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Rappaport's elegant shareholder valuation model

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'Rappaport (1998) puts forward a very elegant shareholder valuation model but fails to recognize the real issues of recognizing the complexity of value drivers and their management'

Copland, T., Koller, T. & Murrin, J. (2000) Valuation: Measuring and Managing the value of companies .New York: John Willy & Sons.

Damodaran, A. (2001) Dark Side of Valuation: Valuing Old Tech, New Tech, and New Economy companies. John Willy & Sons: New York. [online]. Available at: http://proquest.safaribooksonline.com/013040652X.

Damodaran, A. (2002) Investment Valuation: tools and techniques for determining the value of any asset. 2nd edn. New York: John Willy & Sons.

Kazlauskienė, V. & Christauskas, C. (2008) Business Valuation Model Based on the Analysis of Business Value Drivers [online]. Available at: http://www.ktu.lt/lt/mokslas/zurnalai/inzeko/57/1392-2758-2008-2-57-23.pdf. Accessed: 20 June, 2009

Rappaport, A. (1998) Creating Shareholder Value: A Guide for Managers and Investors. Free Press: New York

Soffer, L. & Soffer, R. (2003) Financial Statement Analysis: A Valuation Approach. New Jersy: Pearson Education.

Stowe, D. J., Robinson, R. T., Pinto, E. J., & Cleaves, W. D. (2002) Analysis of equity investments: Valuation. Baltimore: AIMR.

Shefrin, H. (2001) Behavioral Corporate Finance. Journal of Applied Corporate Finance, Vol. 14, No. 3, Fall 2001

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Solution Summary

Rappaport's elegant shareholder valuation model is examined. The complexity of value drivers in management are determined.

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In the year 1986 Rappaport published a book named "Creating Shareholder Value" can be said to be the beginning of the current movement of shareholder value management as he used a new model to value the shareholder's wealth. In his book Rappaport founded the Alcar group, a company that is mainly in the business of software production to help companies achieve some of the goals as discussed in the book. In his model, Rappaport introduced the free cash flow (FCF) model of business and equity valuation to value the share holder's wealth. He showed how the normal discounted cash flow techniques used in project evaluation can be put into use in valuing ongoing business firms and companies in a process to find out the shareholder's wealth.
This shareholder valuation model by Rappaport includes:

S(t-1)=Sales in the prior year
g=growth rate in sales
m=Profit Margin
T=Tax rate
w=Working capital requirement, and
f=Fixed asset investment as a percentage of sales
According to Morin & Jarrel (2000), Rappaport use this free cash flow model to value companies and equity shares in an n order to find out the value of share. In these model excess cash flows generated by the company after taking care of requirements for increased capital spending and working capital investments is called the cash return to the security holders. Now these cash flows obtained by the model can be discounted at the cost of capital to determine the value of the shareholder. Based on this model it is assumed that in any industry, free cash flows above the cost of capital are earned by the ...

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  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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