New Models for Analyzing Changes in Company Value Based on Stochastic Discount Rates

P E Zhukov

doi:10.26794/2587-5671-2019-23-3-35-48

Abstract

We propose new models for analyzing changes in the value of the company using stochastic discount rates. It is shown that for the majority of the companies under study, local changes in the rate of the company value growth (percentage changes to the previous level) are not explained by the corresponding changes neither in the weighted average cost of capital (WACC), nor in the cash flows. This fact, as well as the research results by J. Cochrane, who proved that discount rates volatility is the main contributor to price volatility, became initial prerequisites for building models based on stochastic discount rates. The work presents three models built on stochastic discount rates, where cash flows are assumed to be growing with a certain trend, and the factors affecting the price of the company are described by stochastic discount factors. These models are alternative in relation to the commonly used traditional cash flow discounting (DCF) models where the free cash flow is discounted through the WACC, or the free flow to capital at the opportunity cost of equity. The first model is used to analyze the dependence of the company value on investments. It uses free cash flow subject to zero growth. The second model uses net cash flow from operating activities plus interest, minus the minimum investment subject to zero growth. The third model uses net cash flow from operating activities plus interest adjusted to taxes. This model requires to estimate the rates of the company downsizing subject to zero investment. The third model is applicable for companies with volatile investments, where it is difficult to reliably estimate free cash flow in case of zero growth. The models are designed for analysis of the factors influencing the value of the company for value-based management. Another application of the models is the evaluation of investment value of the company and the answer to the question of its possible overestimated or underestimated value. The third way to apply this model is the empirical evaluation of the weighted average cost of capital applicable to the company’s investment projects, alternative to WACC, assessed by standard methods.

Highlights

А Н Н ОТА Ц И Я В работе предлагаются новые модели анализа изменений стоимости компании с использованием стохастических ставок дисконтирования
Scopus ID: 57200148155 abStRaCt We propose new models for analyzing changes in the value of the company using stochastic discount rates
Cochrane, who proved that discount rates volatility is the main contributor to price volatility, became initial prerequisites for building models based on stochastic discount rates

Summary

ОРИГИНАЛЬНАЯ СТАТЬЯ

Новые модели анализа изменений стоимости компании, основанные на стохастических ставках дисконтирования. А Н Н ОТА Ц И Я В работе предлагаются новые модели анализа изменений стоимости компании с использованием стохастических ставок дисконтирования. Первая модель используется для анализа зависимости стоимости компаний от инвестиций. В ней применяется свободный денежный поток при условии нулевого роста. Во второй модели — чистый денежный поток по операционной деятельности плюс проценты, за вычетом минимальных инвестиций при условии нулевого роста. В последней модели применяется оценка скорости сворачивания деятельности компании при условии нулевых инвестиций. Третья модель применима для компаний с нестабильными инвестициями, для которых трудно надежно оценить свободный денежный поток при условиях нулевого роста. Ключевые слова: полная цена компании; финансовые риски; свободный денежный поток на фирму; средневзвешенная стоимость капитала; стохастические ставки дисконтирования; обобщенный метод моментов.

ORIGINal PaPER

МОДЕЛИ И МЕТОДЫ ИССЛЕДОВАНИЯ

ДИСКОНТИРОВАНИЯ НА ПРИМЕРЕ ОТДЕЛЬНЫХ КОМПАНИЙ