Company Valuation and Share Price

This book provides a guide to company share valuation in today’s volatile markets using asset values, earnings, dividend policy, cash flow analysis and behavioural theory. The case for efficient markets and performance measures (based on yields and P/E ratios) published by stock exchanges worldwide are critically examined to illustrate how investors (private, institutional and corporate) should determine their future trading decisions.

Preface

The 2007 global financial crisis ignited by reckless bankers and their flawed reward structures will be felt for years to come. Emerging from the wreckage, however, is renewed support for the over-arching objective of traditional finance theory, namely the long-run maximisation of shareholder wealth using the current market value of ordinary shares (common stock) as a benchmark.

If capitalism is to survive, it is now widely agreed that conflicting managerial aims and short-term incentives, which now seem to characterise every business sector, must become entirely subordinate to the preservation of ownership wealth, future income and capital gains.

And as we shall discover, the key to resolving this principle-agency problem begins with a theoretical critique of how shares are valued. This not only underpins the practical measures of current and historical stock market performance published in the financial press (price, yield, cover, and the P/E ratio) used by market participants throughout the world. It also provides private individuals and the companies or financial institutions acting on their behalf with a common framework to analyse all their future investment decisions, whether it is an individual share transaction, a market placement, or corporate takeover activity.

Content

• Part One: An Introduction
• An Overview

1. Introduction
2. Some Observations on Traditional Finance Theory
3. Some Observations on Stock Market Volatility
4. Summary and Conclusions
5. Selected References

• Part Two: Valuation Theories
• How to Value a Share

1. Introduction
2. The Capitalisation Concept
3. The Capitalisation of Dividends and Earnings
4. The Capitalisation of Current Maintainable Yield
5. The Capitalisation of Earnings
6. Summary and Conclusions
7. Selected References

• The Role of Dividend Policy

1. Introduction
2. The Gordon Growth Model
3. Gordon’s ‘Bird in the Hand’ Model
4. Summary and Conclusions
5. Selected References

• Dividend Irrelevancy

1. Introduction
2. The MM Dividend Irrelevancy Hypothesis
3. The MM Hypothesis and Shareholder Reaction
4. The MM Hypothesis: A Corporate Perspective
5. Summary and Conclusions
6. Selected References

• Part Three: A Guide to Stock Market Investment
• How to Read Stock Exchange Listings

1. Introduction
2. Stock Exchange Listings

• Summary and Conclusions
• Selected References
• Appendix: Stock Market Ratios