Background and Problem Discussion: Nigeria as an emerging market offers a wealth of opportunity to investors. However, very little is known about how real managers and analysts appraise the economic value of acquisitions and investment projects in Nigeria. Given the high risks of the Nigerian market and increased interests of investors in emerging markets, it is of great importance to research how practitioners carry out valuation in Nigeria.
Purpose: This research attempts to investigate the valuation methods employed by finance managers, investors and financial advisors in Nigeria in comparison with best practices recommended in literature.
Method: Quantitative empirical method using a questionnaire-based survey of financial practitioners with a total of 30 respondents (out of 200 contacted) from corporations, financial advisor/analyst firms, banks & insurance firms and some individual investors.
Theory: The theory section in the literature review looks at different methods and techniques of valuation and the adjustments used to apply them to emerging markets. The common methods of valuation and a theoretical understanding of how they apply to emerging markets are summarised.
Analysis: Quantitative analysis of the survey data to show the percentage of practitioners using a particular method of valuation and the areas of highest uncertainty has been carried out.
Conclusion: Results show that Discounted Cashflow (DCF) is the most popular valuation method with practitioners in Nigeria. 100% of practitioners in corporations, banks and insurance firms and 80% of those in financial advisor firms use DCF-based valuation model. Other valuation models are less in use and the general practice in Nigeria compares well with those in Argentina and the US with little variations. This study also reveals that country specific issues such as computing the value of the country and market risk premiums are the most controversial areas in company valuation with practitioners in the Nigerian emerging market.
Contents
CHAPTER ONE
1.0 INTRODUCTION
1.1 RESEARCH FOCUS AND AIMS
1.2 RESEARCH MOTIVATION, PURPOSE AND JUSTIFICATION
1.3 BACKGROUND TO THE RESEARCH
1.4 OUTLINE OF THE REPORT
CHAPTER TWO
2.0 LITERATURE REVIEW
2.1 EMERGING FINANCIAL MARKETS
2.1.1 CHARACTERISTIC DIFFERENCES BETWEEN EMERGING MARKETS AND DEVELOPED MARKETS
2.2 THE NIGERIAN CAPITAL MARKET
2.2.1 HISTORY
2.2.2 CURRENT POSITION OF THE NIGERIAN CAPITAL MARKET: REFORMS
2.3 VALUATION
2.3.1 PURPOSE OF VALUATION
2.3.2 COMPANY VALUE
2.4 APPROACHES TO VALUATION
2.4.1 MODELS BASED IN DISCOUNTED CASHFLOW (DCF)
2.4.2 MODELS BASED IN RELATIVE VALUATION (MULTIPLES)
2.4.3 MODELS BASED IN REAL OPTIONS (OPTION PRICING)
2.4.4 THE ECONOMIC VALUE ADDED (EVA)
2.5 VALUATION IN EMERGING MARKETS: THEORETICAL CONCERNS
2.6 VALUATION IN EMERGING MARKETS: THE ADJUSTMENTS
2.6.1 ADJUSTMENTS TO MODELS BASED IN DISCOUNTED CASHFLOW (DCF)
2.6.2 ADJUSTMENTS TO MODELS BASED IN RELATIVE VALUATION (MULTIPLES)
2.6.3 ADJUSTMENTS TO MODELS BASED IN REAL OPTIONS
2.6.4 ADJUSTMENTS TO ECONOMIC VALUE ADDED EVA®
2.7 IMPORTANCE OF VALUATION IN THE NIGERIAN MARKET
CHAPTER THREE
3.0 RESEARCH METHOD
3.1 PURPOSE OF THE SURVEY
3.2 SAMPLE STRUCTURE AND SURVEY INSTRUMENT USED BY PEREIRO
3.3 SURVEY INSTRUMENT, SAMPLE STRUCTURE, AND SIZE FOR THE NIGERIAN CASE STUDY
3.4 ANALYSIS OF SURVEY DATA
CHAPTER FOUR
4.0 RETURNED SURVEY INSTRUMENT
4.1 REPRESENTATION AND LIMITATION OF THE SURVEY
4.2 SURVEY RESULTS
4.2.1 RELATIVE POPULARITY OF DIFFERENT VALUATION METHODS
4.2.2 HOW POPULAR IS THE DISCOUNTED CASHFLOW (DCF) METHOD?
4.2.3 ALTERNATIVE MATRICES TO NPV
4.2.4 CASHFLOW VERSUS RATE ADJUSTMENTS
4.2.5 USE OF WEIGHTED AVERAGE COST OF CAPITAL (WACC)
4.2.6 USE OF TERMINAL VALUE
4.2.7 POPULARITY OF MULTIPLES, REAL OPTION AND EVA
4.2.8 MODELLING THE COST OF CAPITAL
4.2.9 COMPUTING THE COST OF CAPITAL PARAMETERS
4.2.10 COMPUTATION OF UNSYSTEMATIC RISK
4.3 BEST PRACTICE: A COMPARISON BETWEEN THE US AND TWO EMERGING MARKETS
4.4 KNOWLEDGE MANAGEMENT ISSUES IN VALUATION
CHAPTER FIVE
5.0 DISCUSSION OF RESEARCH RESULTS
5.1 RELATIVE POPULARITY OF DIFFERENT VALUATION METHODS WITH VALUATION EXPERTS IN NIGERIA
5.2 RISK-PARAMETER INCLUDED IN VALUATION PRACTISES IN NIGERIA
5.3 POPULARITY OF MULTIPLES, REAL OPTION AND EVA BASED VALUATION PRACTISES IN NIGERIA
5.4 THE COST OF CAPITAL AND VALUATION IN NIGERIA
5.4.1 ASSET PRICING MODEL
5.4.2 CONCEPTUALISATION AND TREATMENT OF RISK IN THE PRACTICE OF VALUATION IN NIGERIA
5.4.3 COMPUTATION OF COUNTRY RISK IN NIGERIA
5.4.4 COMPUTATION OF LOCAL MARKET RISK PREMIUM IN NIGERIA
5.4.5 US AND LOCAL BETA IN NIGERIA
5.4.6 DEBT AND EQUITY IN USE IN NIGERIA
5.4.7 THE TREATMENT OF SIZE AND ILLIQUIDITY EFFECTS
5.5 KNOWLEDGE MANAGEMENT ISSUES IN VALUATION IN NIGERIA
5.6 RECOMMENDATIONS
5.7 CONCLUSIONS
REFERENCES
APPENDIX A – QUESTIONNAIRE USED IN THE SURVEY
APPENDIX B – PARTIAL LIST OF COMPANIES OF RESPONDENTS
Author: Jaunty Aidamenbor and Chikanayo Mgbemena
Source: Blekinge Institute of Technology
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