Economic value added and free cashflow to firm :: A Comparative empirical study on firm valuation

ATAS, Sjahril Rachmad, Dr. Jogiyanto Hartono, MBA

2002 | Tesis | Magister Manajemen

The use of discounted-cash-flow (DCF) methods for investment decision making and valuation is well entrenched in finance theory and practice. This rigorous treatment dates back at least to the Old Babylonian period of 1800- ] 600B.C. Relative newcomers with profound conceptual insights are Irving Fisher and Jack Hirshleifer, who provided concise, rigorous utility-theoretic foundations. While originally conceived primarily in response to compound interest problems, the modern literature has broadened application of DCF techniques, most notably to capital budgeting and valuation problems. More recent extensions of the DCF concepts to security valuation and firm valuation using so-called -free-cash-flow" techniques and to managerial performance evaluation using an "Economic Value Added" concept, have stirred interest in the application of DCF methods to a broader range of practical business problems. These extensions, however, have also raised a number of concerns related to putting DCF theory into practice. The Economic Value Added (EVA) is a measure of the dollar surplus value created by an investment or a portfolio of investments. It is computed as the product of the "excess return" made on investments and the capital invested in those investments. The excess return itself is defined as the difference between the return made on the investment and the composite cost of financing that investment. So, unlike traditional accounting performance yardstick, EVA attempts to measure the value added produced by a firm by taking into account cost of capital arising from investment, since cost of capital reflects a company's level of risk (Christinat, 1996). The primary purpose of this study is to clearly setting forth the relationship of free-cash-flow (FCF) and economic value added (EVA ) concepts to each other and to the more traditional applications of DC[' thinking such as net present value (NPV). This study try to provides some finding for understanding the conceptual and empirical linkages between EVA and firm valuation in Indonesian Companies that listed in Jakarta Stock Exchange and also to answer the question of whether firm valuation using both method of EVA and Discounted Free Cash Flow to Firm (NPV) Will lead to the equivalence figure. Secondly, there is no other empirical study that conduct to prove that value-based valuation such EVA and traditional approach of discounted Free Cash Flow to Firm (NPV) are having equivalency. The study began with the introduction of both theories of EVA and FCFF that related to Firm Valuation. Then, empirical data gathered from short-listed company that included in LQ-45 index on year 2000 were used to statistically test the result on Firm Valuation. The study conclude that there is no significant different in Firm Valuation using EVA and FCFF method. This study also conclude that for Indonesia Companies, especially that are listed in Jakarta Stock Exchange or Surabaya Stock Exchange, have to considered deeply the cost and benefit of using such new approach or method.

Kata Kunci : Manajemen Investasi,EVA