Topic: Adaptation of theoretical methods of company valuation for emerging markets.

Introduction

In the modern world, emerging markets play important role in the global market. As far as their inclusion in the international trade and demonstrating readiness to attract foreign investments, they become extremely attractive targets for international finance capital. In addition, the rapid growth of domestic consumption provokes inflow of foreign and local investment to the economy. Moreover, as share of foreign capital increases and transnational corporations (TNC) penetrates the emerging market, it filled with new management processes. These processes where accompanied by a redistribution of resources, as a result the production assets and entire companies quickly move from one owner to another. Which lead to the growing number of mergers and acquisitions, joint ventures, subsidiaries, wholly owned parent company and large-scale reorganization of business and sales of productive assets.

 Emerging market be defined as the market, actively involved in the process of globalization, opening their borders to the global trade and financial flows. As a result, it becomes a platform where investment projects, private and exchange-traded shares of companies considered as an attractive target for buyers and sellers because of their potential profit and high productivity. Emerging markets represent promising and volatile economy, which in terms of investors forms intermediate layer between more developed economies and those that have not actively joined yet in the process of globalization.

    The objective of this assessment is adaptation of theoretical methods of valuation of companies to practice for approximation to the fair market value in the context of emerging markets. The subject of this paper is understanding various ways of company valuation and choose optimal valuation methods which capture the extra level of inherit to emerging market.

General characteristics of valuation methods of the companies

The term "Fair Market Value» means the most probable price at which the evaluation object can be alienated on the open market in a competitive environment where the party’s transactions are reasonable, all the necessary information, and the value of the transaction prices did not reflect any extraordinary circumstances, meaning the following:

· one of the parties to the deal is not required to dispose of the object of valuation, and the other party is not obliged to accept the execution;

· parties to the transaction are knowledgeable about the subject of the deal and they are acting in their own interests;

· assessment of the object is presented in the open market through the public offer, which is typical for similar facilities assessment;

· the price of deal represents a reasonable fee for the object of estimates, and coercion to commit the transaction to the parties deal with someone else's hand was not happen;

· payment for the evaluation of the object expressed in monetary terms (Damodaran,2002).

The existing assessment standards identify three approaches to computing the value of the company.

1. The Income Approach – a set of methods which value the object, based on the definition of expected revenues from the valuation object.

2. Asset-Based Approach - a set of methods which value the object, based on the determining the costs required to restore or replacement object taking into account its ageing;

3. A Comparative Approach (or Market Approach) - a set of methods which value the object, based on the comparison with the similar objects, for which there is a reasonable objective information

Within each approach, there are different valuation methods, where each has differing ways of calculation of the value. For decision-making, which of the methods need to use to value the company, you must answer following questions:

1. The purpose of the valuation (the decision on the sale of shares, assessment the value of the current stock, an analysis of factors of value drivers of the companies and etc.);

2. Type of the value (the market, the fundamental, investment, etc.);

3. The approach to valuation (income, cost, comparative);

4. The method of valuation.

Within an income approach, there are three main methods of valuation:

1. Discounted cash flow method (DCF);

2. Method of economic profits (EVA - Economic Value Added);

3. Method of real options.

If we talk about the cost approach, the classification of methods varies significantly depending on the national / regional specificity. Therefore, the American experts in the field of valuation have developed two methods of cost approach: residual value method and the adjusted book value. In the Kazakhstani context, can often hear the name the following methods: a method of balance capital; Method market capital; method net assets; liquidation value method, substitution method, recovery method, etc.

In general, the use of the cost approach in the context of developing markets is difficult to because of the following circumstances. First, due to dynamic changes in these economies, variations in inflation and exchange rate can significantly distort the current price of the asset, even though it was purchased just a year ago. Besides, reverse situation can occur in context high asymmetry of information. Such, as the acquisition of an asset at a very low cost, which is not reflecting the market value and distorts the financial performance of the new owner of this asset. Second, when using this approach, there is often a controversy when the company's shares are quoted on the stock exchange and have certain cost, although the value of the company (which ' usually significantly different from the value of equity capital) is negative (as the company's liabilities exceed the assets). This may be because the outcome of the "cost" assessment is not the value of operating business, but value of the individual components taken separately from property of this complex business. Thus, in this paper, the cost approach will not be considered. The comparative approach includes the following methods: analogue company method, comparable transactions method and the method of comparing financial ratios in branches.

The methods based on discounted cash flows

By beforementioned claim of the importance of value, we need to understand how to value and different valuation approaches that can be used. There are basic three different ways of the valuation of the company. The first one is discounted cash flow method, which calculates the present value of future cash flows, which are discounted by weighted average cost of capital that captures the cash flow risks. The second, relative valuation model or multiple approach, which value the company by comparing with similar competitor company. The third, option-pricing model, which is more applicable for assets that holds the options nature.

According to the Damodaran (2007), understanding the fundamentals of discounted cash flow valuation method can serve as a basic knowledge for analyzing and understanding other approaches and methods. The main principle of conservation value according to the Koller, Goedhart and Wessels(2010) is the free cash flow. That impact plays crucial role in determining the value and anything that does not create or increase cash flow does not create value (Koller, Goedhart and Wessels, 2010). That is why the cash flow valuation method plays crucial role in investigation of the company value. Which leads to the fact that the money generated by the company need to be higher than the cost of capital and company creates value by investing cash today in order generate future cash flows.

The most recognized methods of valuation of companies in the United States and other developed countries is a discounted cash flow method. The basis of this method lies on the premises that the value of the company is equal to the present value of all cash flows that it will create in the future. Thus, cash flows by this method considered as the main factor that determines the value of the company's. Income approach should use when the current and future income of the enterprises can be defined.

Future cash flows are forecasted on the basis of historical data about the company in the past and expected changes in performance indicators (the prospects of development of the company, capital structure, industry and general economic factors, the value of money, depending on the time and risk associated with obtaining income, etc.) in future. Next, this forward-looking value of cash flows discounted to the present time, to obtain their present value. As a rule, to determine the value of the enterprise beyond the forecast period is used called Gordon model (with the exception of the situation with company liquidation / sale). It capitalizes the financial flows in the terminal period to the value performances using a capitalization rate. At this moment, many investors and even company owners prefer it to the difference between the discount rate and long-term stable cash flow growth rate. In the absence of growth rates, capitalization ratio will be equal to the discount rate.

The concept of discounting inextricably linked with the concept of temporary value of money. Its meaning lies in the fact that the monetary unit, available today, and the currency expected received by some time in the future is not equal. This disparity is due to the action of three main reasons: inflation, the risk of not receiving the expected amount and turnover capital. What is happening in terms of inflation depreciation of money is on the one hand, their natural desire to invest, and on the other hand, explain why we have money available and recoverable. Since practically no risk-free situation in the economy, there is always a non-zero probability that, for whatever reasons, recoverable amount obtained.

Real business practice has demonstrated that in assessing companies should discount the cash flows not net profits or dividends. However, many western managers therefore continue to operate with earnings per share (EPS), wittingly or unwittingly relying on the fact that the market can be fooled (Koller, Goedhart and Wessels, 2010).

The formula for calculating the value of the firm=.