POTENTIAL DIVIDENDS AND ACTUAL CASH FLOW. A REGIONAL LATIN AMERICAN ANALYSIS

We examine the value market assigns to components of the cash flow to equity including potential dividends. We study non financial publicly traded firms from five Latin American countries. The model includes four variables: market value of equity, dividends paid, change in equity investment and change in liquid assets (potential dividends) and are regressed with actual equity value as dependent variable. Tests applied give robust results. The main conclusions: Market assigns less than one dollar to a future dollar for any of the variables studied. Potential dividends destroy value. A dollar invested in liquid assets has a negative Net Present Value and it is not zero NPV investments. We confirm the agency costs of keeping undistributed cash flows.Cash flow to equity, potential dividends, equity value.

Three residual income valuation methods and discounted cash flow valuation

In this paper we show that the three residual Income models for equity valuation always yield the same value as the Discounted Cash Flow Valuation models. We use three residual income measures: Economic Profit, Economic Value Added (EVA) and Cash Value Added. We also show that economic profit and EVA are different, although Copeland, Koller and Murrin (2000, page 55) say that economic profit is a synonym of EVA. Specifically, we first show that the present value of the Economic Profit discounted at the required return to equity plus the equity book value equals the value of equity. The value of equity is the present value of the Equity cash flow discounted at the required return to equity. Then, we show that the present value of the EVA discounted at the WACC plus the enterprise book value (equity plus debt) is the enterprise market value. The enterprise market value is the present value of the Free cash flow discounted at the WACC. Then, we show that the present value of the Cash Value Added discounted at the WACC plus the enterprise book value (equity plus debt) is the enterprise market value. The enterprise market value is the present value of the Free cash flow discounted at the WACC.cash value added; EVA; economic profit; residual income valuation; discounted cash flow valuation; valuation;

Book Values and Market Values of Equity and Debt

This paper propses a contingent claims model to value a firm's debt and equity as functions of observable book values appearing in published financial statements. Equity fair value critically depends on expected earnings, equity book value and earnings volatility, because of the options to default or to voluntarily liquidate the firms. Debt value increases in earnings volability in the proximity of default. Default is triggered by the erosion of equity due to negative earnings. Debt and equity values are materially affected by the strength of the mean reversion of profitability. Voluntary liquidation before default may be optimal and it entails that a sudden sharp decline in profitability can be less detrimental to creditors than a slower but persistent one.Book values, mean reverting return on assets, equity valuation, debt valuation, default option, structural models, voluntary liquidation.

A definition of shareholder value creation

In this paper, we will define and analyze shareholder value creation. To help us understand this concept better, we will use the example of a listed company, General Electric, between 1991 and 1999. To obtain the created shareholder value, we must first define the increase of equity market value, the shareholder value added, the shareholder return, and the required return to equity. A company creates value for its shareholders when the shareholder return exceeds the required return to equity. In other words, a company creates value in one year when it outperforms expectations. The created shareholder value is quantified as follows: Created shareholder value = Equity market value x (Shareholder return - Ke). The created shareholder value can also be calculated as follows: Created shareholder value = Shareholder value added - (Equity market value x Ke). We also calculate the created shareholder value of 142 American companies during the three-year period 1997-1999 and during the eight-year period 1992-1999.Financial management; Stockholders; Value creation

Valuation of Put Options on Leveraged Equity

This paper presents new closed form solutions for the valuation of European put options and of "down-an-in" barrier options written on leveraged equity. Unlike in past literature (Toft and Prucyk, 1997) and in keeping with empirical evidence, the model allows equity to retain value even after the firm's default and reorganisation. This stylised fact can significantly alter the valuation of equity put and "down-and-in" options as bankruptcy costs, bargaining power of equity holders, debt maturity and other firm parameters change. The value of "in-the-money" puts often decreases in the firm's assets volatility. The model can produce a variety of realistic implied equity volatility "skews".Equity put options; Leveraged equity; Default and reorganisation; Barrier options; "down-and-in" options

Market indicators, bank fragility, and indirect market discipline

As a theoretical matter, signals from the bond and equity markets satisfy minimal requirements for a useful indicator. Using option pricing formulas, it is shown that a distance to default measure, based on equity market value and equity volatility, increases with the market value of bank assets and decreases with bank leverage and equity volatility.Bank supervision ; Banks and banking - Accounting ; Bank stocks ; Bank profits

Measuring the Value of Ingredient Brand Equity at Multiple Stages in the Supply Chain: a Component Supplier's Perspective

The goal of this article is to conceptualize the Ingredient Branding strategy and propose tools for measuring value derived from brand equity at the component supplier’s perspective. We demonstrate how brand equity occurs and how it can be measured at three marketing stages: B2B, B2C and B2B2C.This paper characterizes different stages in the Ingredient Branding strategy. Furthermore, the paper provides a different measurement method for each stage, and highlights in the end, an overall view of all participants in the Ingredient Branding value chain. We show fi rst that measuring brand equity at the end user stage alone is not as useful as measuring brand equity at multiple stages of the value chain. The complexity associated with an Ingredient Branding strategy makes it a multi-stage branding and marketing effort. Therefore, various data and measurement tools are needed to meet the needs of marketing managers and scholars focused on brand strategies for differing stages of the value chain. We demons rate that existing brand measurement methods can be modified to analyze multi-stage, interrelated exchanges. The paper extends existing brand measurements to capture the value of an Ingredient Brand both qualitatively and quantitatively, at multiple stages of the value chain.Ingredient Branding, brand measurement, value chain.

A Survey of Housing Equity Withdrawal and Injection in Australia

Over the past decade or so, aggregate data suggest a trend increase in housing equity withdrawal in Australia, potentially stimulating household spending. However, there has been little disaggregated information on how equity is being withdrawn and injected, the characteristics of households altering housing equity, and how funds from withdrawn equity are being used. This paper uses a survey of 4 500 households commissioned by the Reserve Bank of Australia (RBA) to address these questions. The results suggest that, during 2004, the most common method of withdrawing equity was for a household to increase the level of debt secured against a property they already owned. In contrast, most of the value of equity withdrawn was associated with property transactions, with the typical property transaction resulting in a net equity withdrawal. Turnover in the property market is therefore likely to be an important driver of cycles in aggregate housing equity withdrawal. Bivariate and logit analysis suggests a significant life-cycle influence, with the bulk of equity withdrawal being undertaken by older households, while younger households typically inject, primarily through mortgage repayments or deposits for property purchase. Finally, the results suggest that the bulk of the value of withdrawn equity was used to increase non-housing assets, although a significant proportion of households used the funds for consumption expenditure.housing equity withdrawal; housing turnover; household debt

Stockholder and Bondholder Reactions To Revelations of Large CEO Inside Debt Holdings: An Empirical Analysis (CRI 2009-005)

We conduct an event study of stockholders’ and bondholders’ reactions to companies’ initial reports of their CEOs’ inside debt positions, as required by SEC disclosure regulations that became effective early in 2007. Results show that bond prices rise, equity prices fall, and the volatility of both securities drops at the time of disclosures by firms whose CEOs have sizeable pensions or deferred compensation. The results indicate a transfer of value from equity toward debt, as well as an overall destruction of enterprise value, when a CEO’s inside debt holdings are large