IFFM Blog

Corporate valuation  in most instances is used by investors looking to invest into companies, stakeholders (managers) looking at increasing shareholder value and companies looking at merger & acquisition (M&A) of another company, or the other way around where the smaller company uses valuation to determine the price it should sell at. The valuation of a company relies on many factors, from the current economy environments to the comapany's balance sheet. (Ward, 2017) Typically, business owners should not valuate their company by themselves and they would lack the impartiality to valuate the company objectively. Instead, professional valuators should be soughted to provide a fair and accurate valuation of the company. There are three valuation approaches: Stock Market Valuation Stock market valuation is very simply the number of ordinary shares vs the current market price (also known as market capitalisation) This provides a useful gauge or guide to the share...

Dividend Policies determines when, how much cash and if a company should provide a pay out to the comapany's owners in form of dividend rather than repurchases of shares, reinvestments or reduction of debt. (Kennon, 2017) Such decisions are made by the company's board of directors, and it is up to them to formulate an effective dividend policy to provide maximum returns to its shareholders and yet, ensuring the continuity of the company's sustainability. The constraints in the construction of dividend policies come in four categories: Legal In reference to The Companies Act, it is specified that dividends should only be paid out of realised profits, inclusive of realised profits made in previous years Regulatory & Governmental Regulatory requirements may affect a companies ability to provide a payout to the shareholders. Windfall or supplementary taxes can be sometimes be targeted at regulated industries. Hence, further impeding their ability to provide p...

In the previous post, it was discussed that a company that is hoping to gain investors should first evaluate their cost of capital in order to ensure that cash generated is sufficient to cover the rate of returns expected by investors, as well as for company growth. This is calculated primarily through the use of Weighted Average Cost of Capital (WACC) formula should a firm have a mixed Capital Structure . According to Murray, capital structure is defined as the combination of equity and debt that a firm has on its balance sheets (Murray, 2017). Companies strive to optimise their WACC such that it is most beneficial for their operations. While individuals ranging from academics to corporate management have hypothesised the ideal capital structure models, the theories on what works best is not reflected in successful companies around the world  (Baker, Singleton and Veit, 2010)   One factor that results in this is that how persons managing a company decide to structure the fir...

For any firm, securing investors to facilitate global, or even regional, expansion of a business is important. However, the valuation of a company changes when entering a different economy as it is impacted by country-specific risks   (Grabowski, 2015)  Different country risks will affect a company's International Cost of Capital   (Susmel, n.d.) , which is the minimum rate of return that is expected in order to draw finance providers into investing in a foreign market. To estimate this, the cost of capital must first be understood. Cost of Capital , or discount rate, simply   refers to the rates of return that persons who are keen on investing should expect from a company (Gallo, 2015). From a firm's perspective, it can also be described as the cost of money a company will need to use so as to achieve financing, or induce individuals to buy and retain shares. The cost of capital may be employed by senior staff in order to assess individual investments (Gal...

Capital Market  is a system in which investors transfer those funds to individuals, companies, and governments that have a need of fun ds. ( saylordotorg.github.io, n.d.)  It  carries ou t the desirable economic function of directing and driving funds in form of capital to productive uses. Capital markets can be accessed in either debt or equity. Market efficiency suggests that at any given time, prices fully reflect all available information on a particular market .  For it to become efficient, investors must have the  perception  that the market is inefficient and possible to beat. ( Heakal , 2013) In 1970, Eugene Fama hypothesised that there are 3 different forms of Market Efficiency (EMH): 1. Weak Form Efficiency Weak form is when available public information is used, mainly historical data, in attempts to determine the current share prices in the market. (open.edu, n.d.) There is fundamentally no mechanical trading rules based on historical move...

Modern Portfolio Theory (MPT) is an investing model where the investor tries to keep the market risk to the minimum in order to enjoy maximum returns for a given portfolio of investments. (Thune, 2017) It utilises mathematical tools assist investors to diversify, resulting in reduced risk. Markowitz (1952) theorised two concepts of MPT, whic h are (D'Alessio, n.d.): Any investor's goal is to maxmise return for any level of risk Risk can be reduced by creating a diversified portfolio of unrelated assets Markowitz (1952) also identified two further types of risks which could be affected by a strategy of investment diversification: Systematic Risk  which affects all types of investments and impossible to diversify away Unsystematic (or Specific Risk ) which can be diversified away Capital Asset Pricing Model (CAPM)  is a stock valuation model that displays the correlation between expected returns and expected risks, where the return on an asset ...