This paper investigates the shareholders’ possibility to evaluate firm’s value. The fact, that due to the different objectives of the shareholders and the managers, the shareholder value is a suitable figure to synchronize different interests will be shown. Having shown
two approaches to calculate shareholder value, these approaches will be assessed, if they provide a suitable calculation of the shareholder value. The discounted cash-flow approach (DCF), basing on prospective cash-flows, is a suitable method to determine shareholder value. The realoption approache extends the DCF-approach by the flexibility component. Regarding the occasions of evaluation, the calculating shareholder can use both approaches, but he has to be sure about the approaches’ boundaries.
Table of Contents
1 INTRODUCTION
2 THE SHAREHOLDER VALUE APPROACH
2.1 Market value orientation
2.2 Shareholder Value as firms’ objective
3 EVALUATION OF FIRMS
3.1 Occasions of evaluation
3.2 Diversity of methods
4 METHODS OF EVALUATION
4.1 Discounted Cash-flow
4.1.1 Entity approach
4.1.2 Equity approach
4.2 Real options approach
4.2.1 Financial option price models
4.2.2 Flexibility
5 ECONOMIC ASSESSMENT
6 CONCLUSION
Research Objectives and Themes
The paper investigates the methodologies available to shareholders for evaluating the value of a firm, aiming to demonstrate how specific evaluation approaches can synchronize the conflicting objectives of shareholders and managers while determining a useful firm value.
- Analysis of the Shareholder Value approach in the context of capital market orientation.
- Examination of evaluation occasions and the diversity of methodological approaches.
- Deep dive into the Discounted Cash-flow (DCF) model and its variations (Entity vs. Equity approach).
- Integration of the Real options approach to incorporate entrepreneurial flexibility.
- Economic assessment of evaluation methods and their practical limitations for stakeholders.
Excerpt from the Book
4.2.1 Financial option price models
Nowadays, there is a diversity of possible models to use. In general, there are two different main approaches. On the one hand, there are the econometric models and on the other hand, there are models of equilibrium.
The econometric models try to determine option prices ex post. This calculation is based on empirical data, which assume that there will not be any prospective changes. Using these kinds of models, regularities will be made transparent. However, the “right” option price can not be calculated.
The models of equilibrium try to calculate a „theoretically right” option price. The advantage of these models is that they implement arbitrary discount factors. So, the assumptions of a perfect capital market can be neglected. Using hypotheses of stock exchange volatility it is assumed that option price models integrate processes of probability calculus: The approach of Black/ Scholes is characterized by a geometrical movement and the approach of Cox, Ross and Rubinstein uses a binomial allocation. Both models assume a capital market without arbitrage.
Summary of Chapters
1 INTRODUCTION: This chapter highlights the impact of globalization and market volatility on firm valuation, establishing the need for effective shareholder value calculation methods.
2 THE SHAREHOLDER VALUE APPROACH: It discusses the transition toward market value orientation to resolve principal-agent conflicts and aligns firm objectives with shareholder interests.
3 EVALUATION OF FIRMS: This section classifies evaluation occasions into those influenced by owners and those that are not, while explaining the primary functions of valuation.
4 METHODS OF EVALUATION: This chapter provides a detailed technical overview of Discounted Cash-flow models and the Real options approach as extensions to traditional valuation.
5 ECONOMIC ASSESSMENT: An analysis is provided regarding the subjectivity of cash-flow calculations and the limitations of both DCF and real options models in real-world scenarios.
6 CONCLUSION: The final section summarizes that while both approaches are useful, they must be applied within their respective theoretical boundaries to be effective.
Keywords
Shareholder Value, Firm Evaluation, Discounted Cash-flow, DCF, Real Options, Equity Approach, Entity Approach, Capital Market, Principal-Agent Problem, Flexibility, Valuation, Investment Appraisal, Financial Management, Market Value, Economic Assessment
Frequently Asked Questions
What is the core focus of this research paper?
The paper focuses on the methodologies used by shareholders to evaluate the value of a firm, specifically examining how different models can help synchronize the interests of managers and shareholders.
What are the central thematic areas covered in the work?
The primary themes include Shareholder Value orientation, various methods of firm evaluation, the Discounted Cash-flow model, Real options, and an economic assessment of these valuation techniques.
What is the primary objective or research question?
The objective is to demonstrate the impact of selected evaluation methods on shareholder value and to outline whether these methods provide a reliable framework for calculating a useful firm price.
Which scientific methods are employed?
The paper employs a comparative analysis of financial theories, specifically focusing on mathematical valuation models like DCF and option price models (e.g., Black/Scholes).
What topics are discussed in the main body of the work?
The main body treats the market value orientation, the principal-agent problem, detailed breakdowns of DCF methods (Entity/Equity), and the application of real options for assessing entrepreneurial flexibility.
Which keywords best characterize this publication?
The most relevant keywords are Shareholder Value, Firm Evaluation, DCF, Real Options, Financial Management, and Market Value.
How does the Real options approach specifically improve upon the DCF model?
The Real options approach addresses the static nature of DCF by incorporating a flexibility component, allowing management to adjust parameters to limit losses or amplify gains in dynamic market environments.
Why is the "principal-agent problem" significant in the context of firm valuation?
It is significant because it highlights the conflict of interest between owners and managers; the shareholder value approach is proposed as a mechanism to discipline management and align their performance with the firm’s market value.
- Quote paper
- Andre Wiedenhofer (Author), 2007, The value of a firm, Munich, GRIN Verlag, https://www.grin.com/document/76338
