DCF Fair Value Valuation, Excessive Assetes and Hidden Inefficiencies

Mielcarz, Paweł; Wnuczak, Paweł

doi:10.5709/ce.1897-9254.27

Cited by 13 publications

(10 citation statements)

References 9 publications

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“…HBU assumes that market participants have the ability to generate economic benefits by using assets in the most profitable way (European Commission, 2012). It means that all inefficiencies incorporated in current operations of a valued company should be eliminated in the process of free cash flow (FCF) estimation (Mielcarz & Wnuczak, 2011). If the current owners of shares are not able to apply the most advantageous strategy to company operations, it ought to be assumed that they should sell the unquoted shares to another market participant that would use the assets according to the HBU concept (European Commission, 2012).…”

Section: Methodological Implications Of the Most Advantageous Market mentioning

confidence: 99%

A new approach to private firm fair value valuation in line with IFRS 13 – the concept of the most advantageous market discount (MAMD)

Mielcarz¹

2014

BEH

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IFRS 13, adopted in 2013, introduced a general framework for fair value valuation of unquoted equity instruments. It has to be performed in line with the "highest and best use" concept and in the conditions of potential transactions carried out on "the most advantageous market". This article presents a new and comprehensive approach to the valuation process of such instruments, which meets these IFRS 13 requirements. This approach applies a concept of the most advantageous market discount (MAMD), based on the well-known underpricing phenomenon. The application of this discount along with the Markowitz theory results in a cohesive, comprehensive and practical framework for unquoted equity instruments valuation according to the fair value concept compliant with IFRS 13. Additionally, this paper presents estimations of MAMD for the UK, Germany, France, Switzerland, and Poland. The obtained results can help valuation practitioners apply the MAMD concept in the process of unquoted equity instruments valuation according to IFRS 13. Compared to other approaches which address the issue of private company valuation, the presented valuation framework for the first time reconciles the requirements set in IFRS 13 fair value definition with the assumption of valuation in the reality of imperfect markets. JEL Classifications: G12, G32, G34, M48

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Section: Methodological Implications Of the Most Advantageous Market mentioning

confidence: 99%

A new approach to private firm fair value valuation in line with IFRS 13 – the concept of the most advantageous market discount (MAMD)

Mielcarz¹

2014

BEH

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“…The shareholder value is assumed to be gradually wasted through unproductive investments. This situation is not sustainable: it contradicts the highest and best use assumption (HBU) endorsed by the International Valuation Standards and International Financial Reporting Standard 13 (Mielcarz, Wnuczak, 2011). The shareholders will try to remedy the situation by either replacing the company's management (if the source of inefficiency resides in managerial practices) or by withdrawing funds and discontinuing value-destroying operations.…”

Section: Theoretical Assumptions Underlying the Calculation Of Residumentioning

confidence: 97%

What is Behind the Figures? Conceptual Mistakes in the Equity Valuations Prepared by Research Analysts in Poland

Mielcarz

Osiichuk

2017

Zeszyty Naukowe Uniwersytetu Szczecińskiego Finanse Rynki Finansowe Ubezpieczenia

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By their nature, corporate valuations are partially built on analysts' opinions, and not only on objective facts. However, it is of primary importance for equity research to be grounded on sound economic theory and existing methodological conventions. Otherwise, an inherent element of subjectivity may degrade into the complete arbitrariness of the assumptions underlying the valuation model. This paper covers conceptual mistakes which may appear in the calculation of the residual value in discounted cash flow valuation models prepared by sell-side equity analysts. In particular, we have analysed some of the essential postulates underlying the estimation of the perpetual growth rate. Our study covering 100 randomly selected investment recommendations prepared by equity research analysts in Poland, shows that these postulates are not adhered to in most cases. Flawed input data translate into the implied company's fundamentals devoid of economic sense. Unrealistic assumptions underlying valuation models question the credibility of investment recommendations and prompt the discussion over the factors shaping the investment decisions of the market participants.

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“…The concept of fair value assumes complete symmetry of information between the transacting parties, i.e., between buyers and sellers. It implies that if the company is being run inefficiently, the negative impact of the identified inefficiencies should be eliminated from the long-term cash flow forecast (Mielcarz & Wnuczak, 2011). Such inefficiencies may include: an excessive stock of cash and non-operating assets; cost inefficiencies; suboptimal financing and capital structure decisions; flawed dividend policy and excessive management perquisites, etc.…”

Section: The Fair Value Considerations In Terminal Value Calculation:mentioning

confidence: 99%

Terminal Value Calculation in DCF Valuation Models: An Empirical Verification

Behr¹,

Mielcarz

Osiichuk

2018

E-Finanse

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The paper presents an empirical verification of the main assumptions underlying the calculation of terminal value in DCF valuation models. The test results suggest that the volatility of free cash flows and the dynamism of the operating environment do not allow us to make a reliable long-term forecast of value creation potential of the public companies in Poland. Regardless of their organic growth phase, the overwhelming majority of the sampled firms are evidenced to exhibit extreme year-on-year fluctuations of sales, investments and cash flows over the short-and medium-term observation windows. The variability of operating results and the probabilistic nature of company--level fundamentals may preclude the possibility of constructing a reliable cash flow forecast for the purposes of a DCF valuation. This methodological issue appears to pose a particular challenge during the calculation of terminal value, which is heavily dependent on highly subjective and uncertain steady-state fundamentals. Therefore, the predictive power of the deterministic DCF models may be reduced to a snapshot of the current market sentiment regarding a particular stock. The paper postulates that a further discussion on the tenets of terminal value calculation may be necessary in order to overcome the existing flaws and increase the accuracy of valuation models. We contribute to this discussion by outlining the principal methodological and theoretical issues which challenge the practicing valuators at the stage of terminal value calculation. Our conclusions may help to shed light on the problems of market short-termism, and high inconstancy of investment recommendations.

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DCF Fair Value Valuation, Excessive Assetes and Hidden Inefficiencies

Cited by 13 publications

References 9 publications

A new approach to private firm fair value valuation in line with IFRS 13 – the concept of the most advantageous market discount (MAMD)

A new approach to private firm fair value valuation in line with IFRS 13 – the concept of the most advantageous market discount (MAMD)

What is Behind the Figures? Conceptual Mistakes in the Equity Valuations Prepared by Research Analysts in Poland

Terminal Value Calculation in DCF Valuation Models: An Empirical Verification

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