2.6. What value is taken into account when making decisions?
When the market sets the price of a stock, it is plunged into darkness - well, at least in the fog. He simply does not have the information that is needed for accurate valuation of companies, and is not able to get it. Result? Extreme volatility.
In order to specify the criteria for evaluating decisions made by the investor, in many analytical models a target function is introduced.
The question of the purpose of the company's functioning and, accordingly, the criteria for evaluating the decisions made is not easy. The answer to the question whether it is possible to reduce various goals (motives of power interests, money wealth, ideological convictions) to the task of maximizing the objective function of one variable is not unambiguous. Suppose that such a function can be constructed, then the solutions are adopted as follows: if the solutions lead to an increase in the value of the objective function, then they are good, if the value of the objective function decreases, then such decisions are unacceptable.
Many economic theories are built on the introduction of the objective function. For example, neoclassical economic theory proceeds from the premise that the goal of making decisions by a rational individual is to maximize utility or welfare. It is often assumed that utility is a monotonically increasing function of income or profit and all the factors of interest can be expressed in monetary form. Thus, a rational individual maximizes the monetary benefit from decision-making (investment, operational, financial).
The company's financial model is based on the fact that the objective function of making managerial decisions and the criterion for their evaluation is the value of the firm. At the same time, business is considered as going concern, acting on the market, and the source of creating new value are the existing and created competitive advantages.
The value of a business is understood as an investment or internal (investment, intrinsic) assessment of the future cash benefits of the owners of capital, taking into account the risk of their investment. Numerically, the value of a business is traditionally defined as the estimate of the future cash flows available to the company's owners of capital on the time horizon considered at the selected point in time. In this case, the discounted cash flow method ( DCF) is used. Traditionally, the time horizon of a company's life is taken as infinity, Two or more time segments are allocated on this horizon with the possibility of predicting monetary benefits.
When considering the benefits, the question arises whether maximize the wealth of stockholders should be considered as its equity holders, or it is necessary to take into account the well-being of all those who are interested in the functioning of the company who have the opportunity to influence the decisions made; will not it be more correct to take into account the benefits received by all holders of the obligations of the company (claimholders). If you reduce their welfare to the cash flows received from the company, then in fact it will be about maximizing the integrated monetary valuation of the company (firm value). Most experts in financial analysis and management agree with this interpretation of the company's financial goal. Maximizing the value of a company means maximizing the well-being of all owners of capital, providing their own (financial and intellectual resources) with a dynamic and sustainable operation of the company on the market. Alternative interpretation of the goal as the maximum benefit of owners of only own capital in a number of cases can also be adopted. Moreover, stock market analysts often identify the notion of the market value of equity (shareholder value) and market capitalization (as a general valuation of common stock at stock quotes). Indeed, if we consider only the interests of the owners of our own capital and reduce their monetary benefits to the benefits of the shareholders, then in this exaggerated form the goal is transformed into the maximization of market capitalization and, accordingly, the maximization of the price of ordinary shares.
Traditionally, in a valuation analysis, preferred shares are treated as an element of borrowed capital, since they have many similar features with coupon bonds1. However, considering the goal that maximizes the benefits only of owners of equity, ignores the position of creditors and other stakeholders, their potential to influence decision-making.
The choice of the target criterion in the value model of analysis should be linked to the company's chosen development strategy and the necessary resources, as well as key competencies. Taking into account the specifics of the development of financial and stock markets in various countries, the influence of investor groups on the CFO, the importance of non-financial stakeholders, it is advisable to allocate a banking-oriented stakeholder model of value analysis, which is demonstrated by companies in continental Europe and Asia, and a personnel-oriented stakeholder model that prevails in companies with a high share of intellectual capital (service companies, high-tech companies). The system of financial management should be built taking into account the formed financial goal and built-in levers of influence on it. These questions will be considered in Ch. 3.
