1 - Perspectives on value and valuation

Abstract

In finance, value is the firm value which consists of fundamental value and shareholder value. Firm value can be based on book value or market value. Market value is based on the stock market performance of a company. The strategic relevance of knowledge assets has led to the generation of new concepts and models for managing a company’s knowledge assets. Value creation is often perceived as the future value captured in the form of increased market capitalization. Valuation is used in functional areas of finance like corporate finance, investment analysis, and portfolio management. The three basic approaches to valuation are discounted cash flow valuation, relative valuation, and real option valuation. Value drivers should be directly linked to shareholder value creation. The determination of value drivers is a critical step in business process valuation since these drivers can either increase or reduce the value. The three main financial drivers of value creation are sales, costs, and investments. Earnings growth, cash flow growth, and return on invested capital are specific financial drivers. Profitability, growth, and capital intensity are considered as important drivers of free cash flow and value of a firm. Practitioners often view EPS as the most important part of value creation. Sales revenue and sales growth were also highly rated for measurement of performance. Value-based management focuses on the application of valuation principles. Stock price maximization is one of the significant factors for value maximization objectives. Maximization of shareholder wealth is the main objective of any value creating organization. The main value drivers for shareholder wealth creation are intangibles, operating, investment, and financial. The measures of shareholder value creation are Economic Value, Equity Spread, Implied Value, and CFROI. The major wealth creation measures are total shareholder returns, annual economic return, and market value added. Shared values are policies and operating practices which enhance the competitiveness of a company. In R&D organizations, intangible assets are key drivers of innovation and organizational value. These intangible assets generate shareholder value and corporate growth. The three methods to value proprietary technology are classified as the market approach, the cost approach, and the income approach. The major challenge in valuation is the development of reasonable assumptions for projections based on historical trends and the reasoning for assumption choices.