Competitive Advantage Period And Valuation Of Firms

In valuation of firms, the DCF model has been the mainstream model and has been widely used in valuation. But there are some problems when using it, for example, how to determine cash flow, to determine discounted rate or determine the forecast period when we divide the model into two stages.In this thesis, we try to determine the forecast period by using the concept of competitive advantage period.Competitive advantage period (CAP) is the time during which a company is expected to generate returns on incremental investment that exceed its cost of capital. Recommending it to valuation means we regard the period in which the company has competitive advantage as the first stage, regard the period in which the company lost competitive advantage as the second stage. That is, whether has competitive advantage is the boundary, and if we determine the CAP, we have determined the forecast period. CAP has linked the firm's characters and environmental factors to forecast period, which makes the model closer to reality.Using the concept of CAP in valuation is significant thought, but it hasn't been taken seriously. The quantity models can only be applicable to effective market. How to use this concept more appropriately in valuation is the focal point in this thesis.Referring to international experience and domestic research, using the latest research productions in the fields of modern microeconomic such as valuation theory, competitive advantage theory and strategy management theory, this thesis has studied "competitive advantage period and firm valuation" systematically. It includes five chapters. The first chapter discusses the mainstream position of DCFM and the importance of determining the forecast period. It also briefly introduces present research and its contents and means. In the second chapter, it systematically discusses CAP. We have explained the definition, the principle and also pointed out the greatimportance of using it in valuation. In the third part, we have researched quantity models. Then, we have selected the companies on market in the household electrical industry to test this model. We find it is not fit for our market. In the fourth chapter, we have put forward a new analysis frame. It is different from previous models. Previous models often use reversing deduction to determine CAP, but this frame determines CAP by the means of analyzing influence factors of CAP. The last chapter, we point out this thesis's shortcoming and expect the future direction and main content of the future research. Also it emphasizes how to consummate and develop this new frame.