nep-cfn New Economics Papers
on Corporate Finance
Issue of 2008‒02‒02
five papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. 110 common errors in company valuations By Fernandez, Pablo; Bilan, Andrada
  2. Ownership links, leverage and credit risk By Elisa Luciano; Giovanna Nicodano
  3. A more realistic valuation: APV and WACC with constant book leverage ratio By Fernandez, Pablo
  4. Corporate Governance and Firm Valuation in Colombia By Carlos Pombo; Luis H. Gutierrez
  5. Residual income and value creation: An investigation into the lost-capital paradigm By Magni, Carlo Alberto

  1. By: Fernandez, Pablo (IESE Business School); Bilan, Andrada (IESE Business School)
    Abstract: This paper contains a classified collection of 110 errors seen in company valuations performed by financial analysts, investment banks and financial consultants. The author had access to most of the valuations referred to in this paper in his capacity as a consultant in company acquisitions, sales, mergers, and arbitrage processes. We classify the errors into six main categories: 1) errors in the discount rate calculation and concerning the riskiness of the company; 2) errors when calculating or forecasting the expected cash flows; 3) errors in the calculation of the residual value; 4) inconsistencies and conceptual errors; 5) errors when interpreting the valuation; and 6) organizational errors.
    Keywords: company valuation; valuation errors; valuation;
    JEL: G12 G31 M21
    Date: 2007–11–05
  2. By: Elisa Luciano; Giovanna Nicodano
    Abstract: This paper explores the relationship between optimal leverage and ownership links. It develops a structural model of a parent and a subsidiary, which issues debt in its own name under a guarantee by the parent. We .nd that zero leverage can be optimal for the guarantor, while leverage close to one can be optimal for the guaranteed company, as this optimally exploits the tax shield of debt while minimizing default costs. As far as credit risk is considered, their joint default probability is lower than that of stand alone units, despite their higher debt capacity. Default probability, spreads and loss given default of the subsidiary are higher than for a stand alone with similar size and volatility. We also study the situation when the subsidiary is constrained to a debt equal to the optimal stand alone level. Only in this case group credit risk depends on the ownership share.
    Keywords: : credit risk, default risk, structural models, optimal leverage, zero leverage, ownership structure, parent-subsidiary.
    JEL: G32 G33 G34
    Date: 2008
  3. By: Fernandez, Pablo (IESE Business School)
    Abstract: We value a company that targets its capital structure in book-value terms. This capital structure definition provides us with a valuation that lies between those of Modigliani-Miller (fixed debt) and Miles-Ezzell (fixed market-value leverage ratio). We show that if a company targets its leverage in market-value terms, it has less value than if it targets the leverage in book-value terms. We also present empirical evidence that permits us to conclude that debt is more related to the book-value of the assets than to their market-value.
    Keywords: value of tax shields; required return to equity; company valuation; cost of equity;
    JEL: G12 G31 G32
    Date: 2007–11–07
  4. By: Carlos Pombo (Universidad del Rosario); Luis H. Gutierrez (Universidad del Rosario)
    Abstract: This paper studies the separation of ownership and control of 108 listed companies in Colombia from 1996 to 2002, finding that voting rights are greater than cash flow rights because of indirect ownership across firms. The paper also examines the association of various ownership and control measures and separation ratios with a firm’s value and performance for the same sample of companies that traded their stock from 1998 to 2002. Large blockholders were found to exert a positive influence upon a firm’s valuation and performance, which validates the positive monitoring approach of large shareholders, but this relationship is not monotonic. The paper further reports results from a 2004 survey which suggests that Colombian firms have been slow to improve their corporate governance practices.
    Keywords: Ownership, Control, Colombian Corporations
    JEL: G32 L22
    Date: 2007–10
  5. By: Magni, Carlo Alberto
    Abstract: This paper presents a new way of measuring residual income, originally introduced by Magni (2000a, 2000b, 2003). Contrary to the standard residual income, the capital charge is equal to the capital lost by investors. The lost capital may be viewed as (a) the foregone capital, (b) the capital implicitly infused into the business, (c) the outstanding capital of a shadow project, (d) the claimholders' credit. Relations of the lost capital with book values and market values are studied, as well as relations of the lost-capital residual income with the classical standard paradigm; many appealing properties are derived, among which a property of earnings aggregation. Different concepts and results, provided by different authors in such different fields as economic theory, management accounting and corporate finance, are considered: O'Hanlon and Peasnell's (2002) unrecovered capital and Excess Value Created; Ohlson's (2005) Abnormal Earnings Growth; O'Byrne's (1997) EVA improvement; Miller and Modigliani's (1961) investment opportunities approach to valuation; Keynes's (1936) user cost; Drukarczyk and Schueler's (2000) Net Economic Income, Fernandez's (2002) Created Shareholder Value, Anthony's (1975) profit. They are all conveniently reinterpreted within the theoretical domain of the lost-capital paradigm and conjoined in a unified view. The results found make this new theoretical approach a good candidate for firm valuation, incentive compensation, capital budgeting decision-making
    Keywords: Corporate finance, management accounting, valuation, residual income, value creation, incentive compensation, outstanding capital, lost capital, net present value, book value, market value
    JEL: G11 G31 D40 M52 G30 M40 D46 M41 G12 G0 M21
    Date: 2007–11–13

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