Literature Review Jimmy Torrez (2006), et.

al wrote an article on Corporate Valuation in it , the different ways and methods of corporate valuations that include the discounted cash flow models, the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Models(APM), sales accelerator and cash flow models of investment, and economic base performance measures such as Economic Rent and Excess Market Value. It seems that more innovated methods to detect changes in companies financial positions are needed. Also, managers financial experiences are essential for companies to compete in a world with a constant change. Going in the direction of performance based measures to explain valuation. Performance based measures are intellectually attractive because of the use of Microeconomic and Corporate Finance theory to explain valuation. Graham and Harvey (2001), et. al wrote an article on cost of capital estimation and capital budgeting practice in Australia The CAPM is the most popular method used in estimating the cost of capital in Australia and the article was based on market research. The use of other asset pricing models is virtually non-existent. The majority of respondent companies vary their estimates of the CAPM beta and the market risk premium over time and frequently review their cost of capital estimates. A majority of companies measure their cost of capital as a weighted average cost of capital (WACC) and in doing so adjust the cost of debt for interest tax shields; however, a substantial minority make no interest tax shield adjustment. The project cash flow will be discounted at the weighted average cost of capital as computed by the company, and most companies will use the same discount rate across divisions. The discount rate will also be assumed constant for the life of the project. The WACC will be based on target weights for debt and equity. The CAPM will be used in estimating the cost of capital, with the T- bond used as a proxy for the risk free rate, the beta estimate will be obtained from public sources, and the market risk premium will be in the range of six to eight percent, with six percent more likely. Asset pricing models other than the CAPM will not be used in estimating the cost of capital. The cost of debt will be adjusted to allow for the effect of interest tax shields, but not by a significant minority of companies. The discount rate will be reviewed regularly, at least annually, and the inputs used in the calculation are varied over time. (2) Narcyz Roztocki Kim LaScola Needy (2000) et.al an article written on EVA for Small Manufacturing Companies This paper examines introducing Economic Value Added as a performance measure for small manufacturing companies. Advantage and disadvantages of

Literature Review using Economic Value Added as a primary measure of performance as compared to sales, revenues, earnings, operating profit, and profit after tax, and profit margin are investigated. The Economic Value Added calculation using data from a small companys income and balance sheet statements is illustrated. Necessary adjustments to these financial statements, that are typical for a small company, are demonstrated to prepare the data for the Economic Value Added determination .Finally, potential improvement opportunities resulting from using Economic Value Added as a performance measure in small manufacturing companies are discussed. The proposed method to calculate Economic Value Added for small manufacturers contains five main steps. Review the companys financial data, Identify the companys Capital (C), Determine the companys Capital Cost Rate (CCR) and Calculate the companys Net Operating Profit after Tax (NOPAT) The unique challenges facing small

manufacturing firms do not change the economic principle that to prosper and grow successfully, a company over time needs to generate average returns that are higher than its capital costs. If a company is not able to show long-term returns which are higher than its capital costs, its long-term existence, independent of the companys size or its business field, will be in jeopardy. Doreen Nassaka (2011) publish his thesis on the valuation theories Analysis of corporate valuation theories and a valuation of ISS A/S In this thesis the following corporate valuation theories have been discussed; the discounted cash flow model, the dividend discount model, the residual income model, real options valuation and valuation using multiples. Furthermore, the capital asset pricing model and the Fama and French three factor model have been evaluated as alternative methods for determination of the expected rate of return on a companys stock. An expansion option was found relevant for ISS, due to their growth through acquisitions strategy in the emerging markets. To verify the valuation results it was decided to apply a multiples analysis to ISS and to value the company based on a peer group of seven similar companies and two different multiples the EV/S and the EV/EBITDA

Literature Review

Harvad business School published an article in International Financial Management A Note on

Valuation Models: CCFs vs. APV vs WACC In this note we compare and contrast three
enterprise valuation models: the weighted average cost of capital (WACC), the adjusted present value (APV) and the capital cash flow (CCF). The three approaches value the entire firm but they differ around the way they treat tax shields. We will first review the rational and the underlying assumptions behind each approach. We will then use a numerical example to illustrate the mechanics behind the three approaches and show under which assumptions they yield the same results. In these it concludes that the three enterprise valuation techniques considered in this paper are different in the way they treat interest tax shields. However we have seen that the WACC approach and the CCF approach are identical and that under certain assumptions the APV approach also yields the same valuation. The WACC approach is easy to use and efficient when the assumption that capital structure will not change in the future can be made (D/V= constant). If debt level is forecasted to remain constant in absolute term (D=constant), the APV approach should be used discounting the interest tax shield at the cost of debt. Finally the CCF approach is the appropriate and most efficient approach when forecasted debt levels imply a change in capital structure. In this case it is also equivalent to the APV approach discounting the interest tax shield at the return on assets.