The complexity of cost analysis lies in the multidimensionality (multiplicity) of the concept of "cost". First, the calculated and observed values are differentiated. Secondly, the estimated cost can be formed taking into account various assumptions and on the basis of various information. Since it is about the future benefits that the company creates for its owners of capital, and not always potentially affordable benefits can be realized through the efforts of managers because of poor quality of management, then the hypothetical or imputed cost becomes important in financial management, the achievement of which should be aimed at the team managers. Let's try to understand a lot of terms that appeared in the financial language with the beginning of the application of the value model of analysis. It should be noted that the terminology has not yet settled in the Russian language, and annoying blunders are often observed. In Fig. 2.5 shows a variety of indicators, united by the common term "market value".
Market value (MV) is a generalized term that emphasizes an alternative accounting (accounting) view of the company. Cost can be viewed from the position of assessing the benefits of owners of only own capital, then the term & quot; joint market value & quot; appears. If the interests of financial and non-financial stakeholders are taken into account, then it is more correct to say in term
Fig. 2.5. The diversity of the concept of "market value (business valuation)"
nach stakeholder value. To denote the current assessment of the benefits of all financial owners of capital (own and borrowed) we will use the term "market value of the company" (value of firm).
Fair market value is the official legal standard used in valuation activities. The justified market value is defined as the price at which the property would pass from the hands to expressed in money or their equivalents. At the same time, the following conditions must be fulfilled: mutual desire to buy or sell, sufficient awareness of the seller and the buyer and the absence of any kind of coercion to buy or sell. Thus, this term involves making a decision on the sale (purchase) of the company. Fair value can be formed taking into account various estimates and agreements between the buyer and the seller, it can be based on information about similar transactions in the market, calculations based on discounting the projected cash flows or other decision-making methods (up to expert assessments based on intuition). It is important only that the opinions coincide, there is a mutual desire to buy and sell the business and there would be no compulsion on either side.
Fair value (or in a number of analytical reports - fair, target) market value - the estimated estimation of the company (business) and equity capital, based on accounting for future benefits and the risk of their receipt from this investment. This is an assessment from the position of a market investor, which opposes the balance (costly) valuation of assets.
Fundamental value is a calculated estimate reflecting the benefits of owning assets and all company capital (own and borrowed) for an impersonal market investor. As a rule, this estimate is formed on the basis of information available on the market on the company. Thus, the principle of valuation for a generalized (impersonal) investor is observed.
Investment value The estimated benefit estimate that is made for a particular investor based on the information available to him (often hidden from wide access). For example, the majority owner (controlling business due to having a large stake in the company), which estimates the prospects for the repurchase of shares from minority shareholders, has significantly more information than market investors, and receives additional benefits at 100% control. The calculation is based on the forecasts of the monetary benefits of the buyer (investor), the evaluation of its investment risks. The company's investment valuation for a strategic investor will be higher than the valuation for a portfolio investor, as it will reflect its additional benefits from combining businesses.
Internal, or intrinsic, true value - a calculated estimate of the benefits of the existing owner of the company, which is based on all available information, i.e. taking into account the influence of fundamental and non-fundamental factors of creating benefits (value).
Thus, the first, the main difference between investment value and the fundamental one lies in the amount of information on which the evaluation algorithm is implemented. For the calculation of investment and internal costs, the amount of information is more widely available, includes also classified information, for example, management accounting.
The second difference between investment costs is the accounting of specific benefits that an investor can receive by attaching a company to his existing business.
The traditional valuation method for investment, internal and fundamental value is the discounting of the projected cash flow (DCF). Fundamental cost is an indicator traditionally calculated by financial analysts of the market (investment banks, professional investors (private equity funds), consultants). Important for them is the valuation not so much of the whole company (of all assets) as of the valuation of equity capital, more precisely, of one share. Therefore, either DCF estimates directly its own capital (a joint-stock fundamental value) as an assessment of the benefits received by shareholders, or from the company's estimated valuation, permanent liabilities (borrowed capital) are deducted. Often published a calculation estimate - the so-called target price, or a fair share chain. This value can be calculated as the ratio of the fundamental valuation of equity to the number of ordinary shares in circulation.
Hypothetical, or imputed, value - the estimated estimate that a company would have if all the fundamental parameters determining its value had industry-average values. This evaluation is important in the management of value, and it will be discussed in Ch. 3.
