B The attainment of the true value of a company based upon its position in the stock market is a difficult task, and many differing theories have been developed to come to terms with perceived valuation weaknesses in previous theories. This is especially prevalent today, as many recent problems, from the bubble bursting on the dot com revolution, to recent accounting scandals in large financial firms, have stressed the need for more rigorous methods of determining true value. One problem that management have had to encounter is the paradox of retaining short-term profits in a sustainable manner that can ensure long-term health of the company. The stock market obsession with factors such as the quarterly rate of return places emphasis on short-term profitability. One competing model, that takes into account assumed growth of the company, can be found in the many discounted cash flow (DCF) models that are being used more frequently as a result of the failings of simply using present rate of return to determine a company’s overall value. DCF models differ from economic profit models because they forecast the potential of future growth of the company and incorporate that into the present-day value of the company. As such, DCF models incorporate estimates of future growth into the present model; however, further analysis of the two competing models for determining company value suggest that, in theory at least, the results should create the same overall value. The economic profit model uses the theory of Alfred Marshall (1890), in which he suggests that â€Å"What remains of the owner’s profits after deducting interest on his capital at the current rate may be called his earnings of undertaking or management† (p. 142). As such, any perceived value created by the company should take into account the opportunity cost of the capital as well as expenses. As such, in many respects the economic profit model is more rigorous in measuring the present-day value of the company, because DCF determines free cash flow through measuring investments in capital and fixed assets. Of course, because the level of investment can be delayed by management, it is possible to generate short-term value at the expense of long-term value. In theory however, both models should produce the same results. Ultimately, DCF is useful for determining the price of an asset in the long run; as such, it provides one of the most useful tools for measuring the long-term profitability of an investment by factoring in future cash flow models. While the presence of short-term deviations in market value can be useful in certain contexts in determining value, many of the models practised are unreliable and unstable in practice. Fluctuations in short-term market value is difficult to measure with any degree of accuracy, whereas DCF models reflect the true value of a company more accurately as the model is based on the acquisition of long term profitability. Certainly, the role of strategic manager should be covered in the great majority of instances by the DCF model. As Koller et al. (2005) suggest, â€Å"What matters is the long-term behaviour of your company’s share price, not whether it is 5 or 10 percent undervalued this week. [†¦] Managers who use the DCF approach to valuation, wit h their focus on increasing long-term free cash flow, ultimately will be rewarded with higher share prices† (p. 100). Therefore, the predictive capacity of DCF can be used as an effective model for creating future growth, although its predictive methods and mechanisms can occasionally be doctored to create larger levels of short-term growth at the expense of long-term growth, as a result of the correlative relationship between investment levels and free cash flow in any valuation process. In addition, DCF relies heavily on projected scenarios; as Mauboussin (2006) comments, â€Å"small changes in assumptions [in the DCF model] can lead to large changes in the value† (p. 7). This requires the need for rigorous assessment of a large quantity of possible growth scenarios. Part C CAPM uses three variables for determining the expected return of a stock, which can furthermore be used to determine the expected value of a company. Unfortunately, despite CAPM providing us with a â€Å"tour-de-force† (Fama French 2004, p. 28) of theoretical analysis that can provide us with a useful series of principles by which central principles of asset pricing can be taught, its empirical record is poor enough, according to