<p>Background: The difference between the market value and the book value of the companies has dramatically increased. One explanation is that the inflow of capital on the market has increased. Another explanation is that companies have a larger share of intellectual capital. The question is how this has influenced the company-valuator's use of valuation-models? </p><p>Purpose: The purpose of this study is to find out what relevance the substance valuation model has, the DCF-model has, and also discover new valuation-models, among company-valuators. </p><p>Method: The study was conducted as a qualitative interview-investigation. We interviewed three company-valuators and one company-partner, in four different consulting-firms. </p><p>Results: The study does only pay attention to the company-valuator's point of view. The substancevaluation-model is not frequently used. The DCF-model is the dominant valuation-model. Other used ways to value companies are relative valuation and real option valuation. Relative valuation is frequently used, while real options valuation is rare.</p>

<p>Background:</p><p>The efficient market hypothesis states that it is not possible to consistently outperform the overall stock market by stock picking and market timing. This is because, in an efficient market, all stock prices are at their correct level, and there are no over- or undervalued stocks. Nevertheless, deviations from true price can occur according to the hypothesis, but when they do they are always random. Thus, the only way an investor can perform better than the overall stock market is by being lucky. However, the efficient market hypothesis is very controversial. It is often discussed within the area of modern financial theory and there are strong arguments both for and against it.</p><p>Purpose:</p><p>The purpose of this study was to investigate whether it is possible to outperform the overall stock market by investing in stocks that are undervalued according to the enterprise multiple (EV/EBITDA), and the price-earnings ratio.</p><p>Realization of the Study:</p><p>Portfolios were constructed based on information from five years, 2001 to 2005. Each year two portfolios were put together, one of them consisting of the six stocks with the lowest price-earnings ratio, and the other consisting of the six stocks with the lowest EV/EBITDA. Each portfolio was kept for one year and the unadjusted returns as well as the risk adjusted returns of the portfolios were compared to the returns on the two indexes OMXS30 and AFGX. The sample consisted of the 30 most traded stocks on the Nordic Stock Exchange in Stockholm 2006.</p><p>Conclusion:</p><p>The study shows that it is possible to outperform the overall stock market by investing in undervalued stocks according the price-earnings ratio and the EV/EBITDA. This indicates that the market is not efficient, even in its weak form.</p>

This thesis consists of two essays on applied microeconomics issues. The first essay presents a hedonic price econometric model of vacant commercial land. The second essay presents cost frontier analysis on the industry and firm's performance of the U.S. Motor Carrier industry. Our hedonic price econometric model includes two new developments in estimating land values in a multicentric urban area First, two composite indexes of market accessibility and highway accessibility are developed to account for the impacts of different characteristics of different regional nodes on land value at a particular site. Second, we use nonlinear least squares to estimate the decay parameters of the accessibility indexes within the model. We found that market accessibility is the dominant land value determinant. The estimated market accessibility decay parameter is different in value from the ones that are commonly assumed in hedonic models. The effect of access to highway interchanges is insignificant. Corner lots are of higher value. Finally, under Seattle's zoning policy, zoning classification of neighborhood commercial and community commercial land does not have significant effect on land value. The second essay uses the stochastic cost frontiers to analyze the performance of the U.S. motor carrier industry in the pre- and post-MCA periods. The average industry inefficiencies were between 14 and 27 percent during studied period. Our results indicate that the deregulation has no impact on industry efficiency. After a short adjustment period, the average industry inefficiency in the post-MCA years falls back to its pre-MCA level of around 14 to 16 percent. We analyzed the firm-specific inefficiencies by tobit regression. Our result shows that union firms are 1.5 and 4 percent less efficient than non-union firms in the pre- and post-MCA years, respectively. Firms located in the southern region are relatively efficient and the ones in the northern regions are relatively inefficient. Our result supports Stigler's Survivor Principle that survivor firms are relatively efficient. / Graduation date: 1998

