The theory of shareholder value is an issue that has to comprise a dichotomy in terms of the standpoint from which it is looked at. Shareholders and the management of a company in many cases still represent counterparts whereas interests do not continuously align.
In this study shareholder value theory is approached by investigating the shareholder perspective in correspondence to shareholder wealth gains in the UK market environment through the implementation of six major financial performance measurement methods including: the Price/ Earnings ratio, the Discounted Cash Flow Model, the Dividend Valuation Model, the Economic Value Added, the Market Capitalization, the Capital asset Pricing Model and the shareholder value approach as suggest by Alfred Rappaport. Having applied them to six selected stock listed companies enabled the author to develop a shareholder value ranking according to their financial performance and the deriving shareholder value dedication.
Table of Contents
1. Introduction
2. Methodology
2.1. Definition
2.2. Approaches
2.3. Applied Approach
2.4. Time Horizons
2.5. Research Techniques
2.6. Research Limitations
3. Literature Review
3.1. The financial market
3.1.1. Providers of Finance - an international mapping
3.1.2. The financial market
3.2. Corporate Objectives
3.3. Shareholder value theory
3.3.1. General Information - Introduction
3.4. Financial Ratios
3.4.1. Price-Earnings Ratio (P/E – Ratio)
3.4.2. Discounted Cash Flow Model
3.4.3. Dividend Valuation Model
3.4.4. Economic Value Added (EVA Model)
3.4.5. Market Capitalization
3.4.6. Capital Asset Pricing Model
3.4.7. Shareholder Value Approach – A. Rappaport
4. Analysis
4.0. Analysis
4.1. Price/Earnings Ratio
4.2. Discounted Cash Flow Model
4.3. Dividend Valuation Model
4.4. Economic Value Added
4.5. Beta Ratio
4.6. Cost of Equity Capital (ke)
4.7. Market Capitalization
5. Findings
5.0. Findings
5.1. Short-term shareholder value
5.2. Long-term shareholder value
6. Conclusion
Conclusion
Objectives & Research Focus
This study aims to examine shareholder value theory within the UK market environment by analyzing the performance of six selected stock-listed companies from the IT/Communication, Oil, and Banking sectors through the application of various financial measurement models.
- Application of six major financial performance measurement models (P/E Ratio, DCF, DVM, EVA, Market Capitalization, CAPM).
- Comparative performance analysis of leading firms in IT/Communication, Oil, and Banking sectors.
- Assessment of both short-term and long-term shareholder value creation.
- Development of a comprehensive shareholder value ranking based on financial performance data.
- Evaluation of the practical relevance of financial models in estimating shareholder value.
Excerpt from the Book
3.4.6 Capital Asset Pricing Model
Bill Sharpe (University of Stanford), John Lintner (Harvard University) and Jan Mossin (University of Bergen) developed the Capital Asset Pricing Model (CAPM) both simultaneously and autonomously in the year 1965. The work as well as innovative findings of those researchers benefited from the earlier work of Harry Markowitz, who together with B. Sharpe was awarded the Nobel Price in economics for their outstanding contribution to the theory of finance in 1990 (Eakins, 2002).
The concept of the CAPM approach was embraced by Pike and Neale (1999) as follows:
“The CAPM explains how individual securities are valued, or priced, in efficient capital markets. Essentially, this involves discounting the future expected returns from holding a security at a rate that adequately reflects the degree of risk incurred in holding that security”
As every theoretical financial model, the Capital Asset Pricing Model also is subject to various assumptions. Lumby and Jones (1999) summarized them by means of classifying them into two categories:
Summary of Chapters
Chapter 1: This chapter introduces the post-financial crisis context and defines the scope of the study, which includes selecting six companies from three different business sectors for performance analysis.
Chapter 2: This chapter details the research methodology, confirming the use of a deductive approach and explaining the use of secondary data and theoretical financial models to evaluate shareholder value.
Chapter 3: This chapter provides a comprehensive literature review, discussing financial markets, corporate objectives, shareholder value theory, and detailed explanations of the six financial ratios and models applied in the research.
Chapter 4: This chapter presents the in-depth analysis of the six chosen companies using the reviewed financial models, including individual performance evaluations for each company across the different metrics.
Chapter 5: This chapter synthesizes the findings from the analysis to develop a ranking system for both short-term and long-term shareholder value for the six considered companies.
Chapter 6: This chapter concludes the study, summarizing the key insights regarding shareholder value creation and acknowledging the inherent limitations of using financial models in volatile market environments.
Keywords
Shareholder Value, Financial Performance, UK Market, Equity Markets, Capital Asset Pricing Model (CAPM), Economic Value Added (EVA), Price-Earnings Ratio, Discounted Cash Flow (DCF), Dividend Valuation, Market Capitalization, Financial Analysis, Shareholder Wealth, Corporate Objectives, Risk Assessment, Investment Performance.
Frequently Asked Questions
What is the fundamental purpose of this study?
The study investigates how shareholder value is created in the UK market by applying six financial models to analyze the performance of companies across three distinct business sectors.
Which financial metrics are primarily utilized?
The research utilizes the Price/Earnings ratio, the Discounted Cash Flow model, the Dividend Valuation model, Economic Value Added, Market Capitalization, and the Capital Asset Pricing model.
What is the core research question addressed?
The work focuses on what shareholder wealth dedication investors can expect from companies in the UK market environment following the global financial crisis.
What methodology does the author adopt?
The author employs a deductive research approach, applying various theoretical financial models to secondary data gathered from financial reports and market databases.
What does the main body of the work cover?
The main body includes a literature review of financial theories and a detailed empirical analysis of six companies, including Vodafone, British Telecom, Royal Dutch Shell, British Petroleum, the Royal Bank of Scotland, and Barclays.
Which industries are selected for the comparative analysis?
The study examines the IT and Communication sector, the Oil industry, and the Banking sector.
Why is the 2007 financial crisis significant to this analysis?
The crisis serves as a backdrop to explain market volatility and the shattered trust of investors, which the research uses to evaluate how effectively companies recovered and generated value for shareholders.
How are the final rankings for companies determined?
The author applies a scoring system ranging from 0 to 5 for each criterion (such as EVA or Beta ratio) to create a cumulative ranking of the companies for both short-term and long-term potential.
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- Tony Müller (Autor:in), 2011, A Study on the Integrated Approach of Shareholder Value Analysis, München, GRIN Verlag, https://www.grin.com/document/211367