Fama French (2004), to â€Å"invalidate the way it is used in applications† (p. 1). The problems with CAPM are built upon a number of difficult foundational principles that, in practice, prove to be unrealistic. Firstly, the Sharpe – Lintner CAPM model (see Sharpe 1964, Lintner 1965) assumes the presence of unrestricted riskfree borrowing in their equations. Of course, this is an unrealistic assumption that severely affects predicting the empirical data. Modifications by Black (1972) attempt to remedy this by creating effective asset v aluations based on risk modelling; but Black’s analysis merely suggests that unrestricted short selling, rather than unrestricted riskfree lending, is a central assumption, and proves equally false in practice. The use of CAPM is therefore encumbered by a number of weaknesses, and relies on a number of assumptions that, in practice, prove difficult to measure. These include difficulties in ascertaining precisely which risk-free rate should be used in particular circumstances, as well as difficulties in measuring the market risk premium and beta. A number of alternative models of determining company value based on risk assessment exist, all of which rely on a fundamentally different definition of risk itself. While CAPM defines a stock’s risk as its sensitivity to the stock market on the whole, other systems use more rarefied versions of risk assessment: the Fama-French three factor model, for example, defines risk in terms of sensitivity to three portfolios: the stock market, a portfolio based on book-to-market ratios and a portfolio based on firm size. Whether the Fama-French three factor model is a better system than the CAPM system remains to be seen; while it is widely held that the Fama-French model offers us a more comprehensive assessment of risk to value than CAPM, which does not rely on the assessment of other portfolios, many critics also state that the Fama-French model is subject to the same interpretative problems as the CAPM system – namely, the Fama-French model, like CAPM, does not state how muc h data should be used; this is especially important considering that the system is based on historical evidence. As Koller et al. (2005) suggest, â€Å"Since 1926, small companies have outperformed large companies, but since 1982, they have not† (323). The lack of a rigorous method for determining how far back the data related to regressed returns should go creates many inconsistencies in risk assessment and valuation, such as the one highlighted above. Arbitrage Pricing Theory (APT) offers us a model similar to the Fama-French model but more generalised in its practice. Of course, while it suffers from the same fundamental implementation-related weaknesses as other models, although it differs insofar as it factors into its central equation the actual return of a security, which is fully specified. While theoretically this model is successful, again it reveals many weaknesses in determining the overall value of a company based on the assessment of portfolio risk: implementation and application of the theory has seldom been presented because of the more generalised nature of the variables and the factors in the central equation; in practice, there has been little agreement on what these factors should be, how many there should be, and how these factors should be weighted and measured. As such, CAPM retains its validity despite its essential weaknesses as, some economists argue, it represents the â€Å"least worst† model for de fining risk. As Koller et al. (2005) suggest, â€Å"It takes a better theory to kill an existing theory, and we have yet to see the better theory. Therefore, we continue to use the CAPM while keeping a watchful eye on new research in the area† (324). Bibliography Brealey, R. A. Myers, S. C. (2003), Principles Of Corporate Finance, 7th ed., London: McGraw-Hill. Koller, T., Goedhart, M., Wessels, D. et al. (2005), Valuation: Measuring and Managing the Value of Companies, London: John Wiley and Sons. Lintner, J. (1965), â€Å"The Valuation of Risk Assets and The Selection of Risky Investments in Stock Portfolios and Capital Budgets.† Review of Economics and Statistics. 47:1, pp. 13-37. Marshall, A. (1890), Principles of Economics, Vol. 1, New York: MacMillan Co. Mouboussin, M. J. (2006), â€Å"Common Errors in DCF Models†, Legg Mason Capital Management. Sharpe, W. F. (1964), â€Å"Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk†. Journal of Financial Economics, 10:3, pp. 237-68.

