Dissertation: Applications of Company Valuation Models

Applications of Company Valuation Models

Empirical Evidence on Selected Topics

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Finanzmanagement, Band 81

Hamburg , 142 Seiten

ISBN 978-3-8300-5857-1 (Print) |ISBN 978-3-339-05857-7 (eBook)

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“One of the most important problems of corporate finance is the valuation of proprietary equities” as stated by Preinreich (1936).

Determining the economic value of a company is indeed an important theoretical and practical issue. The estimation of the true value of a company is essential for stock market investors, either professional or private. Only if he valuates a company accurately, can he assess whether it is over- or undervalued and make profitable investment decisions. Given this importance, different company valuation models, e.g., the dividend discount model (DDM), the discounted cash flow model (DCF) and the residual income model (RIM), have been developed to serve as a theoretical and practical tool for the valuation of companies.

This dissertation focuses on company valuation models and their applications. The primary function of the models is to serve as a theoretical and practical valuation tool. Therefore, the first part (Section 2) examines the performance of the models. The main research questions are “how accurate can the valuation models estimate the market value of a company” and more importantly “what drives the inaccuracy of the models?” This analysis serves as the starting point, as it evaluates the practical relevance and deepens the understanding of the models. Knowing what causes the models to perform poorly helps to assess the reliability of the estimated firm values and reveals potential weaknesses of the models.

Despite the estimation of firm values, the valuation models provide further important applications. In particular, they provide theoretically well-founded proxy measures for variables that are not directly observable. The second part (Section 3 and Section 4) of this dissertation focuses on two proxy measures derived from the theoretical concepts of the valuation models: ex post intrinsic company value as a proxy for future company value and implied risk-premia as a proxy for expected risk-premia. These two proxy measures are introduced into further research fields and by that facilitate refined analyses of the following two important research questions.

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