scholarly journals PRACTICAL APPLICATION OF INCOME CAPITALIZATION METHOD IN BUSINESS VALUATION – SOME HIGHLIGHTS

2019 ◽  
Vol 34 (1) ◽  
pp. 25-30
Author(s):  
Lyubomir Todorov
Keyword(s):  
Growth Rate ◽  
Cost Of Capital ◽  
Market Value ◽  
Annual Growth Rate ◽  
Cost Of Equity ◽  
Practical Application ◽  
Business Valuation ◽  
Advantages And Disadvantages ◽  
The Cost

The paper describes the advantages and disadvantages of the income approach in business valuation, the essence of the method of income capitalization, as well as the peculiarities related to its application. Two main variants of the method are presented, depending on the choice of income to be capitalized. The first option is based on the net cash flow and is mainly applied to the valuation of enterprises with high investment absorption and, respectively, high share of depreciation in total expenses. The second option is based on net profit and is preferred by valuers when valuing low investment absorption firms or holding companies.A practical case study is presented to evaluate a holding company related to the determination of the market value of a minority share package. The cost of equity of the rated entity is determined by the CAPM model modifications for emerging markets. At the end, conclusions have been drawn and some problems have been described that appraisers should pay attention to. The Income Capitalization method has an easy algorithm, but its practical application is not so simple. Both fundamental knowledge and experience, as well as evaluators' attention are required, as a number of factors and circumstances must be taken into account regarding: the choice of income to be capitalized, the choice of variant for valuation methodology, model for determining the cost of equity or the weighted average cost of capital, determining the “small firm risk premium”, determining the normalized income, the long-term rate of income growth, adjustments for minority or majority ownership, adjustments for marketability and others. In this method, the market value of equity (VE) is highly sensitive to the discount rate (the cost of capital), the long-term growth rate and the capitalization rate, respectively. Even small differences in these parameters can lead to a large difference in the value of the estimate. This requires precision and good argumentation on the part of the valuers regarding the pricing of equity, the cost of debt and the long-term average annual growth rate of income.For companies with stable incomes and good prospects for development, this method provides a relatively accurate estimate of the market value of equity. However, it must be borne in mind that the future is always uncertain. In this regard, appraisers should make a sufficiently accurate assessment of the level of business risk and financial risk of the entity being evaluated.

scholarly journals Value Added as a Measure of Economic Profit

2018 ◽  
Vol 16 (29) ◽  
Author(s):  
Silvije Orsag ◽  
Ante Džidić
Keyword(s):  
Bosnia And Herzegovina ◽  
Cost Of Capital ◽  
Value Added ◽  
Business Success ◽  
Stock Exchanges ◽  
Cost Of Equity ◽  
Economic Profit ◽  
Company Value ◽  
Banja Luka ◽  
The Cost

Economic profit is the concept immanent for the value added. It is an attempt to analyze properly the business success in terms of contribution of profit to the increase in the company value and the stockholders’ wealth. Fundamentally, value added is a measure of the business success where all standard costs and the costs of invested capital are excluded from the realized revenues. Profit as a traditional measure of business success ignores the cost of equity, although equity is the most expensive form of capital. To illustrate better this concept, we made an analysis of the most profitable corporations in Bosnia and Herzegovina listed on Banja Luka and Sarajevo stock exchanges. The analysis showed that the majority of these corporations operate poorly because they do not meet the implicit cost of capital, essentially losing the value of capital entrusted to them by their stockholders. Also, this analysis questioned the importance of the industries which are usually considered to be the most important in BiH economy.

scholarly journals Market value calculation and the solution of circularity between value and the weighted average cost of capital WACC

2009 ◽  
Vol 10 (6) ◽  
pp. 101-131 ◽  
Author(s):  
Ignacio Vélez-Pareja ◽  
Joseph Tham
Keyword(s):  
Average Cost ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Cost Of Debt ◽  
Cost Of Equity ◽  
Tax Rate ◽  
Market Values ◽  
Equity Cost ◽  
Tax Payments ◽  
The Cost

