Valuation Models Applied to Value-Based Management—Application to the Case of UK Companies with Problems
Abstract
:1. Introduction
1.1. Value-Based Management—The Importance of Value Creation
1.2. The Importance of Accounting Value Measurement
1.3. Objectives and Research Method of the Study
2. Literature Review
2.1. Value-Based Management (VBM)
2.2. How to Measure a Company Value?
2.2.1. Free Cash Flow Valuation Method (FCFVM)
2.2.2. Residual Earnings Valuation Model (REVM)
2.2.3. Abnormal Earnings Growth Model (AEGM)
2.2.4. Multiple-Based Valuation Methods
2.3. Further Discussion on Valuation Techniques
3. Implementation
3.1. Overview
3.2. Valuation Implementation
3.3. Reformulation of Financial Statements
3.4. Forecast of Financial Statements
3.5. Comparing These Valuation Methods
3.6. Sensitivity Analysis
3.7. Multiple-Based Method Valuation
3.8. Brief Conclusion on Implementation
3.8.1. Best Model for Value-Based Management
3.8.2. The Consistency of the Fundamental Assumption
3.8.3. Calculation Concordance
3.8.4. Suitable Scenario for VBM
3.8.5. Limitations and Difficulties of Practical Implementation
4. Conclusions and Suggestions for Future Work
Funding
Acknowledgments
Conflicts of Interest
References
- Martin, J.D.; Petty, J.W. Value-Based Management: The Corporate Response to the Shareholder Revolution; Oxford University Press: England, UK, 2001; Available online: http://oxfordindex.oup.com/view/10.1093/acprof:oso/9780195340389.003.0004 (accessed on 26 July 2016).
- Chen, S.; Dodd, J. Economic Value Added: An Empirical Examination of a New Corporate Performance Measure. J. Manag. Issues 1997, 9, 319–333. [Google Scholar]
- Marks & Spencer. Marks and Spencer about Us Company Overview. Available online: https://corporate.marksandspencer.com/aboutus (accessed on 20 June 2016).
- Young, S.D.; O’Byrne, S.F. EVA and Value-Based Management: A Practical Guide to Implementation; McGraw-Hill Education: New York, NY, USA, 2000. [Google Scholar]
- Yi, R.; Chang, Y.W.; ** countries. Phys. A 2018, 492, 877–888. [Google Scholar] [CrossRef] [Green Version]
- Townsend, C.; Neal, D.T.; Morgan, C. The impact of the mere presence of social media share icons on product interest and valuation. J. Bus. Res. 2019, 100, 245–254. [Google Scholar] [CrossRef]
2016 | 2017E | 2018E | 2019E | 2020E | 2021E | |
---|---|---|---|---|---|---|
Net operating income (including other comprehensive income items) | 483.20 | 446.84 | 455.77 | 464.89 | 474.19 | 483.67 |
Inventories | 799.90 | 815.90 | 832.22 | 848.86 | 865.84 | 883.15 |
Trade and other receivables | 321.10 | 327.52 | 334.07 | 340.75 | 347.57 | 354.52 |
Current tax receivable | 1.60 | 1.63 | 1.66 | 1.70 | 1.73 | 1.77 |
Trade and other payables | −1617.70 | −1650.05 | −1683.06 | −1716.72 | −1751.0 | −1786.07 |
Current tax liabilities | −75.20 | −76.70 | −78.24 | −79.80 | −81.40 | −83.03 |
Working capital | −570.30 | −505 | −593.35 | −641.14 | −617.31 | −629.66 |
