There are many evaluation methods followed and the most relevant of them are the evaluation based on the Economic Value Added (EVA) which is Net Operating Profit Minus Adjusted Taxes reduced by (Invested Capital*Cost of Capital). This method takes into account the opportunity costs of capital. EVA too suffers from the drawbacks as from accounting.
Another theory, Shareholder value theory suggests that through the interests of the stake holders, the shareholder value can be reaped. This is for ensuring return satisfaction to all the interested parties in the long run. The stakeholder theory aims at a collective interest of all stakeholders or sees the realization of their goals as the ultimate objective. Double value creation system is also followed where a company increases its customer value through its operations as well as creates its shareholder value through the sale of its produce. Thus, it could be noted that the company value could be increased only if both the shareholders and stakeholders interest are considered simultaneously while doing the performance evaluation.
Present Value of Abnormal Earnings (PVAE), which will b...
Present Value of Abnormal Earnings (PVAE), which will be available with the Present Value of Expected Dividends (PVED) and Abnormal Earnings based on Capital Employed, states the value in efficient markets as:
MVE = CSE + PVAE
This results in the distortions or disparity between the MVE and the CSE (market value and book value) and the conditions for this are (i) Economic rents (unbiased accounting) (ii) Accounting distortions (Perfectly competitive equilibrium)
Thus, the information bearing upon the performance evaluation of a company helps in explaining the reason for the difference between the market value and the book value. Ideally, it could be inferred that the most important things to be considered in value creation processes are:
- The Performance evaluation should be able to provide information for proper decision-making and ensure feedback.
- The kind and nature of the information collected and the source from which the information is collected for valuations are therefore significant. The source, its nature, the methods used for valuation, the coherency, the adaptability with the strategic objectives etc serve as crucial indicators.
Discuss the relevance of financial information in the context of the valuation of internet stocks.
The main characteristics of internet stocks are that they are younger, fast-growing, riskier and larger when compared to the non-internet stocks. Nevertheless, the capital requirements of internet companies are very high. They need capital to establish the technological architecture, create a pool of customer base, and also have to spend a major portion on the sides of Research and Development, Marketing etc. On contrary, the