ACCOUNTING-BASED METHODS TO DETERMINE SHAREHOLDER VALUE

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INTRODUCTION AND PROBLEM STATEMENT

It is widely accepted that the primary objective or goal of a firm is to maximise the value of its shareholders’ equity. While there may be legitimate differences of opinion as to whether this is the sole motivation of a firm’s management, it should without a doubt be a dominant variable in management’s decisions. This objective manifests itself especially when capital budgeting and investment decisions are undertaken. An increase in wealth increases the satisfaction of any financial market participant, or in this case, of any shareholder.

JUSTIFICATION OF THE STUDY

If the value created from the assets under the control of management is to be improved, the answer lies partly in determining the real drivers of value and focusing management attention on these. The objective and value of this study lies in the fact that a meaningful mathematical relationship between these variables and shareholder value is developed.

RESEARCH OBJECTIVES

The main objective of this study is to provide guidelines to help the decision-makers in a firm to maximise the value of shareholder equity. The results of the study therefore provide a tool which management can use in order to attain the goal of the firm, i.e. the wealth maximization of the shareholders.

FRAMEWORK OF THE STUDY

The concept of creating shareholder value is not new and has been well documented in literature over the past decades. The problem arises that the views in the traditional or accounting-based methods of determining shareholder value contrast with the so-called economic-based methods of determining shareholder value.

CHAPTER 1 INTRODUCTION
1 1 INTRODUCTION AND PROBLEM STATEMENT
1.2 JUSTIFICATION OF THE STUDY
1.3 RESEARCH OBJECTIVES
1.4 FRAMEWORK OF THE STUDY
1.5 RESEARCH DESIGN AND METHOD
1.6 STRUCTURE OF THE STUDY
CHAPTER 2 ACCOUNTING-BASED METHODS TO DETERMINE SHAREHOLDER VALUE
2 1 INTRODUCTION
2.2 THE BOOK VALUE APPROACH
2.2.1 Inflation
2.2.2 Obsolescence
2.2.3 Organizational capital
2.2.4 Adjusting book value to reflect replacement cost
2.2.5 Adjusting book value to reflect liquidation value
2.2.6 Concluding remarks
2.3 THE EQUITY AND DEBT APPROACH
2.3.1 Introduction
2.3.2 The Efficient market hypothesis
2.3.3 The EMH and appraisal practice
2.4 THE DIRECT COMPARISON APPROACH
2.4.1 Introduction
2.4.2 Selecting comparable companies
2.4.4 An application of direct comparison : the use of P/E ratios
2.4.5 Adjusting the financial data
2.4.6 Concluding remarks
2.5 DISCOUNTED CASH FLOW MODELS
2.5.1 Introduction
2.5.2 Discounted cash flow models
2.5.2.1 No growth in dividends
2 5 2 2 Constant growth in dividends
2.5.2.3 Nonconstant growth in dividends
2 5 2 4 Concluding remarks
2.6 THE RELEVANCE OF EARNINGS PER SHARE AND RETURN ON EQUITY
2 7 CONCLUSION MEASURING SHAREHOLDER VALUE THE ECONOMIC WAYSUNDRY APPROACHES
3.1 THE ACCOUNTING MODELS VERSUS THE ECONOMIC MODELS
3 1 1 Introduction
3.1.2 Inventory valuation – LIFO versus FIFO
3.1.3 The amortization of goodwill
3 1.4 Research and development
3.1.5 Deferred tax
3.1.6 Earnings per share and return on net assets (RONA)
3 1 7 Dividends 4 7
3 1 7 1 The theory on dividends
3 1 7 2 The evidence on dividends
3 1.8 Concluding remarks
3.2 INTRODUCTION TO THE ECONOMIC MODELS
3.3 USING ECONOMIC VALUE TO MEASURE SHAREHOLDER WEALTH – EARLIER MODELS
3.3.1 Introduction
3.3.2 Method of calculating shareholder value
3.3.3 Evaluation
3.4 SHAREHOLDER VALUE CREATION
3.4 1 Introduction
3.4.2 The shareholder value approach to a business
3.4.3 Calculation of shareholder value created
3.4.3 1 Basic principles and models
3 4 3 2 The threshold margin
3.4.3.3 Calculation example
3.4.4 Concluding remarks
3.5 THE ECONOMIC PROFIT MODEL
3 5.1 Introduction
3.5.2 Economic valuation principles
3.5.3 The economic profit model
3.5.4 Evaluation
3.6 CONCLUSION
CHAPTER 4 MEASURING SHAREHOLDER VALUE THE ECONOMIC WAY ECONOMIC VALUE ADDED
4.1 INTRODUCTION
4.2 CONCEPTS UNDERLYING EVA
4.2.1 The rate of return on total capital
4.2.2 The rate of return from a financing perspective
4.2.3 The rate of return from an operating perspective
4.2.4 Concluding remarks
4.3 EVA DEFINED
4.3.1 The theoretical model
4.3.2 Explanatory calculations
4.3.3 Standardized EVA
4.3.4 Concluding remarks
4.4 MARKET VALUE ADDED
4.4.1 Introduction
4.4.2 MVA and EVA
4.4 3 Standardized MV A
4.4.4 The 0-ratio
4.4.5 Concluding remarks
4.5 EVA CALCULATION OF SASOL (LIMITED)
4.6 CRITICISM OF EVA
4 7 BENEFITS OF THE EVA SYSTEM
4.8 CONCLUSION
4.8 1 Evolution
4.8.2 The rise and fall of the leveraged buyout
4.8.3 The best method
CHAPTER 5 VARIABLES WHICH DETERMINE SHAREHOLDER VALUE
5 1 INTRODUCTION
5.2 INTERNAL VARIABLES
5.2.1 Introduction
5.2.2 The variables
5.2.3 Concluding remarks
5.3 EXTERNAL VARIABLES
5.4 EVA VARIABLES
5.4 1 Introduction
5.4.2 Variables determining EVA
5.4.3 Concluding remarks
5.5 CONCLUSION
CHAPTER 6 RESEARCH METHODOLOGY
6 1 INTRODUCTION
6.2 DATA COLLECTION METHOD
6.3 STATISTICAL TECHNIQUES
6.4 HYPHOTHESES
6.5 CONCLUSION
CHAPTER 7 EMPIRICAL RESEARCH RESULTS
7 1 INTRODUCTION
7.2 CORRELATION ANALYSES
7 2 1 Background
7.2.2 MVA without inflation adjustments to data
7 2.3 MVA with inflation adjustments to data
7 2.4 Standardized MVA without inflation adjustments to data
7 2.5 Standardized MVA with inflation adjustments to data
7 2.6 Concluding remarks
7.3 STEPWISE REGRESSION ANALYSES
7 3.1 Background
7.3.2 EVA without inflation adjustments to data
7 3.3 EVA with inflation adjustments to data
7 3.4 Standardized EVA without inflation adjustments to data
7.3.5 Standardized EVA with inflation adjustments to data
7 3.6 Concluding remarks
7.4 CONCLUSION
CHAPTER 8 VALUE-BASED MANAGEMENT
8.1 INTRODUCTION
8.2 CONCLUSIONS FROM EMPIRICAL RESULTS
8.2.1 Hypotheses testing
8.2.2 Conclusions
8.3 RECOMMENDATIONS
8.3 1 Introduction
8.3.2 Recommendations based on the study
8.4 CONCLUSION TO THE STUDY
REFERENCES