"The Power of Proprietary Assets" : Valuing Companies in High and Low Proprietary Asset Industries
The goal of corporate finance is to maximize shareholder value, qualified by corporate social responsibility. But what exactly is value? How does a company make value? How does a company manage value? How does a company measure value? Understanding value and its inner-workings is an incredibly important topic in finance. This paper first explores these questions in-depth, beginning with an academic literature review. Accompanying this exploration of value, the literature review discusses traditional valuation theories and methods. Furthermore, it establishes a framework for discussing the pivotal role value plays in industries with low proprietary assets and industries with high proprietary assets. The research motivation section introduces the four questions this paper aims to address. The first question concerns the broad understanding of the discounted cash flow analysis with valuations of securities. The remaining three questions concern the relationship between proprietary assets and value, using intangible assets as a proxy for the former. The questions are as follows: 1) What are the nuances of applying the traditional discounted cash flow analysis to security valuation? 2) How do intangible assets impact excess value? 3) What is the relationship between intangible assets and excess free cash flow? 4) Do industries with greater intangible asset intensity create abnormal or extra value for shareholders? To determine the relationship between value and proprietary assets, this paper utilizes the traditional discounted cash flow model, comparable companies, as well as ratios. A total of 15 companies, three in five different industries, are valued. Three of these industries have a high level of proprietary assets. These consist of the pharmaceutical, media and entertainment, and technology industries. The last two industries have little to no proprietary assets. These are the banking and insurance industries, with the latter focusing on property and casualty companies. Key findings uncovered through this research include companies with strong intangible asset intensity generate more excess free cash flow, more excess value, and have a higher P/B ratio than companies with weak asset intensity.
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