Levels of profitability as the basis for the formation of requirements...

Levels of return as the basis for the formation of requirements but return on capital

For the required return on the whole capital, the observed profitability estimate is often fixed by the return on assets or invested capital for the industry (sector value ROCE). Typically, this subjective The approach is acceptable for small and medium-sized companies in the absence of professional investors (so-called "professional participants" of the financial market) in the structure of the owners. The main disadvantage of this approach is the indirect consideration of risks. It is assumed that industry values ​​or yield estimates for peers may reflect an acceptable risk premium for the company in question. However, it is not always easy to justify the choice of an analogue company and, in addition, there are often quite specific risks associated not only with the size of the business.

The following ranges of required return on equity are often the guidelines for developed markets: large public companies - 10-14%; medium-sized companies - 15%; private companies - 20%; young private companies or companies with high specific risks - 30-40% '.

One of the commonly used market observable indicators for owners of management companies is the required return on private equity funds. For 2007, direct investment funds with a 10-year investment period were oriented to yield in developed markets in the range of 15-25%, and in emerging markets - at least 30%. The observed indicator of the level of profitability is the dynamics of indices of private equity funds. Similar estimates for United States investors can be found by the levels of return on portfolio investments or individual areas of investment, the profitability of which is fixed by analysts. However, such an approach with reservations can be applied in the valuation of a company or an investment project by a profitable method, but is not acceptable for planning the capital structure.

In a number of cases, survey estimates are applied, when industry experts indicate an acceptable level of profitability for investing in certain projects from their point of view. Often, the survey method is used when investing in various real estate objects (construction of warehouses, office buildings, housing of various classes, etc.).

Explicit Risk Accounting

Approaches that explicitly take into account the riskiness of obtaining monetary benefits are built either on a cumulative basis for a non-diversified owner of capital, or on an investor's portfolio position (that is, on portfolio models). Financial managers of large public companies and investment analysts are forced to do a lot of work to study the macrofactors of the formation of profitability in the market (assess changes in the demand and supply of money on the market), analyze investment and credit risks, and use analytical models to justify their estimates of the required yield. A great advantage of model designs is the possibility of scenario playback of various options for investment and financial decisions and tracking the change in capital costs. When forming the company's strategy, the owners of capital and managers agree on their views and estimates of the barrier rate and fix the "regulatory requirements" for the current work of the company and for future growth.

The main feature of model designs is the analytical linkage of risk factors (macroeconomic, industry-specific, specific to the company) with the required return on investors in the market. The original model looks like this:

Required yield on the market = Risk-free nominal (ie, taking into account inflation) profitability + Risk premium.

If the cash flows generated by the company or project are risk-free, i.e. are expected with a 100% probability, then the risk premium is zero. The greater the risk associated with the expected cash flows, the greater the premium.

Depending on which investors form their own capital, companies use two fundamentally different directions for constructing model designs with direct risk taking into account. The first direction is acceptable for companies with business owners who are often not yet ready to transfer management to managers and are not actually market investors, since all their capital is invested in this business. Academic language is spoken about the non-diversified capital of owners. This direction was called cumulative (accumulative, or factor) construction. The structure looks like this. The company identifies groups of risks, assesses the significance of individual risk factors for the group (often expertly, for example, the point method), each risk score adds a risk premium to risk-free returns. Thus, the more risk factors are fixed by the analyst, the more the cumulative result is the premium. As a rule, three groups of risk are analyzed. Operational risks. This group includes those factors that affect revenue and cost, and ultimately - after-tax operational profit. For example, we can talk about the importance of prices for raw materials (for aluminum companies these are energy prices, for oil refineries - for oil), on diversification of suppliers, and regulation of business by the state. This includes the risk factors associated with changes in tax legislation. Since a certain part of the operational risks is related to the size of the company (the smaller the company, the more difficult it is to build protection against macroeconomic and industry risks), then often there is a separate premium for size (size risk premium, SRP). Group Risk Premium

RP {= SRP + The basic premium to operational risks (macroeconomic and industry).

2. Financial risks. This group gets the value when the company resorts to borrowed sources of financing. The larger the share of borrowed capital in the total capital (ie, the higher the financial leverage), the more unstable the company's net profit is when the market or sectoral operating conditions change. This is due to the fact that interest payments on borrowed capital are fixed and independent of operating profit. The more borrowed sources of financing (both direct in the form of bank and bond loans, as well as indirect in the form of leased equipment or leasing contracts, surety agreements), the greater the risk group and the corresponding risk premium. The risk premium for this group can be labeled as RP.,.

3. Management strength risks. This includes the risks of internal management associated with the existing mechanisms for the formation of decisions and procedures for their implementation, as well as the risks in the relationships of interest groups. These are the risks of corporate governance caused by improper quality of decision-making by managers or members of the board of directors regarding the interests of minority shareholders. When the owner and the manager are united in one person and there are no conflicts of interests between the owners, the corporate governance risk premium is zero. However, the lack of professionalism of the owner-manager and the fixation of all decisions on one key figure in the company can generate a high premium for the risk of quality of internal management. In general, the risk premium for this group can be designated as RP3.

To calculate the required return on equity using a cumulative method, use the following formula:

where to ^ - the risk-free rate (the yield on the market for guaranteed investment options).

This approach can be simplified - transfer some of the risks to the position of the lender and take into account only a specific premium associated with equity. The positions of the creditor and the owner are similar in a number of risk factors, since payments on borrowed capital are not guaranteed because of the risk of the operating and financial group. The higher the financial leverage the company employs, the less protected is the position of the individual creditor and, correspondingly, its higher risk. Lenders assess their risks. Very well this work is put in the banking sphere, because historically banks have worked out methods for assessing the credit risks of the company (they determined the probability of repayment of the disbursed amounts). There are methods developed by banks and departments of debt financing of investment companies that link the risks of non-return of borrowed funds with the required interest rate. Thus, the required rate on borrowed capital can be the base value for analyzing the barrier rate for own capital, and the spread of corporate bonds (as the difference between the yield to maturity on the company's bonds and the risk-free rate on the market) is the prototype of the risk premium (more precisely, its parts) .

Statistics on developed markets, for example, the US shows that the yield of shareholders on average by 400-450 percentage points exceeds the yield on bonded loans. On this fact, the method of "borrowing rate + premium of 4-5%" is being built. However, this method is not acceptable for all companies in the developed market, not to mention developing ones, where the risks of corporate governance can be significant. This approach is acceptable for companies with average investment risk and with a reliably estimated rate of borrowing. For United States companies, the comparison of borrowing rates and cut-off rates for investment projects shows a premium of 8-10% (in ruble terms).

The second (alternative to cumulative constructs) direction of constructing model constructions for direct risk accounting is the consideration of a market investor which, by forming an investment portfolio, can reduce part of the risks of the investment option under consideration The company (and operational, and financial, and quality management). This approach forms the so-called portfolio models of linking risk and profitability. Their essence consists in isolating systematic risks (which can not be removed by diversification) and building a bundle "risk-yield" taking into account these non-eliminated risks. The remaining specific risks of the company are usually entered into the required yield as additional premiums. For example, you can enter a premium for the size, for corporate management.

The practice of consulting the company McCwee showed that the combined risk management approach provides good results. The essence of the approach is to fix in the discount rate applied to the cash flows of the investment project or the company, only systematic risk, while simultaneously including all elements of a specific risk directly into cash flows. In practice, the method of incorporating risk into cash flows through scenarios is used.

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