The relevance of Discounted Cash Flow (DCF) and Economic Value Added (EVA) for the valuation of banks

Inhaltsverzeichnis (Table of Contents)

• Introduction
• The Concept of Shareholder Value
• The Need for a Shareholder-Focused Valuation
• The Discounted-Cash-Flow (DCF) Approach
• Underlying Theories and Assumptions
• Application to Bank Valuation
• Strengths and Weaknesses
• Economic Value Added (EVA)
• The Basic Idea and its Components
• Relation to DCF
• Limitations and Critical Assessment
• Applying DCF and EVA to Bank Valuation
• Empirical Research
• Specific Considerations
• Practical Application
• Conclusion

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

The study aims to explore the applicability of two prominent capital market-based valuation approaches, Discounted Cash Flow (DCF) and Economic Value Added (EVA), in the context of bank valuation. It examines the theoretical underpinnings and practical limitations of these approaches, considering the specific characteristics of the banking industry.

• Shareholder value maximization as a key driver of valuation methodologies
• The role of cash flow analysis in capturing a company's true earning power
• The importance of incorporating market risk and investor expectations in valuation models
• The application of DCF and EVA in the context of bank-specific considerations
• Challenges associated with defining and measuring key variables for bank valuation

Zusammenfassung der Kapitel (Chapter Summaries)

• Introduction: Introduces the concept of shareholder value and its significance in modern business practices. Discusses the need for a shareholder-focused valuation approach, highlighting the limitations of traditional accounting-based valuation methods.
• The Discounted-Cash-Flow (DCF) Approach: Explores the theoretical foundations and assumptions underlying the DCF approach. Examines its practical application to bank valuation, including its strengths and weaknesses.
• Economic Value Added (EVA): Outlines the basic principles of EVA, focusing on its components and relationship to DCF. Critically assesses its limitations, including its dependence on accounting figures and assumptions of efficient markets.
• Applying DCF and EVA to Bank Valuation: Presents empirical research findings on the applicability of DCF and EVA in bank valuation. Discusses specific challenges and considerations related to the banking industry, including the definition and measurement of debt and reinvestments.

Schlüsselwörter (Keywords)

This study focuses on shareholder value, discounted cash flow (DCF), economic value added (EVA), bank valuation, capital market, risk and return, cost of capital, accounting data, market efficiency.