Capitalization reflects market valuation of the company by market investors. Distinguish total capitalization as the market assessment of all financial assets issued by the company and market capitalization (marker capitalization, A/C) as an exchange valuation of only ordinary shares. At the same time, all shares are evaluated based on the observed estimates of quoted securities (shares), the number of which can be substantially less than the total number of shares in circulation by the company. The number of shares in circulation is shares held by the owners of their own capital (individuals and legal entities, nominal holders). That their share, which freely accesses the stock market, was called "free float" (free float).
If the stock price (exchange quotations) correctly reflects the investment qualities of the business (ie its ability to generate benefits to owners of own capital), then the value of market capitalization will be close to the estimated estimate of equity (fundamental shareholder value or fundamental valuation of equity) .
The assumption of a perfect market (as a competitive market for creditors and borrowers without financial frictions (taxes, access costs, commissions on buying and selling securities) allows us to approximate two concepts - "market capitalization" and "fundamental valuation of equity." In finance theory, these two concepts are never identified. In efficient markets (meaning information effectiveness in the interpretation of Yu. Fama, when the price of a share reflects all the information available on the market), one can speak of the coincidence of fundamental assessment trends and market capitalization and the random nature of deviation of stock quotes from the estimated fundamental estimate. The random character is manifested in small values of the amplitude of the deviations and in the temporal shortness of the discrepancy.
In the real world, because the price of a stock is affected by a number of factors in imperfect markets (low stock liquidity, market restrictions associated with trading on the exchange, asymmetric information and false information signals sent by company managers, crowd effects) we should only talk about the degree of this or that approximation of market capitalization to a fundamental assessment of equity. The more effective the market, the closer these values.
The total capitalization ( TS) - assessment of market capitalists of all elements of the company's capital:
where MS - market capitalization; MVPref - observable market valuation of preferred shares (at quotations); MVLTBonds (long term bonds) - market valuation of long-term bonds (according to exchange quotations); VS (bank credit) - used on a permanent basis by the bank's borrowing company.
Total capitalization assumes a rather complicated calculation, since quotes of all elements of capital are necessary. In practice, an approximate estimate is often used, denoted as EV (enterprise value), and is called the "market valuation of the company":
where BVD (book value of debt) - an estimate of the balance values of long-term liabilities, preferred shares and constantly used short-term paid sources of financing; Cash - the cash and cash equivalents currently available (line "cash" in the balance asset).
Since it is difficult for an external analyst to allocate permanent elements of short-term liabilities, EV is often calculated on the basis of: market capitalization, fixed-term liabilities and accumulated cash, reflected in the assets of the balance.
Market valuation of the company:
The simplest method for calculating a company's market valuation is based on peers through sustainable multipliers. For example, if it is known that real estate companies are valued in the market for "four capital" (ie the company's market valuation is four times higher than the balance valuation of capital), then
In order to determine how much the company's own (shareholder) capital, denoted as S (stockholders value), will be valued, it is necessary to use the following algorithm:
1) find by analogy how much the company's capital is valued (using multiples to asset valuation or revenue);
2) subtract from the found estimate used in the company borrowed capital and add cash in the balance assets:
$ = EV-VUO + CAP.
If the task is to find a market valuation of one share, then, by dividing the found equity valuation by the number of ordinary shares in circulation, find the desired value. In the presence of preferred shares, their valuation is summed up with the borrowed capital (the company's obligations).
For corporations that raise capital publicly (from the stock and financial markets) within the framework of cost analysis, the report on invested capital looks somewhat different than in the financial reporting standards. First of all, it is important to divide sources of financing into own and borrowed funds. Market valuation of equity capital-market capitalization, i.e. stock exchange quotation. The market valuation of borrowed capital in an exaggerated form is the valuation on quoted bonds. Thus, for the formation of a sufficient number of basic and net working capital of the company, the financial director should sell the financial assets (stocks and bonds) that are issued by the company as costly as possible on the market. At the same time, it is his responsibility to minimize the costs of servicing these assets, i.e. he should strive to minimize interest on borrowed capital and obligations on settlements with owners. The main lever of reducing the cost of capital available to the manager is the reduction of objective risks that fall on the owners of capital and their perception. The concomitant lever is the optimization of the sources of financing, which allows to balance the payment for capital and risks accepted by the owners of capital.
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