PPE and intangible assets | 5829.90 | 5946.50 | 6065.43 | 6186.74 | 6310.47 | 6436.68 |
Other net operating assets | −67.60 | −68.95 | −70.33 | −71.74 | −73.17 | −74.64 |
Net operating assets | 5192 | 5372.55 | 5401.75 | 5473.86 | 5619.99 | 5732.38 |
Summary of movement in property, plant and equipment (PPE) (or “tangible assets“) and other intangible assets: | ||||||
Brought forward | 5889.30 | 5829.90 | 5946.50 | 6065.43 | 6186.74 | 6310.47 |
Additions less disposals | 503.40 | 513.47 | 523.74 | 534.21 | 544.90 | 555.79 |
Depreciation and amortisation | −562.80 | 396.87 | 404.81 | 412.90 | 421.16 | 429.58 |
Carried forward | 5829.30 | 5946.50 | 6065.43 | 6186.74 | 6310.47 | 6436.68 |
Estimate of free cash flow (in million GBP) | ||||||
Method 2 | ||||||
Net operating income (including other comprehensive income items) | 446.84 | 455.77 | 464.89 | 474.19 | 483.67 | |
Minus: increase in receivables, etc | −6.42 | −6.55 | −6.68 | −6.82 | −6.95 | |
Minus: increase in inventories, etc. | −16.00 | −16.32 | −16.64 | −16.98 | −17.31 | |
Plus: increase in payables, etc | 32.35 | 33.01 | 33.66 | 34.33 | 35.02 | |
Minus: increase in other net operating assets | 1.35 | 1.38 | 1.41 | 1.43 | 1.47 | |
Plus: depreciation and amortisation | 396.87 | 404.81 | 412.90 | 421.16 | 429.58 | |
Minus: additions (net of disposals) etc. to PPE and intangible assets | −818.86 | −835.23 | −851.94 | −868.98 | −886.36 | |
Estimate of free cash flow | 339.77 | 346.55 | 353.49 | 360.56 | 367.77 | |
Method 1 | ||||||
Net operating income (including other comprehensive income items) | 446.84 | 455.77 | 464.89 | 474.19 | 483.67 | |
Minus: Change in net operating assets | −107.07 | −109.22 | −111.40 | −113.63 | −115.90 | |
Estimate of free cash flow | 339.77 | 346.55 | 353.49 | 360.56 | 367.77 | |
FCF Entity Valuation (million GBP) | ||||||
Free cash flow (FCF) | 339.77 | 346.55 | 353.49 | 360.56 | 367.77 | |
Discount rate @ 7% | 1.07 | 1.14 | 1.23 | 1.31 | 1.40 | |
Present value of free cash flows | 317.54 | 303.99 | 287.39 | 275.24 | 262.69 | |
Total present value to 2021 | 1446.85 | |||||
Continuing value (CV) (g = 2%) | CV = 367.77 × (1 + 2%)/(7% − 2%) = > | 7501.51 | ||||
Present value (PV) of CV | 5358.22 | |||||
Entity value (EnV) | 6945.31 | |||||
REVM Entity Valuation (million GBP) | ||||||
Net operating income (including other comprehensive income items) | 446.84 | 455.77 | 464.89 | 474.19 | 483.67 | |
Net operating assets | 5353.70 | 5460.77 | 5569.99 | 5681.39 | 5795.02 | 5910.92 |
Capital charge @ 7% | 374.76 | 382.25 | 389.90 | 397.70 | 405.65 | |
Residual Operating Income (ROI) | 72.08 | 73.52 | 74.99 | 76.49 | 78.02 | |
Discount rate @ 7% | 1.07 | 1.14 | 1.23 | 1.31 | 1.40 | |
PV of ROI | 67.36 | 64.50 | 60.97 | 58.39 | 55.73 | |
Total PV of ROI to 2021 | 306.95 | |||||
CV of ROI | CV = 78.02 × (1 + 2%)/(7% − 2%) = > | 1591.61 | ||||
PV of CV of ROI | 1284.66 | |||||
Entity value (EnV) | 6945.31 | |||||
AEGM Entity Valuation (million GBP) | ||||||