St. Augustin Essay -- essays research papers

From the analysis of St. Augustine Confessions and Beowulf, it is clear that the two authors, St. Augustine and the poet respectively, differ on their views of death, which helps to paint a better picture of the world that each writer lived in. In Augustine's writings, death plays a major role in life; it serves as the stepping stone to a greater existence in heaven. In Augustine's world, Christianity and God both play an important role in how death is viewed. In the poets writings we see a different perspective, one in which the time you spend on earth is of great importance; very little thought is given to life after death. Although God is mentioned and discussed throughout the writing, it is a very different perspective than the one shown by Augustine. In the writing of St. Augustine, the reader gets a small glimpse of what life was like in the Roman Empire in the forth century, and more particularly how death was viewed during this period. According to the Confessions, life, though valued, was just a time spent before God chose to bring your soul to heaven; contingent of course on the fact that you were a Christian. 'Yet in a moment, before we had reached the end of the first year of a friendship….you took him from this world (Confessions, 75).'; 'When all hope of saving him was lost, he was baptized as he lay unconscious (Confessions, 75).'; This passage about St. Augustine's friend helps to illustrate that as death drew near in Augustine's time, thoughts went to the after life in heaven. This hypothesis is furthered when Augustine writes about the death of his mother. 'And so on the ninth day of her illness, when she was fifty-six and I was thirty-three, her pious and devoted soul was set free from the body (Confessions, 2 00).'; Some might argue that the sorrow that Augustine describes at both the deaths of his friend and mother illustrates that death was not looked on as a passage to life in heaven, but as a very sorrowful and deplorable event. Though Augustine admits to feeling great sorrow at the death of those close to him, he goes on to point out that these feelings are merely of the imperfect body. When one lets go and listens to his soul he will see that all things begin and end with God. 'For the senses of the body are sluggish, because they are senses of flesh and blood…They are limited by their own nature (Confessions, ... ...n a rich shroud or embalmed with spices, nor did she wish to have a special monument or a grave in her own country…All she wanted was that we should remember her at your altar, (Confessions, 204).'; This is a very strong example of how different the worlds of St. Augustine and the poet were. From the limited view of the life presented by the authors of the Confessions and Beowulf, it is easy to see that the worlds in which they lived were very different. The world of St. Augustine seems well ordered and compact with cities and government officials. It seems to be a highly intellectual culture strongly influenced by religion and God. The world of the poet seems much different in nature than that of St. Augustine. The poet's world seems to be much less organized and vast, with various kings as opposed to government officials. It seems to be populated with many roaming bands, and the people seem to be much less intellectually and religiously motivated. It seems they lived simple lives in a constant search for glory and notoriety. With such different cultures it is not difficult to concede that their respective views on death would be as diverse as the cultures themselves.

Referee Report for Economics Manuscript Essay

â€Å"Different Risk-Adjusted Fund Performance Measures: A Comparison† Summary This paper compares various risk-adjusted performance measures for a set of mutual funds. The authors argue that performance measures based on Value-at-Risk (VaR) or Extreme Value Theory (EVT) are more appropriate than other popular performance measures such as the Sharpe ratio (SR), the Treynor index (TI) or Jensen ´s Alpha (JA) . They propose a performance index similar to the SR and the TI based on losses calculated by means of VaR together with EVT. They find that EVT-VaR measures are more appropriate in the presence of non-normal data. Main Comments The topic of the paper is of relevance for financial practitioners as well as academics and it is certainly applicable to the current financial stability context. The paper is also generally wellwritten. However, I have some comments for its improvement. 1. The contribution of the paper is not clearly stated. In the 6th paragraph of the introduction, the authors suggest that their main contribution is the construction of a performance index based on EVT-VAR. However, it is not very clear why the new proposed measure should be better in relation to existing measures as it is now explained. It is true that VaR or EVT should be more reliable measures for extreme events but when looking at formula (13) it is not apparent why this measure should be more reliable than the traditional measures. The denominator has, in fact, an â€Å"extreme return† as opposed to the SR or TI which have strictly second moments, so it is not very straight forward to relate these measures. A better job should be done at explaining the implications of such VaR based measure, how it relates to other measures and why it should be better. 2. Why have the measures been compared only in a â€Å"static† way? It is widely known in the finance literature that asset return volatility is time-varying, and to some extent, also expected returns. It would be possible to go around the latter by arguing market efficiency (which is also questionable) but it is certainly much more difficult to argue against time-variability of the standard deviation in the VaR measures (or in the SA and TI ratios). This is very important as the â€Å"good† or â€Å"bad† applicability of a particular performance measure could be sample dependent and as it is now with unconditional measures, this is hard to uncover. For instance, while the authors account for nonnormality of returns in the modified-VaR measure by means of a Corner-Fisher quantile, they assume a constant standard deviation which means that in periods of high volatility they could still understate the VaR. So at the minimum, the performance comparisons should be done for the full sample and different sub-samples and it should be tested whether the measures obtained are significantly different over different samples. 3. The authors concentrate on top 10 and bottom 10 funds for their analysis and discarded the other funds â€Å"for the sake of simplicity†. However, by choosing only the â€Å"tail† funds, the authors are giving from the start an advantage to EVT or VaR measures. It would be more appropriate to also report results on (say) 10 â€Å"mid† funds. 4. It is not very clear why the top 10 funds â€Å"show more departures from normality† in relation to bottom funds. This finding should be expanded and the intuition behind it should be better explained. One could argue that â€Å"losers† could be more volatile than â€Å"winners† as the level of uncertainty with respect to the fund might increase which could lead to more extreme returns. In fact, in the 3rd paragraph of the empirical result section it says â€Å"the bottom 10 funds have, in general, higher VaR values than the top ones, which means that they are more susceptible to extreme events† which is somewhat contradictory with the finding that the top 10 funds exhibit more departures from normality. Moreover, one of the main findings of the study is that the VaR and EVT performance measures perform best in relation to other measures when there are more departures from normality in returns. A better attempt to reconcile the findings of nonnormality, the â€Å"winner vs. looser† funds and the results on the performance measures with some previous studies or satisfactory intuition should be done. Other comments 1. The contributions of the paper should be stated earlier in the paper and not almost at the end of the introduction as it is now. The contributions should be clearer (see also point 1 above) and should be better related to the existing relevant literature. 2. The conclusion is too long. The concluding remarks should be much shorter and should only summarize the main findings and reconcile them with the issues raised in the introduction as well as highlight possible extensions for future work. 3. The tables should also be improved. They should have a short description of the contents to facilitate reading. As it is now, the reader has to constantly come back to the main text to find out what the contents mean. 4. The figures are hardly visible, they should also be improved and a short explanation should be given.