This dissertation focuses on models for company (equity) valuation. Company valuation has many interacting components. Essay 1, On the Fundamentals of Company Valuation, discusses the different roles of these components and shows how their interaction can be captured in a valuation framework. Essay 2, Looking Beyond the Horizon, is devoted to problems connected with horizon (terminal) value estimations. Essay 3, Company Valuation with a Periodically Adjusted Cost of Capital, shows how the cost of equity and the weighted average cost of capital can be simultaneously adjusted to reflect varying capital structures. The main contribution of Essay 4, On the General Equivalence of Company Valuation Models, is the specification of a company valuation framework that ensures that the free cash flow, dividend, abnormal earnings, economic value added and adjusted present value models are all equivalent. One characteristic of the framework is that it explicitly links the specification of discount rates to the anticipated future development of the company. Moreover, the results highlight the reasons for why the different models can produce different value estimates in practical applications. / Diss. Stockholm : Handelshögsk.

This thesis deals with accounting-based equity valuation models. The first study contrasts the performance of three commonly used valuation models, using a large sample of analysts’ forecasts of the elements valued by these models (free cash flow, dividends and abnormal earnings/residual income). The second study investigates empirically whether discount rate estimation is a first-order effect in equity valuation. The third and fourth studies focus on developing routines for implementation of multi-period valuation models, including the critical issue of terminal value estimation. The thesis shows how model choice is a critical issue, given standard implementation of the valuation models (Study 1); how standard models for discount rate estimation are of little or no use practically (Study 2); how one can implement a multi-period valuation framework such that everything is internally consistent, and how this leads to several desirable features, such as model equivalency (Studies 3 and 4). The thesis is valuable to readers interested in accounting-based equity valuation who wish to understand, to distinguish among, and to appropriately implement valuation techniques. / Diss. Stockholm : Handelshögsk.

Background: The difference between the market value and the book value of the companies has dramatically increased. One explanation is that the inflow of capital on the market has increased. Another explanation is that companies have a larger share of intellectual capital. The question is how this has influenced the company-valuator's use of valuation-models? Purpose: The purpose of this study is to find out what relevance the substance valuation model has, the DCF-model has, and also discover new valuation-models, among company-valuators. Method: The study was conducted as a qualitative interview-investigation. We interviewed three company-valuators and one company-partner, in four different consulting-firms. Results: The study does only pay attention to the company-valuator's point of view. The substancevaluation-model is not frequently used. The DCF-model is the dominant valuation-model. Other used ways to value companies are relative valuation and real option valuation. Relative valuation is frequently used, while real options valuation is rare.

The importance of the Hotelling Valuation Principle (HVP) in economic study lies in its ability to examine and drive the decision of how much of a non-renewable natural resource to produce now versus how much to conserve for future generations - the root of natural resource policy, conservation, regulation, and taxation. Hotelling (1931) assumes that net price (selling price less cost per unit of production) will grow at the discount rate, which in a deterministic setting implies that reserve value is equal to current net price. However, the application of this ideal theory to the oil and gas industry may be difficult.<p>The oil and gas industry is influenced by government regulation, potential monopolistic forces, and well production characteristics - each of which violate the assumptions of Hotellings (1931) basic theory. How these violations affect the HVP is an open question. Most have the effect of limiting current supply, and thus driving prices higher than they would be in a perfectly competitive market. On the other hand, at least in the Canadian context, government regulation tends to increase costs, whereas technological advancement tends to reduce costs. The net result of these effects on future net prices and their discounted value, and therefore the effect on the HVP, is not clear a priori.<p>Another problem relating Hotellings (1931) basic theory to the oil and gas industry lies in the stochastic nature of a firms future net prices and extraction quantities, the product of which gives the firms future cash flows. Correlation between quantity and net price may result from expanding production when prices are high and reducing production when prices are low. Of course such correlation will affect the expected cash flows, and therefore firm value. Or, in other words, the ability to adjust production quantity provides real options for oil and gas firms which may add value.<p>Previous tests of the HVP on oil and gas reserves have utilized data that may contain confounding information that results in unreliable conclusions. The two major deficiencies include using (1) acquisition values, which utilize basin-average rather than firm specific net price data, and (2) conventional oil and gas company market valuations, which incorporate additional management exploration expertise value beyond the reserves value.<p>This study contributes to the literature by providing a more definitive test of the HVP through the use of Canadian oil and gas royalty trusts. These pure play publicly traded entities are focused on production rather than exploration and essentially remediate the deficiencies found in previous literature. Additionally, I include an ancillary variable to proxy real option value and control variables for firm characteristics such as oil weighting (proportion of oil relative to natural gas reserves), reserve quality (proportion of proven producing reserves relative to proven non-producing reserves), and firm size (based on enterprise value). This gives the reader a better understanding of value drivers in the Canadian oil and gas royalty trust sector and how they relate to the HVP.<p>My study generally fails to find support for the HVP. In particular, the results indicate that the HVP overestimates reserve value. This suggests that market participants expect net prices to grow at a rate significantly lower than the fair cost of capital, and production constraints limiting the extraction rate are binding. I do find that the real option proxy explains a significant amount of the difference between the value observed and the value predicted by the HVP. This differs markedly from what previous literature on the HVP applied to market data for the oil and gas industry documents. Each of these papers fails to reject the HVP. The fact that I generally find the value to be lower than that predicted by the HVP is not surprising given the previous literature using market data to test it. Since these studies use conventional oil and gas companies, which likely overvalue reserves because of an exploration premium, finding support for the HVP likely means that royalty trusts will likely correspond to a value lower than that predicted. The difference could account for the exploration premium. On the other hand, when I use the log-linear specification over the second, more volatile sub-sample, I also fail to reject Hotellings theoretical value, which is consistent with previous literature using market data.