Most finance textbooks present the Weighted Average Cost of Capital (WACC) calculation as: WACC = Kd×(1-T)×D% + Ke×E%, where Kd is the cost of debt before taxes, T is the tax rate, D% is the percentage of debt on total value, Ke is the cost of equity and E% is the percentage of equity on total value. All of them precise (but not with enough emphasis) that the values to calculate D% y E% are market values. Although they devote special space and thought to calculate Kd and Ke, little effort is made to the correct calculation of market values. This means that there are several points that are not sufficiently dealt with: Market values, location in time, occurrence of tax payments, WACC changes in time and the circularity in calculating WACC. The purpose of this note is to clear up these ideas, solve the circularity problem and emphasize in some ideas that usually are looked over. Also, some suggestions are presented on how to calculate, or estimate, the equity cost of capital.

scholarly journals Superhydrophobic Hair-Like Nanowire Membrane for the Highly Efficient Separation of Oil/Water Mixtures

2020 ◽  
Vol 2020 ◽  
pp. 1-9
Author(s):  
Xinzuo Fang ◽  
Yufan Liu ◽  
Sheng Lei ◽  
Junfei Ou
Keyword(s):  
Environmental Problem ◽  
Oxidation Process ◽  
Separation Efficiency ◽  
Practical Application ◽  
Step Method ◽  
Water Contact ◽  
Low Surface Energy ◽  
Oil Water ◽  
The Cost

Water pollution caused by oil leakage and oily wastewater has become a serious environmental problem. Therefore, it is important to develop an efficient material to remove oil from water. Given the cost and efficiency, the membrane with superhydrophobicity is the most used material for the separation of oil/water mixtures. However, many works have been done through modification with a fluorinated reagent, causing high cost and damage to the environment. In this work, a simple and fast two-step method is employed to achieve a superhydrophobic hair-like nanowire membrane. Through the alkali-assisted oxidation process and modification with nonfluorinated low surface energy chemical, the so-obtained membrane (denoted as SHM), with the water contact angle of about 164°, exhibits excellent separation efficiency for binary mixtures of water and oils (toluene, hexane, gasoline, and so on). Meantime, this membrane also exhibits excellent durability and reusability in the long-term separation process, indicating its great potential for practical application in the future.

Corporate governance and cost of equity: empirical evidence from Latin American companies

2016 ◽  
Vol 16 (5) ◽  
pp. 831-848 ◽  
Author(s):  
Emanuele Teti ◽  
Alberto Dell’Acqua ◽  
Leonardo Etro ◽  
Francesca Resmini
Keyword(s):  
Corporate Governance ◽  
Latin American ◽  
Cost Of Capital ◽  
Negative Relationship ◽  
Developed Countries ◽  
Equity Capital ◽  
Cost Of Equity ◽  
Content Type ◽  
The Cost ◽  
The Relationship

Purpose This paper aims to investigate the extent to which corporate governance (CG) systems adopted by Latin American listed firms affect their cost of equity capital. Several studies on the link between the two aforementioned dimensions have been carried out, but none in the context of Latin American firms. Design/methodology/approach A CG index is created by taking into account the peculiarities of each country and the recommendations given by the corresponding CG institutes. In particular, to assess the level of CG quality, three sub-indexes have been identified: “Disclosure”, “Board of Directors” and “Shareholder Rights, Ownership and Control Structure”. Findings The results indicate a negative relationship between CG quality and the cost of equity. In particular, the “Disclosure” component is the one mostly affecting the cost of equity. Research limitations/implications This study contributes to the literature by adding knowledge on the relationship between CG and cost of capital considering, for the first time, the overall Latin American market. Practical implications The paper proves that institutional investors all over the world are disposed to pay a premium to invest in firms with effective CG standards; moreover, this premium is higher in emerging countries such as those analyzed in this paper, rather than in developed countries. Originality/value To the authors' knowledge, this is the first paper empirically investigating the relationship between CG and cost of capital in Latin America.

