A new approach to assessing a company’s financial indicators: taking into account business and financial risks
Peter Brusov
DOI: https://doi.org/10.59429/ff.v2i2.6750
Keywords: business and financial risks, capital structure, Modigliani–Miller (MM) theory, Brusov–Filatova–Orekhova (BFO) theory, risk and profitability, CAPM, CAPM 2.0
Abstract
There are two main methods for estimating the value of assets. The first method is the well-known CAPM (Capital Asset Pricing Model), which uses the risk-free rate as the initial return and takes into account only the business risk associated with investing in a specific asset, and not in the market as a whole. The second method is associated with the use of one of two main theories of capital structure (Brusov–Filatova–Orekhova (BFO) theory and Modigliani–Miller (MM) theory), which take into account only the financial risk associated with the use of debt financing and allow the calculation of all financial indicators of a company of arbitrary age (BFO theory) or perpetuity one (MM theory).
The article develops a new approach related to the use of the company’s current profitability, taken from the annual report, as a seed profitability of an asset (company). As part of the new approach, a methodology has been developed that makes it possible to calculate all the main financial indicators of a company within the framework of capital structure theories, taking into account both financial and business risks. Transition from CAPM to a new methodology significantly improves the accuracy of the estimate. The new approach, unlike CAPM, has forecasting capabilities.