The importance of the Hotelling Valuation Principle (HVP) in economic study lies in its ability to examine and drive the decision of how much of a non-renewable natural resource to produce now versus how much to conserve for future generations - the root of natural resource policy, conservation, regulation, and taxation. Hotelling (1931) assumes that net price (selling price less cost per unit of production) will grow at the discount rate, which in a deterministic setting implies that reserve value is equal to current net price. However, the application of this ideal theory to the oil and gas industry may be difficult.<p>The oil and gas industry is influenced by government regulation, potential monopolistic forces, and well production characteristics - each of which violate the assumptions of Hotellings (1931) basic theory. How these violations affect the HVP is an open question. Most have the effect of limiting current supply, and thus driving prices higher than they would be in a perfectly competitive market. On the other hand, at least in the Canadian context, government regulation tends to increase costs, whereas technological advancement tends to reduce costs. The net result of these effects on future net prices and their discounted value, and therefore the effect on the HVP, is not clear a priori.<p>Another problem relating Hotellings (1931) basic theory to the oil and gas industry lies in the stochastic nature of a firms future net prices and extraction quantities, the product of which gives the firms future cash flows. Correlation between quantity and net price may result from expanding production when prices are high and reducing production when prices are low. Of course such correlation will affect the expected cash flows, and therefore firm value. Or, in other words, the ability to adjust production quantity provides real options for oil and gas firms which may add value.<p>Previous tests of the HVP on oil and gas reserves have utilized data that may contain confounding information that results in unreliable conclusions. The two major deficiencies include using (1) acquisition values, which utilize basin-average rather than firm specific net price data, and (2) conventional oil and gas company market valuations, which incorporate additional management exploration expertise value beyond the reserves value.<p>This study contributes to the literature by providing a more definitive test of the HVP through the use of Canadian oil and gas royalty trusts. These pure play publicly traded entities are focused on production rather than exploration and essentially remediate the deficiencies found in previous literature. Additionally, I include an ancillary variable to proxy real option value and control variables for firm characteristics such as oil weighting (proportion of oil relative to natural gas reserves), reserve quality (proportion of proven producing reserves relative to proven non-producing reserves), and firm size (based on enterprise value). This gives the reader a better understanding of value drivers in the Canadian oil and gas royalty trust sector and how they relate to the HVP.<p>My study generally fails to find support for the HVP. In particular, the results indicate that the HVP overestimates reserve value. This suggests that market participants expect net prices to grow at a rate significantly lower than the fair cost of capital, and production constraints limiting the extraction rate are binding. I do find that the real option proxy explains a significant amount of the difference between the value observed and the value predicted by the HVP. This differs markedly from what previous literature on the HVP applied to market data for the oil and gas industry documents. Each of these papers fails to reject the HVP. The fact that I generally find the value to be lower than that predicted by the HVP is not surprising given the previous literature using market data to test it. Since these studies use conventional oil and gas companies, which likely overvalue reserves because of an exploration premium, finding support for the HVP likely means that royalty trusts will likely correspond to a value lower than that predicted. The difference could account for the exploration premium. On the other hand, when I use the log-linear specification over the second, more volatile sub-sample, I also fail to reject Hotellings theoretical value, which is consistent with previous literature using market data.

