Embedded value

Abstract: Purpose – Building on the property rights framework, the purpose of this paper is to frame the cooperative business model in terms of strategic options held either by the board or by members. Options that are analyzed include growth and restructuring, dividend allocation, member entry and exit, and member embedded value options.Design/methodology/approach – Empirical estimates of the options' financial value, as well as sensitivity analyses, are presented for a stylized example using historical data and Monte Carlo option‐pricing methods. Attention is paid to the effect of member age, discount rate and business operation size.Findings – Results suggest that the board's growth options can be substantial, while member options generally have small but nontrivial value. Implications for the stability of membership are drawn.Practical implications – The financial or economic value of strategic options in agricultural cooperatives can be significant, and decision makers may benefit from accounting for their pre...

Abstract: This study explores the strategy of value investing, specifically for the insurance industry in Thailand. It employs multiple measures of “value,” suitable for insurance companies, such as the price-to-earning (PE), price-to-book (PB), and cyclically adjusted price-to-earnings (CAPE). Value premium exists in the Thai insurance industry, and most of the value portfolios constructed from these measures significantly outperform the market, even when adjusting for price volatility and portfolio’s β$\beta $. The cumulative returns are also higher for the value stocks, when compared to the growth stocks, and the Thai stock market. Constructing a value portfolio, using the PE ratio, results in the highest returns and is far better than PB and CAPE. The value anomaly cannot be fully explained by either the capital asset pricing model or the Fama-French three-factor models.

Abstract: Current reporting practices for unrealized asset impairments are inconsistent. To address this problem, in December 1990 the Financial Accounting Standards Board issued a discussion memorandum, followed in November 1993 by an exposure draft, Accounting for the Impairment of Long-Lived Assets. Given the considerable costs of implementing such a standard, some have asked if the disclosures the FASB might require are worthwhile. If the net cost of these disclosures is significant, companies would be penalized and performance might suffer. This article explores the costs and benefits of providing asset impairment information to see if such disclosures might impair a company's performance. THE CONCEPT Of IMPAIRMENT If an asset's value declines, the asset has suffered economic impairment. If its value in place (the net present value of remaining cash flows) falls below its abandonment value (the amount that could be obtained through sale or other disposal), the asset should be abandoned and an impairment realized. If an asset is disposed of for less than book value, a realized loss will be recognized. If the asset's value in place declines but remains greater than its abandonment value, the asset should be retained. This type of impairment is unrealized because there is no disposal. As long as an asset's value in place remains above book value, no loss is recognized. However, if the asset's value under such circumstances declines so it is worth less than book value, a loss may be recognized, even though there is no disposal. DEFINING AN ASSET'S VALUE Several valuation bases were described in the FASB DM, including the present value of future cash flows, the sum of undiscounted future cash flows, current market value and net realizable value. Future cash flow measures are theoretically superior but subject to substantial uncertainty and potential manipulation. However, current market value and net realizable value are sometimes difficult to obtain and may be inappropriate benchmarks for some company-specific assets. Another difficulty inherent in evaluating impairment is specifying the appropriate level for the analysis. In many cases, it is impossible to estimate cash flows for specific assets; evaluation must then be based on the narrowest group of assets for which sound cash flow estimates are available. Unfortunately, such aggregation allows companies to group poorly performing assets with high performers to avoid the impairment charge. The potential requirements of the standard raise the possibility that significant--and costly--changes in a company's accounting system will be necessary. Many companies' information systems cannot break out actual cash flows, even for groups of assets. In addition, basing valuation on future cash flow measures means a company must generate and validate formal, consistent forecasting models. Further, if companies are required to consider writedowns annually for a large number of assets (or asset groups), the yearend burden on both internal staff and external auditors could increase substantially. Increasing impairment disclosures at first glance may seem far too costly and, hence, a poor allocation of company resources. POSTAUDITING Reporting on writedowns, however, is not an independent process; impairment cannot be considered in isolation. More specifically, a substantial amount of the related analysis already is performed routinely by many companies' financial management systems. This process often is called postauditing (also tracking and monitoring) of capital expenditures. Postauditing is the evaluation of independent assets or groups of assets on a regular basis to decide whether to keep or abandon them. In practice, there are varying levels of sophistication in companies with such systems. Studies show that while many companies lack sophisticated postauditing systems, more than 75% of large industrial companies have institutionalized some kind of a postaudit process. …

Abstract: SUMMARY One of the oft-quoted theorems of finance is that decision making based on net present value will lead to the maximisation of shareholder value. The study analyses the reality background of this theorem within the disciplinary borders of business economics. Since finance is based directly on the bases of microeconomics, the study touches upon the presentation of the different disciplinary frames of business economics and microeconomics. The paper demonstrates that the economic content of shareholder value of a firm calculated from its business value and the project’s net present value fundamentally differ from one another. With their summing up, in general cases, no index emerges with meaningful economic content. Moreover, only in exceptional cases does the ranking based on the net present value lead to the maximization of the shareholder value.