Valuation Models Applied to Value-Based Management. Application to the Case of UK Companies with Problems

TL;DR

This paper reviews valuation models and applies them to UK companies to assess how accounting numbers influence business value within a value-based management framework.

Contribution

It provides a comprehensive review of valuation methods and demonstrates their application to real UK company cases, highlighting advantages and limitations.

Findings

Valuation models can influence business value assessments.

Application to UK companies shows mixed impact of accounting numbers.

Multiple valuation approaches offer complementary insights.

Abstract

Many still rightly wonder whether accounting numbers affect business value. Basic questions are why? and how? I aim at promoting an objective choice on how optimizing the most suitable valuation methods under a value-based management framework through some performance measurement systems. First, I present a comprehensive review of valuation methods. Three valuations methods, (i) Free Cash Flow Valuation Model (FCFVM), (ii) Residual Earning Valuation Model (REVM) and (iii) Abnormal Earning Growth Model (AEGM), are presented. I point out to advantages and limitations. As applications, the proofs of the findings are illustrated on three study cases: Marks & Spencer's business pattern (size and growth prospect), which had a recently advertised valuation problem, and two comparable companies, Tesco and Sainsbury's, all three chosen for multiple-based valuation. For the purpose, two value drivers are chosen, EnV/EBIT (entity value/earnings before interests and taxes) and the corresponding EnV/Sales. Thus, the question whether accounting numbers through models based on mathematical economics truly affect business value has an answer: Maybe, yes.