Humanitarianism and Universalism essays

Humanitarianism and Universalism essays In the article Women and Cultural Universals, Martha Nussbaum discusses about basic human capabilities that should be granted to every human being regardless of their sex, race, or religion. However, a problem arises with reaching such basic rights since every nation has their own definition of this matter. In order for these basic human capabilities to be accepted throughout the world, nations ought to reach a generalized consensus on what rights an average human should have, rights that ought to transcend cultural traditions and religious barriers. All in all, the point of Nussbaums basic human capabilities list is to put forward something that people from many different traditions, with many different fuller conceptions of good, can agree on, as the necessary basis for pursuing their good life (462). There is a similarity of this ideology with Mary Kaldors global humanitarian approach. Even though both ideologies attempt to stabilize certain situations in troubled nations, th ey have different approaches. Nussbaum believes that her list of basic human capabilities should be implemented into every nation, especially those nations that are currently violating the rights of their inhabitants. By having a uniform rule throughout the world, nations will lose their specific identity in the world stage. Part of a nations strength and power comes from the richness of old traditions that truly symbolize that nation and their inhabitants. Kaldors global humanitarian approach calls for nations to unite under a common cause to solve a problem. These nations would still maintain their identity, but they would have to accept a basic human capabilities list and form their own views based on that list. Some readers may consider that Nussbaums list will not lead to universalism, but a generalized idea of a global humanitarian approach. This humanitarian app...

Research Paper Ideas

Research Paper Ideas Research Paper Ideas Research Paper Ideas You must approach research paper topic choice very seriously. You do not take trite, long-studied research paper topics because you are unlikely to say something new. The best way is to find a topic that is sufficiently relevant and at the same time insufficiently known in the science. Undoubtedly, your research paper adviser might greatly help you. But even without outside help, it is very useful to get acquainted with the English language literature devoted to the country and the period that you want to deal with. While selecting research paper topic you must keep the perspective in range of vision. It is very good when a student dedicates his work to specific circle of college research paper topics. Thus, by the last course he compiles findings for the last scientific college work. It is important that the choice of the topic is clearly understood by the student - you have to understand the goals and objectives of research paper writing. Your research paper writing must not be purely descriptive. It should contain a central idea, the key idea dedicated to the research itself. Research Paper Ideas and Tips Once enough information is collected, you should start writing research paper. You do not have to wait until 25 articles are identified and all information is processed. Experience shows that research paper writing is about finding "white spots" that require more reference to the sources. First, make a clear research paper outline and show it to your adviser. Among research paper writer there are a lot of those who prefer writing research paper "without stopping" within two or three days. Nevertheless, it is very difficult to create a qualitative research paper, and the most part of the previous work is in vain. It is better to write college research paper in stages, writing individual parts and combining them into a coherent research or term paper. Text of the research paper writing should not consist of facts without explanation and analysis. Student should be able to group the existing material and analyze it. It is important to identify the causes, the essence and meaning of events and processes mentioned in English research paper. If the examined subject is controversial, it is better to bring both sides of the argument to the reader's attention and then indicate which side is more logical. Put forward your own ideas and original concepts. .com Research paper ideas are diverse and many students feel lost in details. As the result, they end up with producing poor essay. We offer you a unique opportunity to take advantage of professional custom research paper writing assistance. All you need to do is to place an order, provide detailed instruction and wait until your assignment is being completed for you!