Background: The efficient market hypothesis states that it is not possible to consistently outperform the overall stock market by stock picking and market timing. This is because, in an efficient market, all stock prices are at their correct level, and there are no over- or undervalued stocks. Nevertheless, deviations from true price can occur according to the hypothesis, but when they do they are always random. Thus, the only way an investor can perform better than the overall stock market is by being lucky. However, the efficient market hypothesis is very controversial. It is often discussed within the area of modern financial theory and there are strong arguments both for and against it. Purpose: The purpose of this study was to investigate whether it is possible to outperform the overall stock market by investing in stocks that are undervalued according to the enterprise multiple (EV/EBITDA), and the price-earnings ratio. Realization of the Study: Portfolios were constructed based on information from five years, 2001 to 2005. Each year two portfolios were put together, one of them consisting of the six stocks with the lowest price-earnings ratio, and the other consisting of the six stocks with the lowest EV/EBITDA. Each portfolio was kept for one year and the unadjusted returns as well as the risk adjusted returns of the portfolios were compared to the returns on the two indexes OMXS30 and AFGX. The sample consisted of the 30 most traded stocks on the Nordic Stock Exchange in Stockholm 2006. Conclusion: The study shows that it is possible to outperform the overall stock market by investing in undervalued stocks according the price-earnings ratio and the EV/EBITDA. This indicates that the market is not efficient, even in its weak form.

In this thesis, one methodology for natural gas storage valuation is developed and two methodologies are improved. Then all of the three methodologies are applied to a storage contract. The first methodology is called "intrinsic rolling with spot and forward", which takes both the spot and forward prices into account in the valuation. This method is based on the trading strategy by which a trader locks the spot and forward positions by solving an optimization problem based on the market information on the first day. In the following days, the trader can obtain added value by adjusting the positions based on new market information. The storage value is the sum of the first day's value and the added values in the following days. The problem can be expressed by a Bellman equation and solved recursively. A crucial issue in the implementation is how to compute the expected value in the next period conditioned on the information in current period. One way to compute the expected value is Monte Carlo simulation with ordinary least square regression. However, if all of the state variables, spot, and forward prices are incorporated in the regression there are too many terms, and the regression becomes uncontrollable. To solve this issue, three risk factors are chosen by performing principle component analysis. Dimension of the regression is greatly reduced by only incorporating the three risk factors. Both the second methodology and the third methodology only consider the spot price in the valuation. The second methodology uses Monte Carlo simulation with ordinary least square regression, which is based on the work of Boogert and Jong (2006). The third methodology uses stochastic dual dynamic programming, which is based on the work of Bringedal (2003). However, both methodologies are improved to incorporate bid and ask prices. Price models are crucial for the valuation. Forward prices of each month are assumed to follow geometric Brownian motions. Future spot price is also assumed to follow a geometric Brownian motion but for a specific month its expectation is set to the corresponding forward price on the valuation date. Since the simulation of spot and forward prices is separated from the storage optimization, alternative spot and forward models can be used when necessary. The results show that the value of the storage contract estimated by the first methodology is close to the market value and the value estimated by the Financial Engineering Associates (FEA) provided function. A much higher value is obtained when only spot price is considered, since the high volatility of the spot curve makes frequent position change profitable. However in the reality traders adjust their positions less frequently.