Better risk pricing can unlock billions in investment

2018 ◽  
Keyword(s):  
Direct Investment ◽  
Cost Of Capital ◽  
Political Risk ◽  
Investment Decisions ◽  
Content Type ◽  
Cross Border ◽  
Percentage Points ◽  
Risk Pricing ◽  
The Cost

Subject Pricing political risk. Significance The mis-measurement of political risk is resulting in the cost of capital being valued 2-4 percentage points higher than it should be in assessments ahead of cross-border investment decisions. Research suggests that in 2016 this could have increased net foreign direct investment (FDI) to non-advanced countries by more than 10%. Impacts Political risk measurement is set for a renaissance, with interest from practitioners and end-users likely to proliferate. Frontier markets that are on the edge of inclusion in 'emerging' portfolio allocations could see an uptick in investment inflows. Returns to long-term capital managers, from insurers to pension funds, will rise as cost-of-capital calculations grow in sophistication.

scholarly journals Analysis of the structure and cost of capital in mining enterprises

2017 ◽  
Vol 33 (1) ◽  
pp. 77-92 ◽  
Author(s):  
Robert Ranosz
Keyword(s):  
Capital Structure ◽  
Cost Of Capital ◽  
Cost Of Debt ◽  
Cost Of Equity ◽  
Mining Company ◽  
Optimal Capital Structure ◽  
Mining Companies ◽  
Debt Capital ◽  
Capital Funding ◽  
The Cost

AbstractThis article focuses on the analysis of the structure and cost of capital in mining companies. Proper selection of appropriate levels of equity and debt capital funding of investment has a significant impact on its value. Thus, to maximize the value of the company, the capital structure of the company should be composed to minimize the weighted average cost of capital. T he objective of the article is to present the capital structure of selected Polish and world’s mining companies and estimate their cost of equity and debt capital. In the paper the optimal capital structure for the Polish mining company (KGHM SA) was also estimated. It was assumed that both Polish and world’s mining companies, have no debt exceeding 45% in the financing structure. For the most of analyzed cases, the level of financing with debt capital is in the range between 10% and 35%. T he cost of equity exceeds the cost of debt capital and is in the range between 8% and 20%, while the cost of debt capital reaches the range between 1.9% and 12%. T he analysis of the optimal capital structure determining, performed for the selected mining company, showed that debt capital funding for the company should be in the range between 5.7% and 7.4%.

scholarly journals A Better Way To Measure The Cost Of Equity Capital For Small Closely Held Firms

2012 ◽  
Vol 10 (2) ◽  
pp. 97
Author(s):  
Denis O. Boudreaux ◽  
Praveen Das ◽  
Nancy Rumore ◽  
SPUma Rao
Keyword(s):  
Cost Of Capital ◽  
Average Rate ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Publicly Traded ◽  
Simple Method ◽  
Valuation Process ◽  
The Cost ◽  
Privately Owned

A companys cost of capital is the average rate it pays for the use of its capital funds. Estimating the cost of equity capital for a publicly traded firm is much simpler than estimating the same for a small privately held firm. For privately owned firms there is the lack of market based financial information. In business damage cases, valuation of the firm is often a prime interest. A necessary variable in the valuation process is the estimate of the firms cost of capital. Part of the cost of capital is the equity holders or owners required rate of return. The purpose of this paper is to explore the theoretical structure that underlies the valuation process for business damage cases that involve privately owned businesses. Specifically, cost of equity capital estimate methods which appear in the current literature are examined, and a theoretically correct and simple method to measure cost of equity capital for closely held companies is offered.

Skew Estimation and Compensation in Tape Drives With Flangeless Rollers

2013 ◽  
Author(s):  
Kazuhiro Tsuruta ◽  
Angeliki Pantazi ◽  
Giovanni Cherubini ◽  
Jens Jelitto
Keyword(s):  
Growth Rate ◽  
Data Storage ◽  
Magnetic Tape ◽  
Information Storage ◽  
Annual Growth Rate ◽  
Track Width ◽  
Compound Annual Growth Rate ◽  
Head Positioning ◽  
Term Data

Magnetic tape remains the medium of choice for long-term data storage at the lowest possible cost. Moreover, tape-cartridge capacities are expected to maintain a compound annual growth rate of about 40%, resulting in a 128 TByte tape-cartridge capacity by 2022, as forecast by the Information Storage Industry Consortium (INSIC) roadmap [1]. To achieve these capacities in future tape products, the data track width has to be aggressively reduced through ultra-precise tape head positioning.

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