AtekPC Project Management Office Case Study Example | Topics and Well Written Essays - 750 words

AtekPC Project Management Office - Case Study Example It was mandated with developing entrepreneurial improvements in the cost reduction and management benefits. AtekPC desired to create new products for the markets meeting creative, adaptive and agile standards through designing innovative systems manufacture processes. The office depended on coming up with duties involving a project focus strategy and enterprise-oriented strategy. Responsibly, they were to mentor other workers within the organization through consultation, mentorship, and offering training (Warren McFarlan, 2007). At the heart of any company’s operation are its customers. They are the individual consumers who and why the company exists. AtekPC had different personnel and organizations they sell them PCs. It was identified through customer character that they feared and clung to old technology and could not buy new products that came into the market. AtekPC needed a reliable and cheaper production process to achieve its goal. The production department head Mr. Steven consented that they had challenges with their current manufacture processes (Warren McFarlan, 2007). There are many options available for meeting the process and could be through plant installation or outsourcing of the manufacturing process to another company. To deliver on milestones, a company needs the right employee mix from various departments to achieve their goals. In the project endeavor, AtekPC employee was divided into two factions; those that were pro-PMO and those who resisted the change. The IT department now of the need to change was not quite experienced. The management had the right experience but needed other expatriates to implement the process. Owing to the development of a new PMO, they needed to hire fresh and experienced professionals to spearhead the new department (Warren McFarlan, 2007). Every business wants a positive limelight, which presented from the media. To maintain customers, get to them, and receive their

What is the role of the state in your life in society Assignment

What is the role of the state in your life in society - Assignment Example tutions that govern a society, including the government, government bureaucracy, the judiciary, the armed forces and so on† (Henslin, Possamai and Possamai-Inesedy 2011, p.358). Even in a sociological approach, the role of state can be seen and understood in many ways like the Marxian approach that views state as a tool of oppression of the capitalist class, and the â€Å"state autonomy perspective† where the state is understood to have a role to safeguard its citizens within the economic and social limitations that it is bound to have (Henslin, Possamai and Possamai-Inesedy 2011, p.358). Anyway, when examined in relation with the state, the individual belongs to the civil sphere â€Å"outside of the formal state in which individuals and groups of individuals connect and act, independent of, but often in connection with, the state and the household (Henslin, Possamai and Possamai-Inesedy 2011, p.359). It is this inter-connectedness of the state and the individual that becomes the subject of evaluation in this paper. Health and employment have been considered as the â€Å"key determinants of our well-being† and also they have been accepted as â€Å"major objectives of European welfare state† (Borsch-Supan and Schroder, p.1). From this, it becomes clear that health and employment (which is a derivative of education), are two areas where the state has a major role to play. Security is another field where the state has always played an important role to such an extent that it has to shoulder the responsibility of â€Å"increasing than decreasing life chances for subjects/citizens† (Bedeski, 2007, p.62). The relationship between individual and the state in this regard has two aspects- the responsibility of subjects/citizens towards the state and the reciprocity of this responsibility. The responsibility of subjects/citizens â€Å"include, military service, taxes, obedience to laws, some subordination to officials, and tolerance of other particular interests† (Bedeski, 200 7,