The Methodology of appraisal of market value of equity, shares, bonds & securities for the purpose of their

Resume Dr. Giorgi Rusiashvili

Resume

Abstract: Financial analysts should be primarily concerned about the operating performance of a firm when considering whether to invest in a company.

In light of the recent Enron bankruptcy, the largest in US history, financial managers are reviewing and evaluating valuation techniques and procedures. These techniques, used in conjunction with qualitative evaluation and judgment, may help financial managers to avoid some of the valuation mistakes which occurred in the Enron debacle. This paper sets out a simple, but detailed, step-by-step procedure for computing free cash flows and valuing a growth company. An illustration of the computation of free cash flows and corporate valuation, using EVA and PRVIT was developed by Stern Stewart & Co. for interpreting the financial statements. The companies who use EVA and PRVIT in their day to day financial management in accounting periods are reported in the International Trade and Financial Magazines as one of the top growth companies traded.
Economic Value Added (EVA)
– EVA is an estimate of managers’ success in generating a true economic profit for the year, i.e. a profit on the assets greater than the investors’ opportunity cost of capital.
– EVA represents the residual income after all capital costs, including equity, have been covered.
– EVA measures the extent to which managers have succeeded in adding to shareholder value.
– EVA = NOPAT – A.T. dollar cost of operating capital or (A-T cost of capital) (Capital)
– EVA = EBIT(1-T) – [( Total Operating Capital) X (A.T. % cost of capital)]
– In order to generate positive EVA, a firm has to do more than just cover operating costs. It must also provide a return to those who have provided the firm with capital-debt and equity.
– EVA takes into account the total cost of capital, which includes the cost of equity.
However these techniques are not perfectly used in the transitional economies because of underdevelopment of the financial markets and institutions in these countries. In the paper it is used the special methodology of appraisal of market value of equity, shares, bonds & securities for their selling applying our know-how. The paper answers the question: What is the market value of equity, shares, bonds & securities of the company and/or corporation for their selling knowing what was the firm’s EVA? Assuming the firm’s after-tax percentage cost of capital is always RRR and there is no financial market in the country. Therefore the procedures are illustrated on step by step basis, very clearly and non-ambiguously. Use of the techniques presented in this paper will bring to light the degree of success of the strategic direction and the ongoing performance of the managers of the companies. The application presented would be especially useful to investors who hold growth stocks in their portfolios, equity research analysts, venture capitalists and managers of growth firms in the transitional economies countries.
Acknowledgement: special thanks given to Doctor of Sciences, Professor Nugzar Santeladze.
Keywords: bankruptcy; corporate valuation; dividend discount model; free cash flows; growth companies; operating performance; start-up companies; shares appraisal at market price; transition countries.