Net operating income (including other comprehensive income items) | 446.84 | 455.77 | 464.89 | 474.19 | 483.67 | |
Free cash flow (FCF) | 339.77 | 346.55 | 353.49 | 360.56 | 367.77 | |
Prior year reinvested | 107.07 | 109.22 | 111.40 | 113.63 | ||
Normal change in earnings @ 7% | 6.26 | 6.37 | 6.53 | 6.68 | ||
Change in operating income | 8.93 | 9.12 | 9.3 | 9.48 | ||
Abnormal operating income growth (AOIG) | 2.67 | 2.75 | 2.77 | 2.8 | ||
Capitalised next period AOIG @ 7% | 44.82 | 45.71 | 46.63 | 47.56 | ||
Discount rate @ 7% | 1.07 | 1.14 | 1.23 | 1.31 | ||
PV of cap AOIG | 41.89 | 40.10 | 37.91 | 36.31 | ||
Total PV of cap AOIG to 2021 | 180.23 | |||||
CV of cap AOIG | CV = 3.84 × (1 + 2%)/[(7% − 2%) × 7%] = > | 1119.80 | ||||
PV of CV of cap AOIG | 854.29 | |||||
Capitalised operating income for 2017 | 7127.51 | |||||
Entity value (EnV) | 6945.31 |
g = 2% | WACC = 7% | |||||
---|---|---|---|---|---|---|
WACC = 6% | WACC = 7% | WACC = 8% | g = 1% | g = 2% | g = 3% | |
PV (2017–2021) | 1785.10 | 1736.93 | 1690.77 | 1736.93 | 1736.93 | 1736.93 |
CV (Continuing Value) | 8417.43 | 6425.10 | 5110.92 | 5301.76 | 6425.10 | 8110.12 |
Entity value (EnV) | 10202.54 | 8162.03 | 6801.69 | 7038.69 | 8162.03 | 9847.04 |
EnV change | 25.00% | 0% | −16.67% | −13.76% | 0% | 20.64% |
Equity value (EqV) | 8428.74 | 6388.23 | 5027.89 | 5264.89 | 6388.23 | 8073.24 |
EqV change | 31.94% | 0% | −21.29% | −17.58% | 0% | 26.38% |
EnV/EBIT | EnV/Sales | |||
---|---|---|---|---|
Companies | Tesco | Sainsbury’s | Tesco | Sainsbury’s |
Multiples | 10.6 | 11.0 | 1.0 | 0.6 |
Marks & Spencer’s multiple (median) | 10.8 | - | 0.8 | - |
Marks & Spencer’s multiple (harmonic mean) | - | 10.53 | - | 0.77 |
EBIT | 746.50 | 746.50 | - | - |
Sales | - | - | 9934.30 | 9934.30 |
Entity Value | 8062.20 | 7860.65 | 7947.44 | 7649.41 |
Net financial liabilities | −1762.40 | −1762.40 | −1762.40 | −1762.40 |
Non-controlling interest | −11.40 | −11.40 | −11.40 | −11.40 |
Intrinsic value of equity | 6288.40 | 6086.85 | 6173.64 | 5875.61 |
Shares outstanding | 1605.51 | 1605.51 | 1605.51 | 1605.51 |
Intrinsic value per share | 3.92 | 3.79 | 3.85 | 3.66 |
Average entity value | 7879.92 | |||
Average equity value | 6106.13 | |||
Average share price | 3.80 |
Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. |
© 2020 by the author. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (http://creativecommons.org/licenses/by/4.0/).
Share and Cite
Ausloos, M. Valuation Models Applied to Value-Based Management—Application to the Case of UK Companies with Problems. Forecasting 2020, 2, 549-565. https://doi.org/10.3390/forecast2040029
Ausloos M. Valuation Models Applied to Value-Based Management—Application to the Case of UK Companies with Problems. Forecasting. 2020; 2(4):549-565. https://doi.org/10.3390/forecast2040029
Chicago/Turabian StyleAusloos, Marcel. 2020. "Valuation Models Applied to Value-Based Management—Application to the Case of UK Companies with Problems" Forecasting 2, no. 4: 549-565. https://doi.org/10.3390/forecast2040029