Corporate Value Theory Case Study

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2.2. Corporate value theories
2.2.1. Valuation
David Frykman (2003) identified three bases of valuation, including cash flow, return and operational variables. Thus, a great number of valuation approach such as EVA and DDM can be used under certain conditions. However, the most common valuation approach is the discounted cash flow model(DCF). It considers perspectives of all claimholders in the company. Economists define the corporate value as the present value of expected free cash flow of company discounted by its weighted average cost of capital. It is closely related to the financial decision making of the company and reflects time value, risk and sustainable development capacity of corporate.

Therefore, approaches to achieving maximization
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Tobin’s Q is pointed out by the American economist James Tobin(1969) and is measured by dividing the market value the firm by the replacement cost of assets in place(Dadson, 2012; Mustafa and Osama, 2002; Aburub, 2012). It reflects future expected profits of the company, while the stock price factors are included in the calculation of Tobin 's Q. Under perfect capital market conditions, Tobin 's Q can fully reflect the historical value of the enterprise, the current value and future value. Therefore, it plays as an important role in measuring corporate value in Western countries. Although many factors such as capital market imperfections and lack of mature market mechanism in China reduced the effectiveness of Tobin 's Q, it is still appropriate and meaningful to combine the use of Tobin 's Q with ROE to represent the enterprise …show more content…
Due to a great number of empirical researches based on the US firms, it is necessary to test the robustness of these findings outside the US(Rajan and Zigales, 1995). They found similar leverage levels and negative associations between leverage level and profitability across the G-7 countries in spite of different institutional structures. Kimberly(2000) tested firms in 14 European countries and found the similar results. High debt level could lower weighted average cost of capital and thereby improve competitive advantage of companies. He explained that the reasons of higher level of debt may include aligning the interests of managers and investors and underestimating the risks of financial distress by managers. The finding of Booth(2001) based on data from 10 developing countries suggests that expensive external financing is avoided by firms, which supports the validity of the pecking-order theory and negative relationship. Dadson(2012) analyzed listed banks in Ghana and also found a significantly negative relationship between leverage level and corporate value in terms of ROE and Tobin’s Q. The same result is obtained by Mykhailo(2013) in investigating Ukrainian firms. Empirical analyses of the public Jordanian firms also supports a negative association between capital structure and corporate value (Mustafa,

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