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Article

Does the Wealth Profile of a Company Matter in Discounted Cash Flow Analysis? Valuation Implications for Investors
and Managers

James L. Grant
The Journal of Investing Winter 2011, 20 (4) 27-39; DOI: https://doi.org/10.3905/joi.2011.20.4.027
James L. Grant
is president of JLG Research and a finance professor at the University of Massachusetts in Boston, MA.
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Abstract

This article examines the prospective valuation relationship between MVA and EVA. The author classified companies in the Stern Stewart Performance 1000 Universe in terms of whether they are in a tier 1 wealth profile (top-100 MVAranked companies), a tier 5 wealth profile, or a tier 10 wealth profile (bottom-100 MVA-ranked companies). Overall, the results that the market discounts economic earnings and that the wealth profile of a company matters in particular. Specifically, indicate the market discounts economic earnings for wealth creators, as opposed to the middle-to-low MVAranked companies. Consistent with financial theory, this implies that reliably positive EVA—such as that evident in the wealth creators—has intrinsic value, whereas relatively lowto-negative EVA—as present in low MVA-ranked companies—has questionable fundamental value. The author argues that wealth creators know how to rationalize capital, as they pursue positive NPV opportunities where the return on capital is higher than the cost of capital. On the other hand, low-to-negative MVA-ranked companies face risk pricing challenges as investors question the efficacy of their ability to create shareholder value. Although caveats apply, this prospective valuation of EVA has important pricing implications for investors and managers.

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The Journal of Investing: 20 (4)
The Journal of Investing
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Does the Wealth Profile of a Company Matter in Discounted Cash Flow Analysis? Valuation Implications for Investors
and Managers
James L. Grant
The Journal of Investing Nov 2011, 20 (4) 27-39; DOI: 10.3905/joi.2011.20.4.027

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Does the Wealth Profile of a Company Matter in Discounted Cash Flow Analysis? Valuation Implications for Investors
and Managers
James L. Grant
The Journal of Investing Nov 2011, 20 (4) 27-39; DOI: 10.3905/joi.2011.20.4.027
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  • Article
    • Abstract
    • PROSPECTIVE EVA VALUATION
    • EVA VALUATION BY FORECAST HORIZONS
    • COMPARABILITY WITH EVA “STYLE” ANALYSIS
    • DCF RESULTS BY EVA STYLE
    • IMPLICATIONS FOR INVESTORS AND MANAGERS
    • CONCLUSION AND FUTURE RESEARCH
    • ENDNOTES
    • REFERENCES
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